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Explained: Why SBI expects India’s Q2 GDP to grow by just 4.2 per cent

The SBI has rolled back its forecasts for India’s GDP growth for the current from 6.1% earlier to just 5% now. For the next financial year (2020-21), it expects GDP to grow by 6.2%.

Written by Udit Misra , Edited by Explained Desk | New Delhi | Updated: November 13, 2019 6:56:19 am
Explained: How will SBI rate cuts impact your savings, FDs, and home loans? The SBI note details the dip in its composite leading indicator, which SBI uses to forecast GDP growth. (File photo)

According to India’s largest public sector bank, India’s GDP growth will slow down further in the second quarter (July to August) after it hit a six-year low of 5% in the first quarter (April to June) of the current financial year (April 2019 to March 2020).

In a research note titled “Q2 GDP at 4.2%, FY20 at 5.0%: We should ride the long winter!”, the SBI has rolled back its forecasts for India’s GDP growth for the current from 6.1% earlier to just 5% now. For the next financial year (2020-21), it expects GDP to grow by 6.2%.

Over the past six months, the GDP growth has decelerated at quite a fast pace. Most non-government estimates pegged GDP growth at around 7.5% for the current financial year. Government’s estimates pegged it between 8-8.5% even as lates as July when the full-year Budget was presented. Seen from this perspective, the downward revisions to 5% for the full year suggests that the Indian economy will continue to struggle in the short-term.

Why has SBI dialled down growth estimate?

The SBI note details the dip in its composite leading indicator, which SBI uses to forecast GDP growth. Accordingly, it states that the further slowdown is “on account of low automobile sales, deceleration in air traffic movements, flattening of core sector growth and declining investment in construction and infrastructure”.

SBI states the acceleration rate in its 33 high frequency leading indicators — that is indicators that show effect or changes before the rest of the economy — had fallen from 65% in Q1 (when GDP grew by 5%) to just 27% in Q2.

It also underlines the adverse impact due to excessive rainfall related flooding and the ongoing global economic slowdown.

What can be done?

In 2019 calendar year, the port of call has been the Reserve Bank of India, which has repeatedly cut repo rates to bring down the cost of financing and spur economic growth. So, SBI expects RBI to cut rates further when the Monetary Policy Committee meets in December.

But, as we have explained earlier, RBI’s repo rate cuts have had limited impact. SBI’s note, too, states: “However such rate cut is unlikely to lead to any immediate material revival…”

Against this backdrop of a growth slowdown, SBI does warn the government against policy surprises. “Against such growth slowdown, it is imperative that India (that is, the government) adheres to no negative policy surprises in sectors like Telecom, Power and NBFCs. For example, it is imperative that a lasting solution is worked out for the NBFC sector that has been much delayed now,” it states.

Also read | Explained: Moody’s cuts India outlook to negative. What does it mean?

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