Indian economy seems to have slowed down slightly in 2018-19 due to muted exports, declining growth of private consumption and tepid increase in fixed investment, the finance ministry said in its latest Monthly Economic Report for March 2019.
The growth outlook, however, remains upbeat as the stock market indices have risen in January-March 2019 and inflationary expectations are subdued, the report said. Low inflation created room for monetary policy easing in 2018-19 but reduction in the key short-term lending rate, or repo rate, announced by the Reserve Bank of India have so far not led to a decline in commercial lending rates offered by the banks.
“Though easing of monetary policy has the potential to support growth, the recent cuts in repo rate are yet to transmit to weighted average lending rate of banks; thus the effects of the easing on investment activity are yet to manifest,” the report said. The RBI has cut repo rate by a total of 50 basis points in this calendar year but banks are yet to fully pass on the benefit of lower rates to customers. Default on debt papers by various companies, starting with IL&FS group, led to liquidity conditions remaining tight in last six months, preventing any sharp fall in lending rates.
The report also flags other key challenges facing the economy — export revival in the face of an appreciating exchange rate, pause in recent uptrend seen in fixed investment and slowing farm sector growth rate. “The real effective exchange rate has appreciated in Q4 of 2018-19 and could pose challenges to the revival of exports in the near future…Though fixed investment as percentage of GDP has been trending up since 2017-18, this trend may pause for a while, also evident in slowing down of growth in non-food bank credit in Q4 of 2018-19,” the report said.
Growth in gross value added or GVA in agriculture sector has been slowing since first quarter of 2018-19 and may continue to fall in January-March quarter as well. The data for the fourth quarter GDP growth is yet to be released by the government.
Agriculture, forestry and fishing sector’s GVA growth was pegged at 2.7 per cent October-December 2018 as against 4.6 per cent in October-December 2017, as per latest available data released by the Central Statistics Office (CSO).
India’s economy grew at the slowest pace in six quarters at 6.6 per cent in October-December, the third quarter of this financial year, the data showed. The CSO had also revised down its overall GDP growth estimate for 2018-19 to a five-year low of 7.0 per cent as per the second advance estimates, against its earlier estimate of 7.2 per cent.
Along with falling GDP growth, private consumptions appears to have declined in January-March 2019 but government spending is holding up in the same period.
“In line with declining real GDP growth, private consumption in Q4 of 2018-19 has also declined as reflected in the drop of growth of two-wheeler sales towards the end of the year…The expected firming up of government consumption expenditure in Q4 of 2018-19 is on course as growth in cumulative revenue expenditure of the central government has been higher in recent months,” as per the finance ministry report. Two wheeler sales, for instance, contracted by around 20 per cent in February.
Factory output also slid to a 20-month low of 0.1 per cent in February from 6.9 per cent a year ago due to contraction in manufacturing and an adverse base effect, while retail inflation, based on Consumer Price Index (Combined), rose to a five-month high of 2.86 per cent in March.
On the external front, declining imports would lead to improvement in current account deficit in fourth quarter of 2018-19 while foreign exchange reserves continue to rise, the report said. Forex reserves in terms of months of import cover has fallen from 14 months from April 2016 to 9 months in October 2018. However, the import cover has been increasing since then and was at around 11 months in February 2019.