The latest data from the National Statistical Office (NSO) retained India’s economic growth forecast at 5 per cent for the current financial year, unchanged from the previous estimate presented at the end of January. Growth has dropped from 6.1 per cent in the previous year. But, more strikingly, nominal GDP growth has decelerated from an average of 11 per cent during 2016-17 to 2018-19 to 7.5 per cent this year, with lower inflation adding to the volume slowdown. The value of India’s GDP for FY20 is estimated at around $2.9 trillion.
GDP is estimated from both output and demand lenses, using specific economic indicators as proxies for activity in specific sectors. From the output side, agriculture sector growth was revised up to 3.7 per cent (up from the 2.8 per cent previously), industrial activity was lowered to 1.5 per cent (from 2.3 per cent earlier), while services output remained largely unchanged at 6.5 per cent. Agricultural production is expected to improve based on the third advance estimates of the rabi season crops, as well as higher horticulture and allied sector output (livestock, forestry and fishing), which now is significantly larger than conventional food crops. The key concern regarding the continuing slowdown is the increasing weakness in the industrial sector (particularly of manufacturing, whose growth has progressively fallen from 13.1 per cent in FY16 to 5.7 per cent in FY19, and plummeting to 0.9 per cent in FY20).
From a demand perspective, the obverse side to the manufacturing slowdown is the even sharper drop in fixed asset investment growth — down sharply from an average 8.5 per cent during FY17 and FY19 to -0.6 per cent in FY20. The causes for this contraction needs to be understood in detail, and we will return to this.
The other significant driver of growth in India has been private consumption. For perspective, the share of private consumption had averaged 59-60 per cent during FY16-FY20. Reflecting the higher spending over the last couple of years, the share of government consumption in GDP has risen from an average of 10.5 per cent of GDP over FY12-17 to almost 12 per cent in FY20, resulting in the share of total consumption above 70 per cent.
The really remarkable trend, though, as noted above, is the share of nominal investment in GDP progressively dropping from 39 per cent in FY12 to 30 per cent in FY20. Part of this is actually good, reflecting higher capex efficiency. However, one narrative underlying the contraction in fresh capex in FY20 was slowing household consumption growth, which, in nominal terms, fell from an average 11.6 per cent during FY16-19 to an estimated 9.1 per cent in FY20. Though the deceleration prima facie does not seem significant enough to result in a broader economic slowdown of the current magnitude, the high share of household consumption has contributed disproportionately to lower growth. A direct fallout of this is that seasonally adjusted capacity utilisation (based on RBI surveys) had shrunk from 73.4 per cent in the first quarter of FY20 to 70.3 per cent in the second quarter, and this is unlikely to have improved materially in the second half of the year. This is one of the reasons for the low levels of fresh investment.
The other cause of the low capex, more from the supply side, is a much reduced flow of credit to the commercial sector, and this remains the proximate impediment for growth revival, with signs of risk aversion in lending still strong despite the recent measures by RBI to incentivise credit to productive sectors. Funds from selected sources, over April-January FY20, was only about Rs 9 lakh crore as against Rs 15 lakh crore in the corresponding 10 months of FY19. Growth in bank credit (which is still the largest source of financing) till mid-February 2020 was down to 6.3 per cent — the lowest in three years. Even this is almost wholly driven by retail credit; incremental credit to industry and services over this period was negative.
One bright feature in this economic environment is strong foreign investor confidence in India, reflected in both FPI equity and FDI flows. Many borrowers have used offshore sources to refinance or pay down domestic bank loans and debt. However, a global risk-off environment might restrict even this channel in the near future. Domestic corporate bond issuances have also remained robust, although the dominant set of borrowers still remain public sector agencies and financial institutions.
Monthly economic indicators suggest that the growth deceleration has likely bottomed out in the third quarter. The bet has been on reducing inventories and the consequent production ramp-up to replenish stocks. However, the evidence on this is mixed. The coronavirus effects, both concurrent and lagged, will also moderate some of the emerging positive effects of counter-cyclical policy measures of the past six months. If the outbreak does not abate over the next month or so, the complex supply chains of intermediates sourced from China will run dry and add to the already weak system demand. In addition, surveys indicate that both business and consumer confidence, which while improving, remain muted. A growth revival, hence, is likely to be only very modest over the next few quarters.
A $5 trillion economy by 2025 is still a worthwhile target and aspirational; coordinated strategies, policies, execution and institutional mechanisms will be needed to move up to a sustained 8 per cent plus growth consistent with achieving the target. The focus in the near future should to increase investments and facilitate credit for funding these productive assets so that India’s potential output growth can steadily rise.
This article first appeared in the print edition on March 4, 2020 under the title ‘The growth challenge’. The writer is senior vice president, business and economic research, Axis Bank. Views are personal.
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