India’s economy expanded at the slowest pace in 25 quarters in the first quarter of the current financial year. Gross domestic product (GDP) grew by a mere 5 per cent in the first quarter of 2019-20, down from 5.8 per cent in the fourth quarter of 2018-19, as both consumption demand and investment weakened. In its last monetary policy meeting in August, the RBI had lowered its growth projections, forecasting GDP growth to average 5.8 to 6.6 per cent in the first half of the current financial year. But the numbers released by the statistics office, which are well below expectations, suggest that the slowdown is more entrenched than what is believed.
Higher public spending appears to have helped stem the slide. Excluding public administration and defence, which largely connotes government spending, gross value added by the remaining sectors of the economy grew by 4.5 per cent, down from 5 per cent in the previous quarter, signalling the extent of the slowdown. Manufacturing activity barely registered a rise, growing by a mere 0.6 per cent in Q1FY19. Construction also slowed down to 5.7 per cent, down from 7.1 per cent the previous quarter. The collapse in consumption demand, which has been the bulwark of growth over the past few years, is worrying. Private consumption growth, which has slowed down sharply to 3.1 per cent down from 7.2 per cent in the previous quarter, is unlikely to perk up sharply in the near term. Investment activity, which grew by 4 per cent, is unlikely to witness a quick revival. Going forward, the government is likely to front-load its expenditure, giving a push to economic activity. The cumulative impact of the rate cuts by the MPC (the sharp slowdown creates room for further cuts) will also be felt over the coming quarters. But a broad-based pick-up in economic activity is unlikely in the near term.
In light of the new numbers, the clamour for the government to loosen its purse strings will only get louder, especially after it has received Rs 58,000 crore more from the RBI than what had been budgeted for. But the space for counter-cyclical fiscal policy is all but exhausted. The government has over the past week announced a slew of measures aimed at arresting the slowdown. While sector-specific sops will provide some relief, they are unlikely to address the deeper issues plaguing the economy. To salvage growth, a business as usual approach will no longer suffice.