India's gross domestic product (GDP) growth estimate for FY19 has been lowered to 7 percent by the Central Statistics Office from an earlier estimate of 7.2 percent. This will be the lowest GDP growth in the last five years. The third quarter GDP growth slipped to 6.6 percent from an average growth of 7.5 percent the first half of FY19. While lower growth in the third quarter was expected due to the base effect, the deceleration has been sharper than market expectations. GDP growth has been pulled down by lower growth in agriculture and government consumption.
However, if we dig deeper into the data, there are some positive signals. Core gross value added (GVA), calculated by netting agriculture and government spending from GVA, growth has improved to 7.1 percent in Q3 FY19 from 6.7 percent in Q2 FY19. Core GVA is reflective of the private business and it seems to be improving. The main concern at this point is whether the sharp pick up in investment growth will be sustained, given the mixed signals coming from other high-frequency indicators.
Investment GDP is estimated to have improved to 10 percent in FY19 from 9.3 percent in previous fiscal (CSO advance estimate). Other investment indicators like the index of industrial production (IIP) capitals goods growth has also improved to 7.3 percent in the fiscal year so far, against 4.2 percent in FY18. Capacity utilisation in the manufacturing sector has improved to 74.8 percent (close to the long-term average of 74.5%) and bodes well for a pick-up in investment. However, CMIE data on investment projects remain weak. New investment projects announced fell to a 14-year low in Q3 FY19, while stalled projects remain at a record high. Quarterly data for projects under implementation shows a sequential deceleration in construction, real estate and electricity, but the growth is improving for the manufacturing and services sector.
It will be very critical that the investment growth momentum continues and the government will have to take the lead. Going by the interim budget, the picture is not too rosy on the capex front. Government’s capital expenditure to GDP is budgeted to fall to 4.5 percent in FY20 from 5.1 percent in FY19. Central public sector enterprises (CPSE) capex plan based on IEBR (internal and extra-budgetary resources) for FY19 also does not look impressive.
As far as the private sector is concerned, stressed assets in many core sectors such as steel and power remains a cause of concern. Credit supply could improve from the banking sector with six (of the total of 11) banks out of the prompt corrective action framework. Credit growth to the industrial sector is still anaemic but has improved in FY19 (up to September). However, the recent crisis in non-banking financial companies and a sharp fall in fresh disbursements would exert some tightening on credit availability in the economy.
The other big piece of India's growth story is development on private consumption, which contributes 58 percent to the GDP. As per advance estimates, private consumption growth has improved to 8.3 percent in FY19 from 7.4 percent in FY18. However, there has been a moderation in growth in Q3 FY19. The agrarian stress seems to be having an adverse impact on consumption growth in the economy.
High-frequency indicator like IIP is showing healthy average growth in consumer durables, whereas growth in consumer non-durables remains weak. Auto sales have been showing dismal performance. As far as the external sector is concerned, India’s exports (as per GDP data) have been recording double-digit growth in the current fiscal. However, with given concerns on global economic slowdown, further acceleration in exports growth is unlikely.
In a nutshell, the economy is giving mixed signals with some positive signs emanating from industrial/services sector and investment growth. Going forward, if the investment uptick gathers pace, it will result in private consumption growth gaining momentum. The fall in global crude oil prices and domestic inflation are big positives for the economy.
On the flip side, rising fiscal pressure is a cause of concern. If the government is unable to meet its ambitious revenue targets, it would affect capital spending, which would disturb the uptick in the investment cycle. The other big concern is that any further disruption in India's financial sector could tighten the overall credit availability in the economy, leading to disruption of investment and growth trajectory.(Rajani Sinha is a corporate economist based in Mumbai)