On the occasion of Modi 2.0 completing 100 days, a look at just where the economy is headed
Rakesh Sharma | Harish Puppala
You must have heard of the dismal news regarding India’s economy in recent days - it seems to be tottering. The latest GDP growth figures came as a serious wake up call for a government that looks like it isn’t done yet with the honeymoon phase of the resounding 2019 election victory. (To make matters worse, millennials are trolling the finance minister with their weapons of choice – tweets and memes.)
India's gross domestic product grew by an unimpressive 5% in the previous quarter, i.e. April-June 2019. The latest official data seems to confirm the growing fear of a slowdown. The doom and gloom following that report forced the government’s hand, and it announced a slew of measures aimed at boosting the economy hit by weak household spending and muted corporate investment.
But what does this disappointing GDP growth really mean for the economy? That’s what we’re looking at on this episode of Digging Deeper.
The GDP numbers
India’s economy grew at its slowest pace in over six years following a sharp deceleration in consumer demand and cooling down of investment.
So, to recount, here’s what happened: Towards the end of August, the Central Statistics Office, or the CSO, released economic growth data for the first quarter of the current financial year 2019-20. It was speculated for weeks prior to the announcement that what was around the corner might not amount to good news. Even the Reserve Bank of India had marginally lowered the GDP growth projection for 2019-20 to 6.9% from 7% projected earlier in the June policy. The central bank had underlined the need for addressing growth concerns by boosting aggregate demand.
GDP growth in the fourth quarter of the previous fiscal topped off at 5.8%, in addition to the waves of not so great news from various sectors - like the falling sales of automobiles and everyday consumables. Even so, the official GDP data of just 5% growth in Q1 came as a shock to many. In comparison, GDP growth was 8% in the same quarter of 2018-19. (Let’s also not forget that economists agree that to realise the dream of a 5 trillion dollar economy by 2024, we need an annual growth of at least 9%!)
Let’s look at the different sectors that were affected. According to a report in Business Standard, sharp deceleration in manufacturing output and subdued farm activity also helped drop GDP growth to 5% in the April-June quarter.
[Trigger warning: numbers coming up]
GDP is a good measure when you want to compare India with another economy, while GVA is more useful when comparing different sectors within India’s economy. Gross value added (or GVA), which is GDP minus taxes, - therefore, a more realistic proxy to measure economic activity - grew 4.9% in April-June 2019, compared to 7.7% in the same period last year and 5.7% in January-March this year. The GVA growth in the manufacturing sector plummeted to 0.6% in Q1 of this fiscal from 12.1% expansion one year ago. The farm sector’s GVA growth was fairly muted, staying at 2% compared to 5.1% in the corresponding period of FY19. Construction sector GVA growth slowed down to 5.7% from the earlier 9.6 percent. The mining sector, on the other hand, climbed to 2.7% from 0.4% a year ago.
The last time GDP growth went this low was the 4.9% during the April-June quarter of 2012-13.
The National Statistical Office released a statement that read, “GDP at Constant (2011-12) Prices in Q1 of 2019-20 is estimated at Rs 35.85 lakh crore, as against Rs 34.14 lakh crore in Q1 of 2018-19, showing a growth rate of 5 percent.”
There’s more: Gross Fixed Capital Formation (or GFCF), a barometer of investment, was estimated to be Rs 11.66 lakh crore in the first quarter as against Rs 11.21 trillion a year ago. In terms of GDP, GFCF at current and constant prices during the first quarter was estimated at 29.7% and 32.5% respectively, as against 30% and 32.8% last fiscal.
According to a Moneycontrol report, muted household spending as reflected in metrics like falling car sales have resulted in unsold inventories. Rising unused capacities in factory plants reflect slackening demand and feeble investment. Automobile showrooms have not been reporting brisk activity, implying lower spending ability and flat income growth. Hundreds of showrooms have shut shop. Tractor and motorcycle sales – indicators of rural demand – continued to contract. Commercial vehicle sales slowed even after adjusting for base effects, mirroring how stocks aren't moving rapidly across the country to fill shop shelves beaten by low demand. Construction activity indicators have also slackened, with contraction in cement production and slower growth in finished steel consumption in June. Construction sector GVA grew 5.7% during April-June, 2019, compared to 7.1% in the same quarter last year and 9.6% in January-March 2019. Import of capital goods – a key indicator of investment activity– contracted in June. Trade, hotel, transport, communication growth stood at 7.1% in Q1 compared to 6 percent in the previous quarter. Electricity and other public utilities grew by 8.6% in Q1 as against 4.3% last quarter. Agriculture grew at 2%in Q1 compared to a contraction of 0.1%in the preceding quarter.
Cause for Concern?
Aside from youngsters using too much Ola Uber to bother buying cars for themselves, what else is at play?
Chief Economic Adviser K.V. Subramanian said the slowdown is due to endogenous and exogenous factors. Gourav Kumar, principal research analyst at fundsindia.com, told Reuters, “...the indications we have seen in the past few months, growth was expected to be slow. However, 5% is far below street estimates of 5.6%-5.7% and does come as a surprise. This was primarily driven by lower growth in private consumption. Manufacturing growth staying almost flat is also worrying and immediate steps are needed to revitalise this sector. An overall recovery may take another couple of quarters as the NBFC sector is still recovering from the liquidity crisis.” Rupa Rege Nitsure, group chief economist, L&T Financial Holdings, said, “National accounts data is consistent with the picture suggested by leading indicators for Q1... GDP growth has decelerated to 5% - the lowest since Q4, FY13...Except for mining activity and power generation, all other productive sectors have slowed on a y-o-y basis. In our opinion, the weight of structural factors has gone up in the slowdown and mere monetary stimulus may not work beyond a limit.”
The RBI was a bit more evasive in its evaluation. It said, “The diagnosis is difficult, these conditions are hard to disentangle cleanly, at least in the formative state.”
Other economists were more direct. Madhavi Arora, the lead economist at Edelweiss Securities, Mumbai, said, "The...5 percent is clearly a shocker, and confirms that the growth slowdown is more entrenched, thus giving further scope for coordinated fiscal and monetary response. The growth slump clearly reflects that the slowdown is beyond just the cyclical aspects and policymakers need to address the structural constraints to ensure secular growth picks up ahead. We do not see much immediate momentum in the growth picture. Near-term growth dynamics are unlikely to change dramatically."
Sakshi Gupta, Senior Economist with HDFC bank in Gurgaon, told India Today, “GDP growth has come in line with our forecast of 5 percent-5.2 percent. The slowdown is being felt across sectors, including agriculture, manufacturing and services. A strong base effect from last year only added to the pain. Going ahead, we are looking at activity improving from these lows. This could be the bottom for the current slowdown. Policy stimulus by the RBI and the government along with normal monsoons will provide some relief in the second half. For the year, we expect GDP growth at 6.5 percent. The RBI is likely to deliver another 40 bps in rate cuts this year. While this will address the cyclical part of the current slowdown, the structural issues could continue to plague the system this year."
The fall in consumption is being seen as an equally grave issue, given that it has accounted for 55-58% of GDP. As Businessline explained, “Consumption is at the core of domestic demand in India, and hence the sharp fall in private final consumption expenditure from 7.2% in the March quarter to 3.1% in the June quarter needs immediate attention.” While rural consumption has been weak for some time due to low wage growth, it appears that urban consumption is also slackening.
According to BloombergQuint, “Economists conjecture that this could be because of weaker employment opportunities and lower availability of finance from non-bank lenders could be the reason behind the slowing urban consumption.”
Devendra Kumar Pant, chief economist at India Ratings and Research, is concerned about the collapse of private consumption demand. He told Bloomberg, “Declining savings, especially household saving, is a major challenge for the economy and is leading to structural growth slowdown. While the fiscal space to undertake counter cyclical measures are very limited, we believe, the government would undertake some measures to provide short-term boost to the economy.”
The released data also indicates that credit to consumer durables shrunk by as much as 71% as of June. Vehicle loan growth has slowed considerably to 5%. The capex cycle also continues to be subdued - credit growth to industry is still single-digits.
Furtherm, as real GDP growth fell from 8% last year to 5% in the previous quarter, the sharp fall in nominal GDP growth from 12.6% to 8% during this period, is worrisome. An analysis in Businessline explained that the GDP deflator (meaning, growth in the ratio of nominal to real GDP - a measure of inflation) has fallen from 4.3% last year to 2.8% currently. The report said, “If high inflation hurts consumers, low inflation also has an impact on India Inc. and consumers. While falling food prices hurt agriculture income and spending, overall inflation also has a bearing on the wage growth and income levels across industries. Nominal GDP, also decides the credit requirement of a corporate, and hence impacts the growth in bank credit. CPI inflation has fallen from 7.4% levels five years ago to 3.15% recently.”
The Businessline report also sounded a warning on the big merger of public sector banks. It said, “The recently announced big bank mergers within the PSU Bank space will hurt credit growth...At a time when growth in the economy needs the banking system to ramp up lending activity, the bank mergers can only cause more disruption. Given that the immediate attention will be to focus on the integration process, bankers will mostly look at consolidation of loan book and containing asset quality rather than scale up lending.”
Things are so bad that Subramanian Swamy - yes, that Subramanian Swamy - declared, with no small amount of disdain, “Get ready to say goodbye to Rs 5 trillion if no new economic policy is forthcoming. Neither boldness alone or knowledge alone can save the economy from a crash. It needs both. Today we have neither. [sic]”
The road ahead
Finance Minister Nirmala Sitharaman did announce steps to revive economic growth and shore up market confidence, including rolling back recent tax hikes on foreign and domestic equity investors and several measures for industries. The government also further liberalised foreign direct investment rules in many sectors, in an effort to get economic growth back on track.
Chief Economic Adviser KV Subramanian sought to clarify, “The government is alive to the situation and has taken several measures...We should be back to the high growth path soon.”
According to an Indian Express analysis, the present growth trajectory indicates we’re not out of the woods yet. A State Bank of India report said when GDP grew by 8% in Q1 of FY19, 70% of leading indicators, such as car sales, showed acceleration. In this quarter, only 35% of such indicators showed acceleration, and GDP grew by 5%. For Q2 (July to September), only 24% indicators show acceleration. Meaning there could be more pain ahead.GDP growth rate forecasts for the current year have been revised downwards. Observers expected a real GDP growth rate of between 5.4% and 6.4% for the previous quarter. SBI now estimates the full-year growth at 6.1%, ICICI Securities expects 6.3%, and Pronab Sen, former Chief Statistician, thinks it will be 5.5 percent. Six months ago, a majority of the estimates for FY20 were around 7.5 percent. Weak growth implies the government’s fiscal deficit figures are likely to be breached. Since weak growth will lead to lower tax revenues, the government is likely to struggle if it wants to push up growth by spending on its own. Independent experts expect the slowdown to persist for a while and see another rate cut by the RBI in October after the 110 basis points slashed in this round of monetary easing.Get access to India's fastest growing financial subscriptions service Moneycontrol Pro for as little as Rs 599 for first year. Use the code "GETPRO". Moneycontrol Pro offers you all the information you need for wealth creation including actionable investment ideas, independent research and insights & analysis For more information, check out the Moneycontrol website or mobile app.