GDP growth slumps to 6-year low of 4.5% during July-September

Dragged by dip in consumption and exports

Indian economy recorded slowest growth rate in six years during July-September quarter. However, the Finance Ministry put up a brave face by saying that economy has bottomed out.

According to data released by the Ministry of Statistics and Program Implementation, the second quarter GDP (Gross Domestic Product) growth rate was 4.5 per cent as against 7 per cent during corresponding period of last fiscal (2018-19). This is the lowest growth rate after fourth quarter (January-March) of fiscal year 2012-13, when GDP growth rate was 4.3 per cent. Also, this is sixth successive quarter of growth rate declining.

All eyes on RBI now

With growth rate on decline, core sector (eight key industries) on contraction, fiscal deficit widening and retail inflation on rise, all eyes are now on Monetary Policy Committee headed by RBI Governor. The committee will meet next week to take a call on rate cut. Even after rise in retail inflation, there is hope that the committee will go for another rate cut in addition to 1.35 per cent cut during the current year.

All the three sectors, agriculture, industry and manufacturing recorded lower growth rate than corresponding quarter of last fiscal. However, most worrying is growth rate of just half a percentage point for industry. More particularly, manufacturing has contracted by one per cent. This indicates both consumption and investment demand are still in slow lane.

Experts say that slowdown in GDP growth is largely on account of the slump in consumption expenditure and de-growth in exports. But, for the government expenditure growth, July-September GDP growth would have been much lower. Investment as measured by gross fixed capital formation in any case has been down for last two quarters and again came in at just one per cent. This shows that economy is passing through a declining growth momentum and there is no easy way out. “Ind-Ra believes under the current domestic and global macro environment the government will have to do the heavy lifting to support growth,” Sunil Kumar Sinha, Principal Economist with India Ratings, said.

Nominal GDP growth rate of 6.1 per cent during July-September quarter does not augurs well both for the government and the corporate sector as tax collection of the government and top line of corporate sector is linked to the nominal GDP. However, given the current growth inflation dynamics, Sinha believes the central bank will go for another 25bp (100 bp or basis points mean 1 percentage point) rate cut in the forthcoming monetary policy review in December 2019.

Commenting on the GDP numbers, Economic Affairs Secretary Atanu Chakraborty said the fundamentals of the Indian economy remain strong and “growth is expected to pick up from the third quarter of FY 2019-20”.

Former prime minister Manmohan Singh said the GDP growth rate of 4.5 per cent was unacceptable and worrisome.

According to Rajiv Biswas, Asia Pacific Chief Economist at IHS Markit, confronted with the sharp slowdown in economic growth momentum, the government should give a high priority to implementing additional measures to bolster manufacturing output and kick-start an upturn in the investment cycle. Accelerated government spending on infrastructure projects such as roads, railways and ports, as well as urban infrastructure such as affordable housing and hospitals, are the type of fiscal policy measures that could help revive economic growth momentum within a relatively short timeframe.

“While the RBI has been helping through its monetary policy easing measures, the impact is likely to be more protracted, since monetary policy stimulus effects on the real economy generally act with long lags. Furthermore, the impaired balance sheets of many public sector banks and NBFCs also will dilute the flow-through of monetary policy easing to the economy,” he said.

Congress’ reaction

Congress chief spokesperson Randeep Singh Surjewala said the GDP growth is worse than the previous quarter and is the worst in last six years. “Average GDP growth rate during 10 years of Congress Government was 8.13 per cent. Even in the last year of UPA, i.e 2013-14, GDP growth rate was 6.39 per cent. Let the nation compare it with the BJP Government’s decimation of economy emanating from bankruptcy of economic vision,” he said.

“The growth is expected to pick up from the third quarter of FY 2019-20”.