India’s economic growth cools to six-year low

Slowdown in rate of expansion is latest sign of deepening gloom

India’s economic growth slowed further in the third quarter, highlighting the depth of the downturn afflicting a nation that was only recently revelling in its status as the world’s fastest-growing large economy.

Gross domestic product increased 4.5 per cent over the period compared with the same three months in 2018, down from the 5 per cent pace in the second quarter, official data show.

It marks the sixth consecutive quarter of easing growth, which has seen the rate of expansion tumble from a brisk 8.1 per cent in the first quarter of 2018 to a six-year low in the three months ending September amid deepening gloom over the country’s prospects.

The deceleration underscores how the crisis in India’s shadow-banking sector, which began with the collapse of major lender IL&FS last year, has rippled through the wider economy, as the easy credit that had facilitated a consumer spending boom in the two preceding years ended abruptly. 

“What is happening is slow contagion,” said Aurodeep Nandi, India economist at Nomura. “The pain in the shadow banking industry has spread to other financial entities, and it has spread to the real economy, including sectors like real estate and small and medium enterprises. That in turn has impacted employment opportunities. It’s a domino effect.” 

During the quarter, investment, sluggish for nearly a decade, grew a mere 1 per cent year-on-year, down from 4 per cent in the previous quarter. Manufacturing output contracted 1 per cent.

Private consumption increased by a higher-than-expected 5 per cent, up from 3.1 per cent in the previous quarter. But the biggest impetus to economic growth came from government spending, which increased 15.1 per cent. 

The figures, which many independent economists have argued may overstate India’s true pace of economic growth, also point to the magnitude of the challenge now facing prime minister Narendra Modi’s government, as it struggles to revive investor and consumer confidence, and prevent a further deterioration of economic conditions. 

The Reserve Bank of India, which is due to hold its next monetary policy committee meeting next week, has already cut interest rates by 1.35 percentage points in five successive interest rate cuts since February. 

Meanwhile, Mr Modi’s government also cut corporate tax rates to their lowest levels in the country’s post-independence history, slashing its basic tax rate from 30 per cent to 22 per cent. 

In an attempt to woo international investors seeking alternatives to China, New Delhi announced in September that it was slashing corporate tax rates for investments in greenfield manufacturing plant to 15 per cent, down from 25 per cent. 

But analysts say the administration has little room for further fiscal stimulus, given that it is already likely to overshoot its target of keeping the fiscal deficit to just 3.3 per cent of gross domestic product.

“There are no easy routes out,” Mr Nandi said. 

Indian officials have argued that the July-September period is likely to be the bottom of the downturn, and that the economy is set to see a pick-up in the current quarter, ending December 30. 

But independent economists are doubtful that India is on the brink of a turnround, saying the problems festering in the shadow banking sector are likely to continue to weigh on the country’s growth. 

“While the government has taken positive steps to address the economic downturn, it’s not obvious that any of those will bear fruit in the current financial year,” said Saurabh Mukherjea, chief executive of Marcellus Investment Managers. “There is a real possibility that you might see even lower GDP growth ahead, as the slow-motion implosion of the non-bank financial companies continues.”

Ritika Mankar, chief economist at Mumbai-based Ambit Capital, said India’s growth is likely to remain sluggish over the next year, even if the third quarter marks the low point.

“We are fairly convinced that GDP growth in India is likely to stay low and likely to stay rangebound over the next four to six quarters,” she said.