GDP data: Yet another huge knock for Modi govt's economic growth story

India's economic growth falls for a third successive year, fiscal deficit widens to 4.6%; agriculture and govt spending prevent further decline

The Narendra Modi government’s economic growth story has suffered yet another huge knock. Along with that has come the official admission that the government’s fiscal deficit last year was as large as 4.6 per cent of gross domestic product (GDP), much wider than the 3.8 per cent provided in the Budget presented in February earlier this year.

On the economy front, the provisional estimates released on Friday showed that the rate of growth in India’s GDP fell steeply to 4.2 per cent in 2019-20 from 6.1 per cent in 2018-19.

Look at it another way, the rate of growth for India’s GDP has just about halved in just three years – from 8.3 per cent recorded in 2016-17, the year of demonetisation. There was no respite in 2017-18, either, when the GDP grew by only 7 per cent.

The fall in the growth rate in 2019-20 would have been sharper, but for a rebound in agriculture and government expenditure. Agriculture growth bounced back at 4 per cent, almost double the rate in 2018-19, and public administration, defence and other services saw double-digit growth of 10 per cent, compared with 9.4 per cent in 2018-19.

Manufacturing and construction in 2019-20 showed poor growth numbers, at 0.03 per cent and 1.3 per cent, respectively – down from much higher numbers of 5.7 per cent and 6.1 per cent – in the year-ago period.

Gross fixed capital formation (GFCF), which indicates the level of investment activity in the economy, was down to less than 30 per cent of real GDP. Compared to 2018-19, GFCF saw a contraction of 2.8 per cent, highlighting the deeper problems underlying the slowdown. Even private final consumption expenditure grew at a lower rate of 5.3 per cent in 2019-20, against 7.3 per cent in the previous year.

Did Covid play spoilsport?

Earlier government estimates had suggested that India’s GDP would grow by 5 per cent in 2019-20. The first three quarters of last year had given an annualised growth rate of only 4.6 per cent. Thus, the fourth quarter had to produce a growth rate of 5.4 per cent to fulfil an annual growth rate of 5 per cent.

But, as the latest figures show, the fourth quarter saw only 3.1 per cent growth. On a quarterly basis, manufacturing and construction sectors showed contraction, pulling down the overall growth rate, but agriculture, mining and electricity came up with better numbers.

The impact of Covid-19 in the month of March and the lockdown must have taken a heavy toll on growth in the fourth quarter. If growth with only one month of the fourth quarter experiencing the Covid shock could slip to 3.1 per cent, then one can easily sense the kind of huge contraction the economy would suffer in the first quarter of 2020-21.

Fiscal consolidation takes a big hit

The provisional estimates of the government’s revenues and expenditure during 2019-20 show that the total fiscal deficit is now estimated at Rs 9.37 trillion, compared with the revised estimate of Rs 7.67 trillion. Since the revised nominal size of the economy for 2019-20 has been scaled down marginally from the earlier estimate of Rs 204 trillion to Rs 203 trillion, the fiscal deficit widened to 4.6 per cent GDP – the biggest slippage seen in recent times.

How this would impact the government’s revenues and the fiscal deficit target for 2020-21, only time will tell.