Q4 GDP growth 3.1%: Was a revival on?

Economy expanded at 4.2% in FY20, the lowest rate since FY09, dragged down by manufacturing, construction, investment.

India’s gross domestic product (GDP) grew at a dismal but better than expected rate of 3.1% in the March quarter (Q4) of last fiscal, the National Statistical Office (NSO) said on Friday, giving some credence to the government’s claim that had the Covid-19 pandemic not devastated the economy, the several-quarters-long growth slump could have bottomed out. The NSO undertook significant downward revisions of the expansion rates of the first three quarters of last fiscal and announced GDP growth for the fiscal year 2019-20 was 4.2%, the lowest since 2008-09 that witnessed the global financial meltdown. The Q4FY20 growth rate was, of course, the lowest in 44 quarters.

As manufacturing, construction and electricity declined sharply, FY20 GDP received good support from agriculture-and-allied-sectors that grew at 4%, impressive by its standards and a resurgent mining industry; of course, government spending continued to provide strong backing to the economy in the year with its share in GDP rising to 11.3% from 10.6% in the previous year, but private investment nosedived to lose its GDP share from 31.9% to 29.8%. Despite huge shortfall in budget receipts, the Centre spent at nearly the same level as the revised estimate for FY20, in the process incurring a fiscal deficit of 4.6%, much higher than 3.8% budgeted (RE) and the highest since FY13 (4.8%).

Quarter-wise data reveal the extent of debilitation of the investment pillar – growth in gross fixed capital formation declined precipitously from 4.6% on year in Q1FY20 to (-)3.9% in Q2, to (-)5.2% in Q3 and further to (-)6.5% in Q4. One would have expected the fall in Q4 to be sharper given that since early March, Covid-19 might have put brakes on new projects, so Jan-Feb period must have seen some early momentum in private investments aided by the deep corporate tax cuts announced in September.

Private consumption, the main engine of the economy might have been looking up since Q2FY20, when the relevant demand component showed an increase of 6.4% versus 5.5% in the previous quarter and grew at a faster rate of 6.6% in Q3. Clearly, the pandemic and lockdown upset that incipient momentum, and the growth of private final consumption expenditure declined to 2.7% in Q4.

In the second advance estimate released earlier, the NSO had kept the GDP growth for FY20 unchanged at 5%. Though many analysts have predicted the Q4 growth in the range of 1.2-1.9%, it turned out to be better; but the growth rates for the previous three quarters got revised downwards – Q3 (4.1% versus earlier estimate of 4.7%), Q2 (4.4% against 5.1%) and Q1 (5.1% against 5.6%).

Nominal GDP growth for the last fiscal is now pegged at 7.2% (a 48-year low), against 11% a year before and compared with 7.5% in the second advance estimate firmed up in February, just before the pandemic spread its tentacles. The size of the FY20 nominal GDP is estimated at Rs 203.40 lakh crore, down from the second advance estimate of Rs 203.85 lakh crore.

Of course, everything has gone awry after the pandemic brought most economic activities to a standstill since late March. According to data released separately on Friday, the growth rate of Index of eight core industries for April 2020 declined by 38.1%, compared to a decline of 9% in March 2020. Industries namely coal, cement, steel, natural gas, refinery, crude oil suffered substantial loss of production. The services sector saw a record slump in April, much sharper than the slide in manufacturing.

Services PMI crashed to 5.4 in April, against 49.3 in March, recording its worst month-on-month fall since the survey started over 14 years ago. Merchandise exports contracted by (-)60.3% in April 2020, the highest pace of contraction since 1991. In fact, the downward slide started in March, which saw index of industrial production contracting by 16.7%.

For the June quarter of the current fiscal, economists and rating agencies predict real GDP contraction mostly in the range of 25-40%.

The RBI has projected negative growth for FY21, without giving a specific estimate or range. However, some analysts have warned of an unprecedented contraction, given the first quarter washout. For instance, Nomura has predicted (-)5.2% growth for FY21, Crisil pegs it at (-)5% and SBI group chief economic advisor Soumya Kanti Ghosh projects it at (-) 6.8%.

The government has expended a lot of its resources to support the economy which was on a constant decline for several quarters, if not years. The irony is that it will have to do so in a more aggressive fashion in the current financial year and even the next, given that the pandemic has plunged the growth into negative territory.

Despite the pandemic aggravating the revenue situation, the government is likely to spend at least modestly above the budgeted expenditure in FY21, while an inevitable rejig of the expenditure might result in a reduction in the capex variety.

However, there are questions about the adequacy of the government spending support committed so far. The stimulus package amounting Rs 20.97 lakh crore – equivalent to about 10% of FY21 GDP -involves additional budgetary cost of barely 10% of it.

Stunted input imports and massive cancellation of orders will impinge on merchandise exports (nominal) that have already contracted by a record 60% in April, following a 35% drop in March. However, a massive crash in imports will bridle the damaging impact of an export contraction on net outbound shipments, which continue to be a drag on GDP. As such, the share of exports (in real term) in GDP has shrunk for a fifth quarter in a row – from 21.4% in Q3FY19 to 16.5% in Q4FY20.

Aditi Nayar, principal economist at ICRA, said: “Higher-than-expected growth in Q4 FY2020 should not be viewed with relief, as this data is constrained by the availability of earnings in many sectors, and is thus subject to considerable downward revision at a later stage in our view, especially for manufacturing and construction.” However, higher-than-expected growth of agriculture and public administration is likely to prove more durable, she said.

Normal monsoon has boosted gross value added in the farm and allied sector, which stood out as the second fastest-growing segment in Q4 with a 5.9%, an eight-quarter high.

Upasna Bhardwaj, senior economist at Kotak Mahindra Bank, said it’s probable that some data gaps could have made the latest data (for Q4) patchy. “We expect the Q1FY21 to record a sharp contraction of over 14%, with only a gradual recovery thereafter. For the year, we continue to expect contraction in GDP (over 5%). Accordingly, expansionary fiscal and monetary response will have to continue to aid the economy.”