Economic growth falls to lowest in over 6 years
Gross domestic product (GDP) growth decelerated to the slowest pace in 25 quarters in the three months ended June 30 as a downturn in household consumption took its toll on key sectors, deepening concern about the anaemic state of the economy.
According to data released on Friday by the Central Statistics Office (CSO), the economy expanded 5% from a year ago in the first quarter of the 1919-20 financial year, after growing 5.8% in the quarter ended March, the final quarter of the last fiscal. It marked the fifth straight quarterly decline in growth — the first time since June 1997 that such a prolonged slump has been recorded.
It’s the slowest pace of growth since the March 2013 quarter when GDP, the value of goods and services produced in the economy, had expanded 4.3%.
Slowing household demand has eroded economic growth — a fact signalled by high-frequency indicators such as domestic car sales that have declined for 12 consecutive months. The bimonthly consumer confidence survey of the Reserve Bank of India (RBI) has reported a sharp fall in the net share of respondents who see their non-essential spending going up either now or a year later.
Private Final Consumption Expenditure (PFCE), which accounts for more than half of India’s GDP, grew just 3.1% in the June quarter. Between June 2012 and June 2019, periods for which quarterly GDP data is available for the 2011-12 series, PFCE growth has been less than 4% in only three quarters: June 2012, December 2012 and June 2019.
The collapse of private consumption demand from growth of 10.6% in the quarter ended March to 3.1% in the three months to June is a real cause of concern and may prompt the government to undertake some measures to provide a short-term boost to the economy, said Devendra Pant, chief economist at India Ratings and Research, an arm of the global rating agency Fitch Group.
“It’s coming... coming ... It has come. The reason [for the slowdown in consumption] is the income at the lower level is not growing. Income at the higher level is stagnant. So people are not increasing their purchases”, said Pranab Sen, former chief statistician.
The collapse in consumer demand dented manufacturing sector growth, which plunged to 0.6% in the June quarter. Construction, the single biggest source of employment after agriculture, grew 5.8% in the quarter, the slowest in seven quarters. The agriculture sector recorded 2% growth after falling to minus 0.1% in the March quarter. Another important takeaway from the GDP statistics is the collapse in nominal growth rate, which was just under 8% in the June quarter. Nominal GDP growth factors in inflation, which reflects higher prices.
This is only the fourth instance since June 1997 that nominal GDP growth has been less than 8%, and if the trend is sustained, capable of upsetting the fiscal math. This is because tax calculations, which are a fraction of income, in the budget are premised on nominal GDP growth assumption. This year’s budget has assumed a 12% nominal GDP growth rate.
The latest GDP figures are likely to precipitate a debate on the primacy of cyclical versus structural factors in the current economic slowdown. On Thursday, RBI’s annual report argued that notwithstanding the need for structural reforms, the current slowdown could be a result of cyclical factors.
The government’s action plan to deal with the slowdown is in keeping with the RBI’s reasoning. On 23 August, finance minister Nirmala Sitharaman announced a range of measures to boost economic sentiment, improve availability of credit and working capital and provide some sort of stimulus to the automobile sector.
Chief economic adviser KV Subramanian ascribed the slowdown in GDP growth to a mix of domestic and global factors and said the economy would be on a high-growth path “very soon”.
“The government is alive to the situation and has taken several measures including mega merger of banks [announced during the day],” he said, referring to the proposed merger of 10 public sector banks into four. This, the government argued, will modernise the financial sector and boost its role in the task of making India a $5 trillion economy by 2024.
Some experts do not agree with the cyclical slowdown thesis. “A massive squeeze on the rural sector to keep food inflation under check along with policies such as demonetisation and Goods and Services Tax (GST) only worsening things for the informal sector has given a structural blow to aggregate demand in the economy”, said Himanshu, an associate professor of economics at Jawaharlal Nehru University.
The corporate sector is clinging to hopes of growth bouncing back. “With the onset of the festive season and sufficient monsoon, we expect an all-round improvement across different sectors even as the banks gear themselves with higher liquidity of over Rs 5 lakh crore”, said Niranjan Hirandani, senior vice president of the Associated Chambers of Commerce and Industry of India.
“As indicated by the finance minister, some of the large NBFCs are being reached out by the banks, a critical move that would restore confidence in the sector. Similarly, clarity on the automobile sector with regard to electric vehicles road map etc. should also help”, he added.