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FY20 growth stands at 11-yr low of 4.2%

By Roshan Kishore and Rajeev Jayaswal, New Delhi
PUBLISHED ON MAY 30, 2020 12:02 AM IST

The Indian economy grew by 3.1% in the three months ended March and 4.2% in 2019-20 on the back of falling investment and consumption, with the lockdown imposed to slow the spread of the coronavirus disease (Covid-19) having only a marginal impact because it affected only the last week of March.

The lockdown, however, is expected to sharply affect growth in 2020-21, with many analysts estimating that the economy will actually shrink, perhaps by as much as 5% this financial year.

The quarterly and annual numbers are against projections of 4.7% and 5% respectively, although it has been clear for some time that these will not materialise. Provisional accounts for 2019-20 released Friday showed that the fiscal deficit for the year was 4.59%.

To be sure, the March quarter performance is better than expected. A Reuters poll of economists forecast a growth rate of 2.1% for the March quarter.

The 3.1% growth in the March quarter is the lowest since March 2009, when, under the impact of the global financial crisis, the economy expanded by only 0.2%. The 4.2% growth in 2019-20 is an 11-year low.

According to the Reserve Bank of India (RBI), India’s gross domestic product (GDP) will shrink in 2020-21. This means that India’s GDP would have been in a deceleration phase for four consecutive years since 2017-18. This is unprecedented in post-Independence India.

Friday’s data also shows that Gross Fixed Capital Formation (GCFC), a measure of investment, will contract by 2.8% in 2019-20. The Centre for Monitoring Indian Economy’s (CMIE) database shows that this is the worst investment performance since 1991-92.

Core inflation, ie non-food non-fuel inflation, grew at 3.8% in 2019-20, the lowest since 2012-13, the earliest period for which data is available under the 2012 Consumer Price Index series. RBI reduced its policy rates in every quarter in 2019-20. A contraction in investment in a low interest low inflation environment suggests that it is lack of demand rather than availability of cost of capital which has led to this.

Put the two together and it means that both investment and consumption, two pillars of the economy, are in trouble.

The government announced a host a measures to boost the economy last year. The biggest among these was a reduction in corporate tax rates which was expected to reduce tax burden on companies by ~1.45 lakh crore in the month of September. The economy’s performance in the December and March quarters shows that they have not helped.

Private Final Consumption Expenditure (PFCE) statistics support the weak demand argument. From a peak of 8.1% in 2017-18, it grew at just 5.3% in 2019-20. Government spending is the only head which has grown at a faster pace than 2018-19. However, Government Final Consumption Expenditure accounts for just 10% of the GDP. PFCE and GFCF have a share of 56% and 29%, respectively.

Gross Value Added (GVA) figures for the March quarter also suggest that employment-intensive sectors in the non-farm sectors might have suffered a bigger hit due to the pandemic. Construction and trade, hotel and restaurants category has suffered the biggest reduction in growth rate between the December and March quarters. Manufacturing, which was already contracting in the September and December quarter, lost another 66 basis points in terms of growth in the March quarter. These three sectors account for 41% of India’s total employment.

The index of eight core sector industries — coal, crude oil, natural gas, refinery, fertiliser, steel, cement and electricity — fell by 38% in the month of April. This suggests that non-farm activity, especially manufacturing and construction will not revive in the June quarter as well.

The GDP figures reinforce a trend which was seen in the December numbers released on February 28. They show that the previous numbers were underestimating the economic slowdown. The latest figures highlight a downward revision of 16, 36, 66 and 64 basis points in the GDP growth figures for the March 2019, June 2019, September 2019 and the December 2019 quarter respectively.

DK Aggarwal, president of PHD Chamber of Commerce and Industry, expressed concern about the deceleration in GDP growth to the level of 3.1%. He, however, expressed optimism that the growth will revive in the second half of the financial year 2020-21 on the back of various reform measures announced by the government. The government has announced a slew of policy reforms and a revival package of ~20 lakh crore to help India cope with the Covid-19 pandemic and the impact of the lockdown imposed to fight it.

“The stimulus package will re-fuel economic growth fundamentals of the economy and resume the lost economic activity, going forward,” he said in a statement.

DK Srivastava, chief policy advisor at EY India, said the real GDP growth has fallen to 4.2% in 2019-20, the lowest since 2008-09 when it was 3.1%, due to a contraction in investment (-2.8%) and exports (-3.6%).

“On the output side, there has been a fall mainly in manufacturing, construction as also in the two heavy-weight service sectors namely, trade, hotels, et al, and financial and real estate services. India is thus facing a problem of falling investment and savings and an acute problem of Covif-19-induced lockdown,” he added.

Dilip Chenoy, secretary general of the Federation of Indian Chambers of Commerce and Industry (Ficci), said: “GDP numbers released today are on expected lines. The data reflects the impact on the economic situation due to actions on account of Covid-19. Growth slipped to 3.1% in the fourth quarter of 2019-20 and to 4.2% for the full fiscal year 2019-20 and this is the lowest since 2008-09.”

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