GDP expected to grow at 11-year low
India’s gross domestic product (GDP) is expected to grow at 5% in FY20, a 11-year low, the Central Statistical Office (CSO) said in its first advanced estimate released on Tuesday. The forecast is even more worrying on the revenue collection front, as nominal GDP growth is expected to fall to 7.5%, the lowest since FY76.
The projected growth for FY20 is the lowest since FY09, when GDP growth plummeted to 3.1% amidst turbulence because of the 2008 global financial crisis. The CSO’s forecast is in keeping with the assessment of the monetary policy committee (MPC) of RBI in its December 2019 meeting. To be sure, these numbers are based on extrapolation of data available up to first half of the fiscal year and could change either way in further revisions.
The GDP growth in FY19 was 6.8%. Over the last two quarters, the GDP has grown at 4.5% (July-September) and 5% (April-June). Even the projected 5% annual estimate assumes a small recovery from October onwards.
The slowdown is a result of deceleration in both private consumption and investment. Private Final Consumption Expenditure (PFCE) is expected to grow at 5.8%, the lowest since FY14, while Gross Fixed Capital Formation (GFCF) growth, a metric of investment activity, has collapsed to less than 1%, the lowest since FY03.
Both in GDP and Gross Value Added (GVA), it is only government-related heads—government final consumption expenditure and public administration, defence and other services—which have shown higher growth than last year, which suggests that the entire private sector is caught in the slowdown.
GDP at current prices, which is what matters for tax collection, is expected to grow at just 7.5% in the current fiscal year. This is the lowest nominal GDP growth since FY76, shows an analysis of the Centre for Monitoring Indian Economy (CMIE) database. The projected nominal growth rate is also 50 basis points less than what the report of the task force on National Infrastructure Pipeline (NIP) projected for the current fiscal year. One basis point is one hundredth of a percentage point.
Given the fact that the projected nominal growth rate is 4.5 percentage points lower than the 12% figure assumed in the budget, it is likely to trigger a big revenue shortfall. On Tuesday, Reuters reported that the Union government is expecting a revenue shortfall of up to ₹2.5 lakh crore and is looking to cut back on its committed spending by up to ₹2 lakh crore. The revenue shortfall projected in the report is more than 10% of the budgeted gross tax revenue of the centre in the FY20 Union budget. Such a cut in government spending could add to the growth slowdown, as it will involve a lowering of the higher growth in government spending assumed in the forecasts.
The GDP numbers also suggest that CSO expects food inflation to remain high at least until March. The difference between nominal and real growth for agriculture and allied activities is expected to climb up to 7%, the highest since FY16.
Given the fact that food items have a much bigger share in the Consumer Price Index (CPI) basket, India’s benchmark inflation measure, than the Wholesale Price Index (WPI), which is more aligned to the GDP deflator, the increasing gap between nominal and real growth in agriculture suggests a higher CPI for the rest of the year.
Analysts believe that a rising CPI could create a policy dilemma for the MPC when it meets in February. The MPC did not cut policy rates in its December meeting and a rise in CPI, even though it is being driven by food prices, could add to such reservations.This could adversely affect private investment.
“The government has to decide whether it wants to revive the economy or please fiscal hawks in its budget,” said Himanshu, an associate professor of economics at the Jawaharlal Nehru University.
“Any cut in government spending will adversely affect not just the government component of GDP but also mass demand, which the government does not even know about after scrapping the CES report,” he added.
DK Srivastava, chief policy advisor, EY India, said: “The key news in CSO’s first advanced estimates of FY20 GDP released today is the fall in the nominal GDP growth to 7.5% in FY20 as compared to the previous peak of 13.8% in FY13 ...This fall translates into a fall in tax revenues and an increase in the fiscal deficit which are both detrimental to growth. The estimated real gross domestic product growth at 5% was earlier anticipated by the RBI and the CSO release confirms the continuing slowdown momentum.”
DK Aggarwal, president, PHD Chamber of Commerce and Industry, said growth at 5% for the year 2020, as estimated by CSO, is “worrying”.
“We look forward that growth will rejuvenate soon on the back of a string of economic reforms undertaken by the government during the last few months,” he said.
“The synchronisation of economic reforms between the central government and the state governments and transmission of cut in policy repo rate by the banking sector would pave the way for the revival of growth trajectory. Demand creation would be crucial at this juncture to build the confidence of producers and investors,” he said.