Q2 GDP Growth: Bad But How Bad?

Economists believe that growth will weaken further in the second quarter but may bottom-out thereafter.

A Bloomberg poll of 35 economists estimate GDP growth at 4.6 percent in the July-September. Gross Value Added growth is expected to moderate to 4.5 percent in Q2 FY20 from 4.9 percent in Q1 FY20, according to 22 economists polled by Bloomberg. GVA strips out the impact of indirect taxes and subsidies, providing a better indicator of underlying economic trends.

With first-half growth expected to remain weak, a number of forecasters are now also projecting that the economy will expand at a pace less than the 6.1 percent projected by the Reserve Bank of India for the full financial year. Some, like Nomura Global Markets, expects full year GDP growth at 4.9 percent in FY20.

For a forward-looking assessment of the state of the economy, the central bank relies on a ‘Coincident Economic Indicator for India’—an econometric model based on economic indicators which correlate strongly with GDP growth. Two indices are considered—a six-indicator CEII comprising the production of consumer goods, non-oil non-gold imports, auto sales, rail freight, air cargo, and government receipts and a nine-indicator CEII, which additionally includes IIP-core, exports, and foreign tourist inflows.

Data compiled by BloombergQuint indicates that apart from a pick up in government expenditure, there was little to support the economy in the second quarter.

Looking at these indicators, economists are projecting that growth will fall below 5 percent for the first time since the March 2013 quarter.

Weather-related disruptions, a buildup of stress in credit markets and perhaps the worst bout of slowing in consumer demand will put downward pressure on GDP growth, said Rahul Bajoria, chief India economist at Barclays, in a research note dated November 21, 2019.

Among key sectors, Bajoria estimates that agriculture will grow by 3.5 percent in Q2 as compared to 2 percent in Q1. While better-than-expected monsoon and the continued roll-out of the farmer income transfer scheme should facilitate improvement in activity, excess rainfall in August-September could weigh on output at the margin. Mining and quarrying is estimated to contract by as much as 5 percent as compared to a growth of 2.7 percent in the preceding quarter. The slowdown in manufacturing remains the key pressure point and is expected to contract by 2 percent after registering a growth of 0.6 percent, Bajoria estimates.

Devendra Pant, chief economist at India Rating and Research expects GDP growth of 4.7 percent in the second quarter and pegs full year growth at 5.6 percent. “The 5.6 percent GDP growth will require heavy lifting by the government. Although government expenditure did not witness much traction in Q1 FY20 due to parliamentary elections, it picked up significantly in Q2 FY20,” Pant said.

According to IDFC First Bank, growth in the second quarter could have fallen as low as 4.5 percent and this could lead to ‘lower for longer’ growth for India. The research house pegs full year growth at 5.3 percent now.

Auto Sales

Vehicle sales were among the first indicators to signal weakness in the state of the economy. This continued in the second quarter.

Auto sales fell 21.5 percent in Q2 FY20 on an annual basis as compared to a contraction of 12.3 percent in the first quarter of the ongoing financial year.

To be sure, sales exhibited a positive growth of 10.1 percent in September on a month- on-month basis, though it remains to be seen if the reversal can be sustained.

IIP Core

Industrial production, which held up until the first quarter, also fell in the second quarter led by a steep contraction in September.

It contracted by 1 percent in the second quarter on an average as compared to a growth of 3.2 percent in the first quarter of the current fiscal. In the second quarter of last financial year, this indicator had shown a growth of 11.2 percent.

Production Of Consumer Goods

Contraction in production of consumer durables deepened to 7.2 percent on an average in the second quarter.

Consumer non-durables, however, continued to grow, albeit at a slower pace, as the category comprises largely of basic food products. Consumer non-durables grew by 3.7 percent on an average in the second quarter.

Logistics

Growth in different segments of logistics continued to be dragged down by low economic activity.

Rail freight contracted by 3.7 percent in the second quarter of the current financial year as compared to a growth of 2.7 percent in the first quarter and 4.4 percent growth in the year-ago quarter.

Air cargo continued to decline, contracting by 1.4 percent in the second quarter, as compared to a contraction of 0.9 percent in the first quarter and a growth rate of 11.1 percent in the year-ago quarter.

Foreign Trade

India’s foreign trade position has moderated due to weak domestic and global demand. Non-oil and non-gold imports continued to contract for the third straight quarter. They contracted by 6.8 percent in the second quarter as compared to a contraction of 4.2 percent in the preceding quarter and a growth rate of 10.8 percent in the second quarter last year.

Exports contracted further by 3.6 percent in the second quarter on an annual basis after having contracted by 1.4 percent in the first quarter and recording a growth of 11.2 percent in the year-ago quarter.

However, given the sharper fall in imports vis-a-vis exports, the contribution of net exports may improve during the quarter.

Government Spending Support?

Amid a broad-based decline in high-frequency indicators across the private sector, a pick-up in government spending may aid the economy in the second quarter after a period of lull during the general election time.

Government expenditure grew 39.8 percent for the second quarter on an annual basis. The increase in expenditure was steeper than what was seen in the same quarter last year.