India GDP Growth Falls To 4.5% In July-September Quarter
A man rests on the step of a building in Mumbai, India, on Thursday, Aug. 29, 2019. (Photographer: Dhiraj Singh/Bloomberg Direct Download)

India GDP Growth Falls To 4.5% In July-September Quarter

The Indian economy slowed further in the July-September 2019 quarter, as consumption failed to revive and private investment remained stagnant. Government expenditure, however, picked up pace and helped hold up the economy.

Gross domestic product growth came in at 4.5 percent in the second quarter of 2019-20 compared to 5 percent in the first quarter, showed data released by the Central Statistics Office on Friday. In gross value added terms, the economy grew at 4.3 percent compared to 4.9 percent in the previous quarter.

A Bloomberg poll of 41 economists had estimated GDP growth at 4.5 percent in Q2. GVA was estimated at 4.4 percent, according to 27 economists.

In the current GDP series, the lowest growth rate recorded was 4.3 percent in the fourth quarter of FY13. The growth rate for the second quarter of FY20 is the lowest since then. India’s GDP has now moderated for the sixth straight quarter from 8.1 percent in the quarter ended March 2018, to 4.5 percent now.

The numbers are in line with the weakness shown by high frequency indicators, said Ashima Goyal, member of the Prime Minister’s Economic Advisory Council.

The number has come in-line with what we were expecting based on high-frequency data. In Q1, most analysts who work with high-frequency data predicted a higher growth than actual numbers. So it suggest there is stabilisation on GDP estimation and that it is actually growing at 4.5 percent and not at 3 percent.
Ashima Goyal, Member, Prime Minister’s Economic Advisory Council

Also read: GDP Fine Print: What Economists Make Of The Data

Nominal GDP Growth At Decade Low

Nominal growth in the second quarter, which includes the impact of price changes, fell to its lowest in a decade and stood at 6.1 percent in Q2 vs 8 percent in Q1. Nominal GVA fell to 6.3 percent, the lowest since the third quarter of FY03.

However deflators, which are used to deduce real GDP growth, were lower in Q2 than in Q1.

“ Nominal GDP growth at 6 percent is a big worry. What will happen is your debt- GDP ratio will start flattening out, then probably increase as well. We are already at 69-70 percent debt GDP. So people who are advocating a wider fiscal deficit to be allowed to go up should be taking that into consideration,” said Kaushik Das, chief India economist at Deutsche Bank.

Sectoral Trends

GVA growth was largely pulled down by a contraction in manufacturing and supported by the ‘public administrator’ category.

  • The agriculture sector grew at 2.1 percent in Q2 compared to 2 percent in Q1
  • Mining grew at 0.1 percent in Q2 compared to 2.7 percent in Q1
  • Manufacturing contracted by 1 percent compared to growth of 0.6 percent in Q1
  • Electricity and other public utilities grew by 3.6 percent in Q2 as against 8.6 percent in Q1
  • Construction grew at 3.3 percent in Q2 compared to 5.7 percent in Q1
  • Trade, hotel, transport, communication grew at 4.8 percent in Q2 compared to 7.1 in Q1
  • The financial services sector grew at 5.8 percent compared to 5.9 percent in Q1
  • The public administration segment, supported by government spending, grew at 11.6 percent in Q2 vs 8.5 percent in Q1
Excluding government consumption and agriculture growth, GDP growth stood at 3.2 percent- the weakest print in a decade...Barring government spending, no material gains were seen across sectors.
Rahul Bajoria, Chief India Economist, Barclays

Expenditure Trends

Private consumption, which had fallen to the lowest in the current series last quarter, saw a modest rebound in Q2, while government expenditure continued to do the heavy lifting.

  • Private consumption, reflected in private final consumption expenditure, grew by 5 percent in Q2 compared to 3.1 percent in Q1
  • Investments, as reflected by gross fixed capital formation, grew by 1 percent in Q2 as against growth of 4 percent in Q1
  • Government final consumption expenditure, grew by 15.6 percent in Q2, after growing by 8.8 percent in Q1.

The sequential uptick in growth of private consumption expenditure in Q2 FY2020 is somewhat at odds with the evidence from various sectors regarding subdued consumption sentiment in rural as well as urban areas, said Aditi Nayar, principal economist at ICRA.

Siddhartha Sanyal, chief economist at Bandhan Bank added that despite the modest revival, consumption growth remains below trend. “The consumption basket is close to two-thirds of the economy and typically that gives us a growth rate of 7-8 percent,” Sanyal said.

The Big Picture

The bigger picture, according to economists, continues to be that the Indian economy remains weaker than it has in many years. A large part of the weakness, according to PMEAC’s Goyal, is attributable to relatively high interest rates and weak flow of funds into the economy.

Das of Deutsche Bank agreed that said that further steps are needed to smoothen the flow of credit to the economy.

“Our sense is that the third and the fourth quarter numbers for the fiscal year are going to be marginally better and you will see even sequentially growth is starting to show some signs of improvement,” said Bajoria.

With growth remaining weak, the Monetary Policy Committee is expected to cut rates again when it meets next week. While headline inflation has risen due to higher food prices, weaker core inflation means that the committee may continue to opt for lower rates along with easy liquidity conditions, Das said.

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