Q1 GDP Growth: A Quarter Of Many Lows
Men use smartphones in front of a shuttered store in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

Q1 GDP Growth: A Quarter Of Many Lows

Growth in the Indian economy plunged to a six-year low, with gross domestic product growing at just 5 percent compared to a year ago. Apart from the headline number, the fine print of the GDP release was also worrying.

Economists point to the sharp fall in nominal GDP growth, which has a signifcant bearing on earnings of corporations and eventually the government’s tax collections. They also point to the sharp slowdown in employment generating sectors like construction and manufacturing.

Nominal GDP Lowest In Fifteen Years

Data for the current GDP series with the 2011-12 base, available on Bloomberg, shows that 8 percent nominal GDP growth during the quarter was the lowest in this series.

According to Neelkanth Mishra of Credit Suisse, when the data is compared across series, the nominal GDP growth recorded in the first quarter is the lowest in fifteen years. It is also well below the 11 percent used for budget calculations, which could bring fiscal targets in question.

“Government spending will very likely slow down as tax revenues start to come under pressure: nominal growth, just below 8 percent, was the weakest in 15 years, even below June 2009 levels due to low inflation,” Mishra said.

Consumption Growth At 18-Quarter Low

The weakness in consumption added to the already sluggish private investment to push GDP growth down.

Private consumption expenditure growth fell to an 18-quarter low. Total consumption, which includes the government, also slowed sharply to 4.1 percent from 8.1 percent last quarter.

“It has been consumption expenditure which has been the main engine of growth since FY12 is showing signs of losing steam, with both rural and urban demand weakness,” said Indranil Pan of IDFC Economic Research in his note. Urban demand has been impacted by the liquidity crunch facing NBFCs, while rural consumption has been impacted by the negative terms of trade facing the agriculture sector, Pan wrote.

Manufacturing Growth At Its Lowest In Two Years

The sectoral division of GDP data showed that the manufacturing sector saw growth fall to 0.6 percent, the lowest in two years.

The manufacturing sector had seen a de-growth in the June 2017 ended quarter. If that one quarter, which could have had to do with de-stocking ahead of GST implementation is excluded, manufacturing growth is the lowest since 2012.

“The contraction in volumes in the auto sector, the year-on-year decline in the value of merchandise exports, as well as a slowdown in growth in other consumer sectors seem to have underpinned the marginal rise in manufacturing growth in Q1 FY20, negating the benefits arising from low commodity prices,” said Aditi Nayar, economist at ICRA.

Construction Growth Falls To Seven Quarter Low

Construction — another employment intensive sector — also saw growth fall to a seven quarter low.

The construction sector, too, has been hit by a series of changes from the Real Estate Regulation Act to a weakened funding scenario. In recent months, non-bank lenders have been forced to pull back on lending to developers, which has impacted the pace of construction activity.

“After agriculture real estate/construction is the second largest employer and also has the huge backward and forward linkages with other sectors. So reviving real estate sector will be crucial both from the investment as well as consumption point of view,” said Devendra Kumar Pant, chief economist at India Ratings and Research.

Agriculture Sees Modest Pick-Up

Perhaps the only dim silver lining in the GDP data was the modest pick-up in agriculture growth to 2 percent. However, real growth remains very low and so do food prices. This would imply continued weak growth in nominal growth in the agriculture sector, which would mean that rural incomes are likely to remain under pressure.

The outlook for the agriculture sector is mixed.

Ahead of the GDP release, CRISIL said that after three years of healthy growth, kharif output this time could decline 3-5 percent because of lower sowing acreage and yields being impacted by uneven distribution of rains. However, farm profit from field crops is expected to increase 10-12 percent in the kharif season 2019 because of expected higher prices, said CRISIL.

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