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Q1 GDP Shocker: Economists Cut FY20 Growth Estimates, Predict More Rate Cuts

The lowest quarterly GDP growth in 6 years has prompted economists to review full-year estimates & call for more monetary easing.



Goods are transported on a tricycle through a street in Kolkata, India. (Photographer: Brent Lewin/Bloomberg)
Goods are transported on a tricycle through a street in Kolkata, India. (Photographer: Brent Lewin/Bloomberg)

A fall in India’s quarterly GDP growth rate to 5 percent — the lowest in six years — has prompted economists to review full year growth estimates and call for more monetary easing.

The consumption and private sector-led deceleration in growth is driven by factors ranging from reduced availability of financing from non-bank lenders to weaker income growth and falling savings, economists said in response to the data release on Friday.

6 Percent GDP Growth In FY20?

The sharply lower-than-expected GDP growth in the first quarter of the current financial year could mean that growth in the full financial year may be much lower than expected.

Sonal Varma, chief India economist at Nomura has marked down the full year growth forecast to 6 percent. This is well below the RBI’s forecast of 6.9 percent GDP growth.

Varma believes that Q1 FY20 marked the trough in the growth rate cycle and expects some modest improvement from here on.

In hindsight, the decision to keep banking system liquidity tight until June amid the shadow banking crisis perpetuated the slowdown. However, the course correction (on liquidity) has started since July. The impact of the cumulative 110 basis points of rate cuts and surplus liquidity is enabling better transmission and should support a gradual growth recovery.
Sonal Varma, Chief India Economist, Nomura

Varma expects another 40 basis points in rate cuts in 2019 and does not expect the government to give in to calls of a fiscal stimulus.

While rate cuts and liquidity will likely support a consumer recovery, a recovery in private capex remains challenging, Varma said.

Fall In ‘Core-GVA’

Along with the fall in the headline GDP growth, the contribution of the private sector to growth also fell.

Sajjid Chinoy, chief India economist at JPMorgan pointed out that core GVA growth — which excludes the contribution of agriculture and government spending — weakened even more sharply than the headline print. Core GVA growth fell to 4.9 percent in the April-June 2019 quarter compared to 6.1 percent a year ago.

Consumption is currently undergoing a perfect storm in India, likely reflecting both cyclical factors (tighter financing conditions, a struggling auto sector) and more structural ones (a decline in agrarian terms of trade which is depressing rural purchasing power and a sustained fall in household savings in the wake of softer income and wages).
Sajjid Chinoy, Chief India Economist, JPMorgan

Chinoy expects another 25 basis point interest rate cut at the next monetary policy meeting in October.

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No Major Impetus To Growth?

With a deeper-than-estimated trough and lack of significant impetus to the growth, the recovery could be weak, said Suvodeep Rakshit at Kotak Institutional Equities.

Kotak revised its GDP growth estimate for FY20 by 50 basis points to 5.8 percent.

Pressure on the economy and sectors of the economy has been broad-based, said Rakshit.

While rural consumption has been weak owing to near stagnant farm income growth, urban consumption has been under pressure owing to (1) trough in savings rate, (2) worsening financing conditions and (3) fading out of government salary adjustments. Government expenditure growth also slowed to 8.8 percent (13.1 percent in Q4 FY19) primarily due to slower pace of expenditure during elections.   

Given the weak growth and benign inflation, the research house expects another 75 basis points in interest rate cuts in FY20, with a cut of 40 basis points in October.

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The Few Silver Linings

While a slowdown in both rural and urban India is weighing on consumption, there are some small green shoots, said Pranul Bhandari, chief India economist at HSBC Global Research.

On the GVA side, agriculture, electricity and trade services inched up. While core GVA fell on a y-o-y basis, it improved a notch sequentially. On the GDP side, net exports improved (with imports slowing faster than exports). Fixed investment also grew at a faster clip (but the number tends to get revised sharply in subsequent quarters).
Pranjul Bhandari, Chief India Economist, HSBC Global Research

Bhandari said the slowdown, which has been driven by several factors, has attracted a multi-pronged policy approach, including steps taken to stabilise the NBFC sector, easier banking liquidity and the recent measures announced by the government for the auto and MSME sectors.

Additional policy support could come for another 50 basis points in rate cuts this financial year, Bhandari said.