How Far Did GDP Growth Slip In The January-March Quarter?

Growth in the Indian economy may weaken in the January-March quarter as a confluence of factors turned adverse. Slower financing from non-bank lenders, weaker demand for consumer products like automobiles, and lower output in the farm sector are expected to pull down the fourth quarter’s GDP growth to near 6 percent.

India’s Q4 GDP growth is expected at 6.3 percent, according to a Bloomberg poll of 30 economists. The range of growth estimates is wide and stretches from a low of 5.7 percent to a high of 7 percent. GDP growth stood at 6.6 percent in the third quarter and is expected to grow at 7 percent in financial year 2018-19, according to the Central Statistics Office’s second advance estimates.

“Both investment demand and consumption demand are showing signs of moderation as revealed by various leading indicators,” Soumyakanti Ghosh, chief economist at State Bank of India, said in a report earlier this week. SBI Economic Research expected Q4 GDP growth to slip to 6.1 percent and FY19 growth to settle at 6.9 percent.

The decline in economic growth is “emanating largely from agriculture, and more modestly, from industrial activity, offsetting a slight rise in services,” said Saugata Bhattacharya, chief economist at Axis Bank Ltd. Bhattacharya, too, expects growth in the fourth quarter to slide to 6.1 percent.

Consumption Slowdown

Trepidation over weakening economic growth has emerged from high-frequency indicators such as auto sales and non-oil, non-gold imports. Consumer goods firms, which have reported earnings for the January-March quarter in recent week, have also spoken of weak consumer demand, particularly in rural areas where lower farm incomes have impacted demand.

“Consumption indicators, such as vehicle sales, are flashing deep red. Moreover, industrial production and external sector activity is also looking bleak. Based on the high-frequency data currently available, our nowcasting model points to growth of 5.7 percent for fourth quarter,” Rabobank economists Hugo Erken and Sophie Borra said in a note on May 24. Rabobank’s Q4 GDP growth estimate is the lowest among the economists polled by Bloomberg.

SBI’s Ghosh said high-frequency indicators are pointing to a slowdown in both urban and rural consumption demand.

According to estimates by Axis Bank, agricultural output could contract 0.1 percent in the fourth quarter compared with 2.7 percent growth in the third quarter. A high-base effect from the year-ago quarter and weaker output could impact growth in agriculture. Growth in industry is seen at 5.6 percent in the fourth quarter compared with 6.1 percent in the preceding three months, while growth in the services sector is expected to be steady at 7.6 percent.

The impact of a credit crisis being faced by non-bank lenders continues to be an overhang on the Indian economy as well. While Reserve Bank of India’s data suggests that flow of funds to the economy in FY19 was higher than in FY18, many people think that availability of credit for various sectors has been constrained.

In addition, the lack of financing to the real estate sector is likely to lead to slower growth for the financing and real estate segments, according to projections by Axis Bank. Some of the slowdown in financing may be compensated with higher growth in the “public administration” segment.

A ‘Kitchen-Sink’ Quarter?

Many economists expect the fourth quarter to be the low-point and expect GDP growth rates to slowly revive from thereon. This was highlighted by Chetan Ghate, member of RBI’s Monetary Policy Committee, in the April meeting.

“I see sub-7 percent growth rates confined possibly to just two quarters: third and fourth quarters of FY19. These will be our ‘kitchen-sink’ quarters (i.e., quarters where most adverse outcomes to the economy are realised),” Ghate had said.

The RBI, in its April monetary policy review, had projected a GDP growth rate of 7.4 percent for FY20. While economists see that forecast as optimistic, they do expect economic growth to stabilise.

Goldman Sachs’ Chief India Economist Prachi Mishra said downside risks to growth may emerge from the troubles faced by the NBFC sector. Mishra forecasts FY20 growth at 7.4 percent but with downside risks.

“The acceleration is based on our assumption of lower oil prices in FY20, an increase in confidence post the elections once the new government and the cabinet take office, and some easing of infrastructure bottlenecks,” Mishra wrote in a note this week.

Should the RBI continue to see some of the factors depressing growth as transient, it may choose to keep further monetary accommodation on hold for now. Mishra sees a status quo on rates in the June policy as the MPC may choose to wait for full transmission of its earlier announced rate cuts.

However, should the GDP data on Friday suggest surprising and protracted weakness, an RBI rate cut of a higher quantum cannot be ruled out. “We are penciling a larger rate cut (35-50 basis points) by the RBI in the forthcoming policy,” SBI’s Ghosh said.