Photographer: Dhiraj Singh/Bloomberg

GDP Growth Moderates To 6.6% Pulling Down Economic Expansion In FY19

The Indian economy slowed in the October-December 2018 period, showed government data released on Thursday. The slower growth in the third quarter, together with a downward revision in growth for earlier quarter, brought down the estimate for growth in 2018-19 to 7 percent from the earlier estimate of 7.2 percent.

At 7 percent, growth in the Indian economy has fallen to a five-year low.

Gross domestic product rose by 6.6 percent in the third quarter of the current financial year, showed data released by the Central Statistics Office on Thursday. This compares to 8 percent growth in the first quarter and 7 percent growth in the second quarter. Given the estimated 7 percent growth for the full financial year, fourth quarter growth is pegged at 6.3 percent.

In gross value added (GVA) terms, the economy grew at 6.3 percent in the third quarter of FY19.

A Bloomberg poll of 41 economists had estimated GDP growth at 6.8 percent for the third quarter. GVA growth was estimated at 6.5 percent according to 29 economists polled by Bloomberg.

The primary reason for the downward revision in FY19 growth is an upward revision in FY18 GDP growth announced as part of the revised estimates released on Jan.31, 2019, said Devendra Pant, chief economist at India Ratings and Research. Those estimates had revised the growth rate for the last financial year to 7.2 percent from 6.7 percent earlier.

FY19 GDP growth at 7 percent is lowest in last five years and Q3 FY19 growth at 6.6 percent is a six-quarter low. This indicates that the economy is losing steam.
Devendra Pant, Chief Economist, India Ratings and Research

Sectoral Trends

  • Agriculture sector grew at 2.7 percent in Q3 compared to 4.2 percent in Q2
  • Manufacturing grew at 6.7 percent in Q3 compared to 6.9 percent in Q2
  • Construction grew at 9.6 percent in Q3 compared to 8.5 percent in Q2
  • The mining sector growth stood at 1.3 percent compared to -2.1 percent in Q2
  • Trade, hotel, transport, communication growth stood at 6.9 percent, unchanged from the previous quarter
  • The financial services sector grew at 7.3 percent compared to 7.2 percent in the previous quarter.
  • The public administration segment, supported by government spending, grew at 7.6 percent in Q3 vs 8.7 percent in Q2.

Data for the full financial year tells the story of an economy where some segments have slowed, while others have seen acceleration in growth. Agriculture and mining are two sectors which have seen a significant drop in real growth rates between FY18 and FY19.

For the agriculture sector, in particular, a sharp slowdown has been seen in nominal growth from 7 percent in 2017-18 to 3.2 percent in 2018-19. This reflects the sharp fall in food prices. Real growth in agricultural output is seen slowing to 2.7 percent this year compared to 5 percent last year.

In output terms, there is not really a slowdown in agriculture because you should look at output over a longer period. So that is not alarming. What is alarming is that we are seeing is that in recent quarters, the nominal growth number has been running below the real growth number for agriculture. Which means far incomes continue to take a hit.
Pronab Sen, Former Chief Statistician of India

However, growth in the manufacturing sector picked up significantly as did activity in the construction sector. The pick-up in construction may have been largely due to government spending on infrastructure, said Sen.

Expenditure Trends

Expenditure trends show that private spending slowed compared to the second quarter but remained at par with the first quarter of the year. Investment, as reflected by gross fixed capital formation remained strong.

  • Private final consumption expenditure grew 8.3 percent in Q3 compared to 9.8 percent in Q2.
  • Government expenditure grew 6.5 percent in Q3 compared to 10.8 percent in Q2.
  • Gross fixed capital formation growth was at 10.6 percent in Q3 compared to 10.2 percent in Q2.
Private consumption slowed substantially. This was expected after the fallout in India’s shadow banking system which had been active in the consumer loan space. Even government consumption was weaker than before. On the other hand, gross fixed capital formation and exports were a notch stronger.
Pranjul Bhandari, Chief India Economist, HSBC

Impact On Fiscal Deficit Data

Pant of India Ratings said the data would help the government meet its fiscal deficit targets.

“The size of the economy (nominal GDP) in FY19 is now estimated as Rs 190.54 lakh crore compared to the earlier estimate of Rs 188.41 lakh crore. “This will help government to achieve fiscal deficit/GDP target for FY19 even though the fiscal deficit till January 2019 is 121.5 percent of FY19 (revised estimate),” said Pant.

The government is targeting a revised fiscal deficit of 3.5 percent for FY19, it said in the budget announced in February.