GDP growth expected to print sub-6.5% in FY20: ICRA's Aditi Nayar

The pace of growth of GDP and GVA in Q1 FY20 recorded a surprisingly sharp slowdown to 5 per cent and 4.9 per cent, respectively, from 5.8 per cent and 5.7 per cent, respectively in Q4 FY19. The main culprit was the manufacturing sector, which saw a collapse in growth to 0.6 per cent in Q1 FY20 from the low 3.1 per cent in Q4 FY19. Accordingly, while the headline GVA growth slowed to 4.9 per cent in Q1 FY20 from 5.7 per cent in Q4 FY19, the expansion of GVA ex-manufacturing recorded a narrower dip to 5.9 per cent from 6.3 per cent, respectively.  

The contraction in volumes in the auto sector, the YoY decline in the value of merchandise exports, as well as a slowdown in growth in other consumer sectors contributed to the subdued manufacturing GVA growth in Q1 FY20, outweighing the positive impact of low commodity prices. With substantial inventory correction likely to have been undertaken in some sectors in Q1 FY20, manufacturing GVA growth may not remain this subdued in the coming quarters, even if consumer sentiment and exports remain tepid. 

Government spending was the key driver of GDP growth in Q1 FY20. The outlook for the same appears somewhat mixed. The pace of government spending is expected to pick up in the post-Budget months. Moreover, additional spending may be incurred following the recent measures announced to arrest the slowdown in economic growth. However, a back-ended reduction or deferral in expenditure may have to be undertaken in Q4 FY20, to prevent a fiscal slippage, particularly if tax revenue collections do not revive.

The low growth of private consumption expenditure in Q1 FY20 is unsurprising, given the mounting evidence of weak urban and rural sentiment. The unfavourable temporal and spatial spread of the monsoon rains may affect kharif yields and further dampen rural sentiment in H2 CY2019. However, the rapid replenishment of reservoirs bodes well for rabi sowing and rural sentiment in Q4 FY20. 

The cumulative repo rate cuts of 110 basis points and improved transmission of monetary easing would boost sentiment to some extent going forward. Nevertheless, consumer sentiment and demand will remain contingent on the broader outlook for agricultural and economic growth, as well as availability of financing through NBFCs.

Regardless of the monetary easing and the measures announced so far by the government to support the economy, some of the constraints to economic growth, including the moderate capacity utilisation levels, cost of land acquisition, and weak outlook for farm incomes, would persist. We continue to expect private investment to remain muted, particularly given the availability of brownfield assets through the NCLT. Exports too are unlikely to revive considerably given the global economic slowdown.

Although the pace of expansion is expected to rise in the subsequent quarters from the multi-year low recorded in Q1 FY20, GVA and GDP growth are expected to print sub-6.5 per cent in the current fiscal.

The unexpectedly low print for Q1 FY20 is likely to lead to a further paring of the MPC’s GDP growth forecast for FY20. Whatever space is assessed for further policy rate cuts is also likely to be front loaded in the October 2019 policy review.

Views expressed are personal