GDP growth slips to five-year low on slowdown in investment, manufacturing

Govt blames NBFC crisis for the slowdown

India’s economic growth fell to 5.8 per cent in the January-March period of 2018-19, the lowest in 20 quarters, due to a sharp slowdown in investment and manufacturing growth as well as a contraction in agricultural production. This pulled down the gross domestic product (GDP) expansion to 6.8 per cent in FY19, the slowest in the first stint of the Modi government. The economy’s revival will be a key challenge for the new finance minister, Nirmala Sitharaman. 

Economic growth in FY19 was much below the government’s own projections of 7.2 per cent in the first advance estimates and 7 per cent in the second one. Economists expect the Reserve Bank of India’s (RBI's) Monetary Policy Committee to cut the policy rate in the upcoming meeting to revive investments.

The March quarter growth made India fall behind China as the fastest-growing large economy after a year-and-half, as the neighbouring nation grew by 6.4 per cent in the quarter. On an annual basis though, India continued to remain the fastest-growing large economy. This point was emphasised by Finance Secretary Subhash Chandra Garg.

Garg attributed the slowdown in GDP to the crisis in non-banking financial companies (NBFCs). “The slowdown in the fourth-quarter GDP was due to temporary factors like stress in the NBFC sector, which affected consumption finance. The first quarter of the current fiscal year (2019-20) would also witness relatively slow growth but from the second quarter onwards, it will pick up,” Garg said.

However, financial services and related sectors grew by 9.5 per cent in the fourth quarter of FY19, the highest pace in at least eight quarters.

Growth in the gross fixed capital formation (GFCF), which denotes investments, declined to 3.4 per cent, the lowest in several quarters. With private investment already low, the government’s curtailment of capital spend in the fourth quarter to meet the fiscal deficit target could be blamed for the sharp fall in the GFCF growth, which was over 10 per cent in the previous three quarters. The government’s revenues saw a shortfall of over Rs 1.6 trillion, according to the data released by the Controller General of Accounts on Friday. 

With the fiscal deficit targeted at 3.4 per cent of GDP for 2019-20 in the interim Budget, it would be crucial to see if Sitharaman will go by this number or change it to perk up the economy. 

"We believe that the government should target a structural deficit as an alternative to targeting the fiscal deficit, like most advanced economies and several emerging market economies. This serves as an automatic counter-cyclical stabiliser unlike the current target that has been set from the outset as a fixed percentage of GDP," SBI group Chief Economic Advisor Soumya Kanti Ghosh said. 

Private final consumption expenditure growth fell to 7.2 per cent in the fourth quarter from 8 per cent in the third and 9.7 per cent in the second. The growth stood at a meager 7.3 per cent in the first quarter. Manufacturing activity suffered a slowdown, with growth falling to 3.1 per cent in Q4 compared to 6.4 per cent in the third quarter, 6.9 per cent in the second quarter and 12.1 per cent in Q1.

“Low growth in manufacturing calls for direct intervention by the government. The economic activities are likely to pick up as the government is likely to undertake measures to boost growth,” Madan Sabnavis, chief economist at CARE Ratings, said. 

However, lower consumption and investment may continue to constrain the overall economic growth, which is expected to see only gradual pick-up in the coming year. 

“We project the country’s GDP to grow by 7.2 per cent in 2019-20. There is a 50 per cent chance that the RBI will go in for a rate cut by 25 bps in its June policy to give an impetus to the lagging growth,” he said. 

The government’s final consumption expenditure showed a stellar growth of 11.5 per cent, which could be on account of revenue spending to meet routine expenses like salaries.

Agriculture and allied activities saw a 0.1 per cent contraction in Q4, compared to 2.8 per cent in the previous quarter. The meteorological department predicted on Friday that the monsoon would be normal this year. However, some regions such as north-west and north-east would receive less than normal rains, according to the official weather forecaster. 

Acreage for the rabi crop was lower than last year, which has impinged on the agricultural performance. 

"We expect consumption impulses to remain muted in the upcoming print, and recovery in the same will depend on the monsoons and the efficacy of the income schemes for the rural population," said B Prasanna, group head – global markets – sales, trading and research, ICICI Bank. 

D K Joshi, chief economist at CRISIL, said he expected the economic growth to lift in fiscal 2020, particularly from the second half over a weak base, as normal monsoons, softer interest rates and budgetary measures kick in to support consumption. "These factors should help growth cross 7 per cent in fiscal 2020," he said.