GDP growth slows to nearly 7-year low of 4.7% in Q3 on weak manufacturing

Unprecedented contraction in investment and manufacturing output in two successive quarters dragged down India’s economic growth to a 27-quarter low of 4.7 per cent in the quarter ended December 2019 (with the previous quarter’s growth having been corrected).

Looking ahead, gross domestic product (GDP) growth is set to stagnate at 4.7 per cent in the March quarter (Q4) too, according to the annual estimate of 5 per cent by the National Statistical Office (NSO).

Even in annual terms, investment is set to show a contraction of 0.6 per cent, according to the second advance estimate for FY20 released by the NSO. Manufacturing is set to show 0.9 per cent growth, the lowest since 2012-13 in the current GDP series. 

Still, two areas have offered a respite. First, consistent growth above 6 per cent in the services sector, which occupies more than half the space in the economy, has kept the economy afloat. Secondly, positive signals on farm output in the rabi season are seen to gradually push agricultural growth above 3 per cent.

Consumer spending (private final consumption expenditure), on the other hand, is seen growing below 6 per cent for many quarters. Balancing this, government spending has grown strongly at 13.2 per cent and 11.8 per cent in the second and third quarters (Q2 and Q3), respectively.

Responding to the data released by the NSO, the Department of Economic Affairs said GDP growth had bottomed out, and that positive growth in core sector output bode well for the manufacturing sector in this quarter and later.

Interestingly, the GDP estimates for FY19 have been revised downwards significantly, pushing up quarterly growth estimates for the current financial year. 

For example, Q2 GDP growth of 4.5 per cent has now been revised to 5.1 per cent. 

The finance ministry has been highlighting “green shoots” in the economy, and several indicators have indeed shown improvement in Q3 over Q2. 

But the extent of the economic downturn raises doubts over revival. Experts too said any uptick in growth was a tough ask. 

“Despite the fact that Q3 shows strong results due to the festive season and higher rural spending driven by the kharif harvest, the growth slowdown is continuing,” said Devendra Pant, chief economist at India Ratings.  D K Srivastava, chief policy advisor at EY India, said: “The current slowdown is likely to continue at least for one more quarter. The Centre’s gross tax revenues also show a contraction of 2 per cent during April-January FY20.”

Capital investment, represented by gross fixed capital formation, contracted by 4.1 per cent and 5.2 per cent in Q2 and Q3, respectively.  The investment rate, which is the ratio of capital formation to GDP, fell to 26.1 per cent in Q3, at least a decadal low. As a result, investments, which used to contribute 35 per cent to the economy in FY13, now contribute only a quarter (26.1 per cent).  

While investments have stagnated in the past, a strong and a consistent contraction has happened for the first time in many years. Lowest-ever capacity utilisation in industry, at 69 per cent, suggests little chance of investment revival. Yet, the government expects that gross fixed capital formation will show an uptick in Q4, and a back-of-the-envelope calculation shows it growing at 2.5 per cent in the March quarter. 

The government expects bumper rabi output, and has factored in a 5 per cent increase in agriculture growth in Q4, sharply rising from 3.5 per cent growth in Q3. In FY20, low private consumer spending growth of 5.3 per cent is set to be compensated by 9.8 per cent growth in government spending. But this rests heavily on revenue mobilisation, which has shown poor growth compared to the previous year.