Why economic recovery may be muted in FY19 despite big manufacturing push

Trend likely to continue next fiscal, with world economy seen slowing and there being no let up in the US-China trade spat; RBI may change stance with inflation cooling

The economy is officially projected to register a gradual recovery from 6.7 per cent growth rate in 2017-18, the lowest under the Modi government, to 7.2 per cent in the current financial year. 

The fact that the estimate at the start of financial year 2018-19 was 7.5 per cent and even the Reserve Bank of India's conservative projection was 7.4 per cent, points to a no-so-rapid recovery in the current financial year, especially considering that the impact of demonetisation and GST roll out is fading away. 

In fact, when the economy grew at 8.2 per cent in the first quarter of the current financial year, the excitement was so high that the projection of growth was optimistically pegged to go even beyond 7.5 per cent for FY19, disregarding the fact that the quarter had produced such a stupendous growth rate on a low base of 5.6 per cent growth a year ago. The first quarter of the last fiscal had seen both, the lingering effect of demonetisation and the nervousness due to the imminent roll out of GST.

The excitement was belied when the second quarter GDP numbers for FY19 came out. There was a decline of over one percentage point to 7.1 per cent in that quarter, from 8.2 per cent in the first. With a much higher base effect in the third and fourth quarters, the GDP growth rate is projected by advance estimates to decline to 6.8 per cent in the second half of FY19 from 7.6 per cent in the first half. By comparison, the RBI had pegged economic growth to average 7.2-7.3 per cent in H2FY19.

The economy may not grow as expected in FY19, despite the fact that manufacturing is projected to grow at 8.3 per cent in FY19, up from 5.7 per cent in FY18. Also, investment activity is forecast to pick up sharply with gross fixed capital formation (GFCF) projected to grow by a robust 12.2 per cent in FY19, from 7.6 per cent in FY18. These segments are shown to be driving growth at a higher rate in FY19 than in FY18. 

As such, one has to be careful while projecting the growth for FY20. With world economic growth seen to be slowing down in the current financial year and there being no let up in the trade war between the US and China, the growth rate in India may not cross 7.5 per cent in the year. This would still enable India retain the fastest growing large economy tag for itself, but would make it longer for the economy to grow by over 8 per cent, which was seen in the second year of this government. 

The widely-tracked consumer price index-based inflation rate continued to decline since July of the current financial year to reach 2.19 per cent in December, 2019, significantly lower than 4.6 per cent in the first month of the financial year. However, much of the pull down still came from food inflation which had been in the negative zone for the past three months. For instance, non-food non-fuel, or core inflation, still stood at 5.7 per cent in December. 

In this context, RBI might still be wary of cutting the repo rate at the February meeting of its monetary policy committee, but it will surely change its stance from calibrated tightening to neutral. Going forward it is expected to cut the repo rates by at least 0.5-0.75 percentage points in FY20, subject to fuel and other commodity prices, rupee value against the dollar and impact of increase in minimum support prices and other expected farm measures on food prices.