Unsavoury implication of GDP numbers: Slowdown has not bottomed out

The latest data released by the Central Statistics Office (CSO) indicates that GDP growth stood at a subdued 4.7 per cent in Q3FY20, which is in line with our estimates. Encouragingly, the reassessed pace of economic expansion in Q1FY20 and Q2FY20 has been revised upwards by the CSO to 5.6 per cent and 5.1 per cent, respectively, albeit on the back of a lower base for the corresponding quarters of FY2019. However, this reveals the unsavoury implication that the slowdown in the growth momentum continued in the just-concluded quarter, belying our expectation that the GDP growth had bottomed out in Q2FY20.

The further dip in the year-on-year (YoY) GDP growth to a 27-quarter low 4.7 per cent in Q3 from 5.1 per cent in the last quarter was driven by a moderation in the pace of expansion of government consumption, an inevitable fallout of the growing revenue risks at the central and state government level. 

Additionally, gross fixed capital formation contracted by 5.2 per cent in Q3, the worst performance for the 2011-12 series, underscoring the faltering investment sentiment, modest capacity utilisation levels, as well as the YoY decline in capital spending by the state governments. But, the momentum of private consumption expenditure recorded a modest uptick in Q3, preventing a sharper slowdown in growth.

Unsurprisingly, the contraction in manufacturing and electricity in Q3 FY2020 emerged as the chief drag to GVA growth, which decelerated to 4.5 per cent in that quarter from 4.8 per cent in Q2. Although the pace of expansion of public administration and defence eased in Q3 relative to the last quarter, it was crucial of growth, remaining the fastest growing sub-sector for the second consecutive quarter. Excluding public administration and defence, which reflects government non-interest revenue spending, the GVA growth would have printed at an even more anaemic 3.7 per cent in Q3.

Based on the CSO’s advance estimate of GDP growth for FY20 of 5.0 per cent, the pace of expansion for Q4 is implicitly estimated at 4.7 per cent, unchanged from the level in Q3. However, the embedded GVA growth is pegged to rise markedly to 5.0 per cent in this quarter from 4.5 per cent in Q3. 

On the positive side, the outlook for the agricultural sector and rural demand has improved appreciably following the expansion in rabi sowing and abundant moisture conditions. But, the lead indicators for the industrial and services sectors portray an unfavourable picture for January, including the 6 per cent contraction in the Centre’s expenditure in that month.

Moreover, the rapid spread of the Coronavirus is likely to have an adverse impact on various sectors of Indian manufacturing, trade and tourism, and dent business and risk sentiment, in the first half of 2020. The only silver lining is the fall in commodity prices would give some cushion to earnings in the near term. Overall, incoming information on the spread and duration of the coronavirus outbreak poses the key downside risk to our GVA and GDP growth forecasts of 4.8 per cent and 5.0 per cent, respectively, for FY20. 

The MPC may well undertake a final rate cut in FY2021. However, this will be forthcoming only when there is clear evidence of the CPI inflation reversing towards 4 per cent, which suggests a high likelihood of a pause in the next 2-3 policy reviews.

The writer is principal economist at ICRA