GDP Growth – A Looming Concern?

India’s Q2FY20 GDP growth came in at a six-year low of 5.0 per cent. Q1FY20 reading had come in at 5.8 per cent. This is the first time in seven years that two consecutive readings are below 6 per cent. The concern stems from the fact that the slowing growth rate cannot be attributed to the vagaries of nature and a consequent impact on agriculture. The core Gross Value Added (GVA) growth (ex-agriculture and government spending) indicates a slowdown in the private sector business cycle. Consumption growth, which is the back-room engine for Indian growth, has slowed down considerably (3.1 per cent Q2FY20 from 7.2 per cent Q1FY20). Global growth is witnessing a commensurate slowdown. US and China are at loggerheads on tariff wars, which has impacted the overall global growth. These external factors have also contributed to the slowdown in domestic growth. 

Consumption is currently reflecting both cyclical factors like tighter financial conditions in the NBFC sector, a struggling auto sector and more structural ones like a sustained decline in agrarian economy which has reduced the rural purchasing power, and a fall in household savings in the wake of softer income and wages. 

The nominal GDP growth has slowed down to a 10-year low of 8 per cent, below the budget estimate of 11 per cent. This may impact the tax collections of the government for this fiscal. However, the deficit may remain contained. The surplus transferred by RBI basis the Jalan Committee report may help government tide over this year. Having said that, the government is now finding it increasingly challenging to kick-start the economy. The RBI has reduced interest rates by 110bps year to date. However, the cost of borrowing has not reduced at a similar pace. The transmission of rates has been a challenge and to overcome this the RBI is intending to set an external benchmark to which all the loan products will be linked. The government has also announced a slew of measures and clarifications to smooth the markets. Some of these include: i) auto sector clarifications pertaining to BSIV vehicles and ii) time bound repayment of excess GST to MSME.  The reversal of enhanced surcharge on equity capital gains for foreign and domestic investors was the most anticipated rollback and had a fleetingly positive impact on the equity markets. Most of these measures are not direct subsidy. This portends well for the fiscal deficit as well. The Finance Minister has also mentioned that there will be few more sops that would be announced during this week. The market expectation is that these announcements would be pertaining to real estate sector. 

The slowdown is very real and the government is fully cognisant of this. Having said that, structural changes do take time to fructify and translate into real long-term growth. In the interim, we may see India witnessing a minor slowdown in the coming few quarters.