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Low credit growth and tighter spending by the government could drag growth down further (Mint)
Low credit growth and tighter spending by the government could drag growth down further (Mint)

Five signs that FY20 GDP growth will worsen from CSO’s estimate

  • CSO estimates gross value added of manufacturing will be at a two-decade low of 2%
  • Historically, CSO’s advance estimates of GDP growth tend to be revised downwards

The advance estimate of India’s economic growth in FY20 has not created a furore in the market because investors saw it coming. Most economists had anticipated the extent of the slowdown.

But the big question is whether it will get worse. In all probability it will—the Central Statistics Office’s (CSO’s) data has enough signs that portend even slower growth.

Graphic by Santosh Sharma/Mint
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Graphic by Santosh Sharma/Mint

“We doubt the cycle has bottomed, as conditions are not yet in place to support a cyclical recovery," analysts at brokerage firm Nomura Financial Advisory and Securities (India) Pvt. Ltd wrote in a note to clients.

The stark sign is the fall in the growth of gross fixed capital formation, which is expected to grow by a mere 0.97% in FY20. Investments are critical to ensure higher growth in future and a sub-1% growth does not augur well.

The second sign is from declining growth in manufacturing. CSO estimates gross valued added of manufacturing to be at a two-decade low of 2%. Short point, Indian companies are not investing for future capacity and are not using their existing capacity to its fullest. It also means companies are not really seeing much demand in future.

The third sign is reports of government tightening its purse strings. A government serious about maintaining its fiscal deficit typically chops expenditure in the final quarter. Economists say gross domestic product (GDP) growth could drop to 4.5% for FY20, which puts CSO’s estimate as optimistic. Clearly, the statistical office is hoping for a decent recovery in the second half.

“We are uncertain of the recovery based on faster growth in private consumption expenditure as it is likely to get hurt due to a higher base and not grow as fast as expected," wrote economists at Motilal Oswal Financial Services Ltd in a recent report.

That brings us to the estimates. This is CSO’s first advance estimates and the statistical office will subsequently release its second and third estimates. Typically, the first advance estimates have always overestimated growth. Going by historic trends, CSO will end up revising its estimates downwards in the coming months.

The fifth sign is that bank credit growth was at 7% towards December-end. The country’s largest lender, State Bank of India, expects credit growth to be not more than 10% in FY20. Past growth periods have been accompanied by far higher bank credit growth than nominal GDP growth. This time, slow loan growth shows that economic recovery won’t be that easy.

India’s economy has gone through multiple shocks within a short span, which began with the demonetization in FY17. The policy responses, too, needed to be robust, but monetary policy has run out of powder. With the fiscal space largely diminished, the economy is on a wing and a prayer. That should worry investors.

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