Photo: Mint
Photo: Mint

India’s GDP data lends support to demand for monetary policy push

  • Investment is still sluggish, but the fact that it hasn’t worsened more is a good sign, say economists
  • Perhaps it should, but first the central bank should lower its own forecasts from optimistic levels

India’s third-quarter economic growth confirmed the widespread worry that it is losing momentum and needs policy support. Now, should the Reserve Bank of India (RBI) cut policy rates by a bigger margin than the 25 basis points most expect?

Perhaps it should, but first the central bank should lower its own forecasts from optimistic levels.

Gross domestic product (GDP) at constant prices grew by 6.6% for the December quarter, lower than the 6.8% anticipated by economists, and the 7% growth reported in the September quarter. There is a bit of an adverse base effect, considering GDP growth in the same quarter the previous year was a brisk 7.7%.

Note that RBI didn’t change its projection for FY19 GDP growth of 7.4% when it released its monetary policy statement earlier in the month, even as it showed how worried it is on growth. Considering the Central Statistics Office has revised its estimate for FY19 GDP growth to 7% from the earlier 7.2%, the central bank too may make changes accordingly.

So, where all has the slowdown emerged from?

As feared, growth in private final consumption expenditure has slowed to 8.4% from nearly 10% the preceding quarter. The consumption slowdown is likely to have emerged from rural centres, given the distress due to collapse in prices of several agricultural produce. With farmers earning less, they have less to spend. Some of it could also be due to the general caution ahead of the national elections.


However, private consumption is not the main culprit, because it was 59.1% of GDP at constant prices in the December quarter, compared with 56.1% in the September quarter. What seems to have pulled down GDP is government final consumption expenditure, which was just 9.7% of GDP, compared with 11.9% GDP in the September quarter. Indeed, the government has tightened its purses to meet fiscal deficit targets.

Has investment seen the much- awaited spurt?

Gross fixed capital formation growth has held up at 10.64% even though it is slower than the previous year’s 12.23% growth number. Investment is still sluggish, but the fact that it hasn’t worsened more is a good sign, say economists. That said, for investment growth to improve or even sustain, consumption growth has to come back to its strong track, according to Upasna Bhardwaj, senior economist at Kotak Mahindra Bank Ltd. “While investment growth is holding up as of now, if consumption was to fizzle out, which is happening, beyond a point this improvement in investment growth won’t sustain," she said.

December quarter GDP numbers vindicate the policy rate cut RBI announced earlier this month. But, it seems that the economy needs a bigger sentimental push through monetary policy, especially when the government would be hard-pressed to spend. Ergo, growing expectations of a 50 basis point rate cut are not surprising at all.

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