Most analysts expect the GDP growth rate in June quarter to be lower than the 5.8%--a five-year low--registered in the March quarter of 2018-19. If the GDP print slips below 5.8%, then it will confirm that the slowdown in economic activity persists and a recovery is unlikely anytime soon. However, if the GDP reading is above 5.8%, it may be inferred that the process of economic recovery has begun.
Cyclical versus Structural:
The debate over the nature of the economic slowdown among policy makers and analysts has intensified in recent times, with some believing that India is going through a structural slowdown, while others have maintained it is a cyclical slowdown and may end sooner than later. While a structural slowdown may require big ticket economic reforms and fresh ideas to steer the economy away from the path of downturn, a cyclical slowdown can be dealt with by sector-specific incentives to minimize the temporary pain.
The Reserve Bank of India (RBI) in its 2018-19 annual report released on Thursday said it was difficult to diagnose the nature of India’s slowdown, but that it could be a soft patch mutating into a cyclical downturn. “The diagnosis is difficult; these conditions are hard to disentangle cleanly, at least in the formative state," the central bank said in the report.
Finance minister Nirmala Sitharaman last Friday announced a slew of confidence building measures for both investors and consumers, but stayed away from announcing any fiscal stimulus. While the clamour for pump priming the economy has been growing to ride over the current slowdown, the RBI’s Rs1.76 trillion payout to the government has sparked a debate on the need for fiscal stimulus. Many analysts believe a precariously slow pace of tax collections in the current fiscal may force the government to use the additional ₹58,000 crore received this year above the budget estimate to meet the fiscal deficit target of 3.3% of GDP in 2019-20. Also, a dip in GDP growth may pressure the government to announce further stimulus. So far, Sitharaman has maintained that she has not decided how to spend the payout from RBI, but on Thursday she said government will frontload capital expenditure in the current financial year.
The central bank under governor Shaktikanta Das has reduced policy rates for four consecutive times in their bi-monthly monetary policy reviews, with an unorthodox 35 basis points rate cut earlier this month. While on Thursday, RBI in its annual report said reviving consumption and private investment demand have assumed the highest priority in 2019-20, signaling more rate cuts could be on the anvil, a dip in GDP growth in June quarter may lead to demand for rate cut by at least 50 basis points or more at the next policy review in October.
Growth projections for FY20:
The RBI has projected India's GDP growth for FY20 at 6.9% – in the range of 5.8-6.6% for the first half (April-September) of 2019-20 and 7.3-7.5% for the second half (October-March). While most analysts and financial institutions have estimated growth rate between 6.5-7% for 2019-20, global rating agency Moody’s Investors Service has pegged GDP growth at 6.4% for the period. A further decline in GDP growth in the June quarter can lead to more downward revisions in full year growth projections by forecasters.
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