Non-government GDP growth at lowest since FY09

Gross domestic product (GDP) growth for FY20 came in at 4.2%, the lowest since FY09, when it was at 3.1%. But the non-government part of GDP grew by just 3.3%, the slowest since FY09, when it had grown at 2.2%. Mint takes a look.

By how much did FY20 non-govt GDP grow?

One way to measure GDP is to total up private consumption expenditure, government expenditure, investment and net exports (exports minus imports). If government expenditure is left out of this calculation what is left is non-government GDP, which forms close to 90% of the economy. The non-government GDP growth in FY20 stood at 3.3%. This was the lowest since FY09, the year when the financial crisis broke out. The difference between GDP growth and non-government GDP growth in FY20 was 90 basis points and has grown over last few years. One basis point is one hundredth of a percentage.

Why has non-govt GDP growth slowed down?

The total amount of investment in the economy contracted by 2.8% during FY20. This is the biggest contraction since FY92, the year India had faced a big economic crisis. Interestingly, the investment to GDP ratio (in real terms) has contracted from a high of 34.3% in FY12 to 29.8% in FY20. What this tells us is that corporates are not interested in investing and expanding their businesses in India. With investment contracting, enough jobs haven’t been created, leading to per capita income growing of just 3.1%. This has led to a slowdown in private consumption growth to 5.3%, the slowest in a decade.

Where can the slowdown in growth be seen?

The massive slump in investment can be seen in bank lending to industry, which had peaked at 22.4% of the GDP in FY13 and FY14. In FY20, it fell to 14.3%. This is a clear indicator of investment growth not keeping pace with the overall growth of the economy. As far as the slump in consumption growth is concerned, it can be seen in auto sales contracting in FY20.

So, what drove GDP growth in FY20?

As was the case in FY18 and FY19, the GDP growth has primarily been driven by growth in government expenditure, which grew by 11.8% in FY20. It had grown by 11.8% and 10.1% in FY18 and FY19, respectively. There had been a similar growth in government expenditure in FY09 and FY10, at 11.4% and 14.2%, respectively. The problem is that the government doesn’t form a large part of the economy and can only do so much. Hence, genuine revival in economic growth will have to be led by the private sector.

How did the dip in oil prices drive growth?

In FY20, the average price of crude oil fell by 13.5%, versus FY19, to $60.50 per barrel. India imported 85% of the crude oil it consumed in FY20. In volume terms, crude oil, petroleum products imports rose to 270.3 million tonnes in FY20, compared to 259.8 million tonnes in FY19. But in value terms, the import bill fell from $128.3 billion to $119.2 billion. Imports are a negative entry in the GDP calculation. Hence, a lower import bill pushed up GDP growth. Vivek Kaul is the author of the Easy Money trilogy.