Q2 GDP growth slows to a more-than-six-year low of 4.5%

The fall in the GDP growth rate from 5% in the previous quarter will likely ratchet up the clamour for a fiscal stimulus. The persistent slowdown may also force the Reserve Bank of India to go in for another round of interest rate cuts at its monetary policy review meeting on 5 December.

In comparison, China’s GDP growth slowed to 6% in the September quarter, the weakest quarterly growth since 1992, down from 6.2% in the previous quarter.

Data released by the department for promotion of industry and internal trade, ministry of commerce and industry, showed that the core sector, which comprises eight infrastructure industries, contracted by 5.8% in October, the second consecutive month of contraction, signalling the worst may not be over for the manufacturing sector.

All infrastructure sectors contracted, barring refinery products and fertilizers. Contractions in the output of coal (-17.6%) and electricity (-12.4%) were the steepest.

In September, the core sector had shrunk by 5.1%.

Atanu Chakraborty, economic affairs secretary in the finance ministry, said: “The fundamentals of the Indian economy remain strong. GDP growth is expected to pick up from third quarter of 2019-20."

Former prime minister Manmohan Singh said a 4.5% growth rate was “unacceptable".

“Aspiration of our country is to grow at 8-9%. Sharp decline of GDP from 5% in Q1 to 4.5% in Q2 is worrisome. Mere changes in economic policies will not help revive the economy," he added.

According to data released by the National Statistical Office, nominal GDP grew 6.1% during the September quarter, against the government’s assumption of 11.5% in the 2019-20 budget. This will impact both tax collections, as well as deficit numbers. In the April-October period, the Central government exceeded its annual fiscal deficit target at 102.4%, and exhausted 112.5% of the revenue deficit target, according to data released by the Controller General of Accounts.

During the second quarter, the only silver linings included government expenditure, which grew 11.6%, and the financial services sector, which grew 5.8%. The labour-intensive construction sector, which had recently shown signs of revival, decelerated sequentially to 3.3%, while the trade and hospitality sector grew by 4.8%.

Gross fixed capital formation, which represents investment demand in the economy, decelerated to 1% in the September quarter after picking up in the preceding three months, while private consumption showed sequential improvement, expanding by 5.1%.

However, Aditi Nayar, principal economist at Icra Ltd, said the sequential uptick in growth of private consumption expenditure is at odds with evidence from various sectors that show subdued consumption sentiment in rural as well as urban areas.

“The modest agricultural growth (2.1%) in Q2 is in line with our forecast, based on the mixed trend in the output of kharif crops revealed by the first advance estimates of crop production. However, with the flooding in various parts of the country in August-September, and the delayed withdrawal of the monsoon, excess moisture could lead to crop yields being lower than the initial estimates," she added.

The Narendra Modi administration has taken a series of steps to reverse the slowdown, including a cut in the corporate tax rate in September from 30% to 22% for companies not availing tax breaks, and from 25% to 15% for new manufacturers.

The cabinet has also cleared a proposal to set up a ₹25,000-crore debt fund to complete stalled housing projects, a move that is expected to boost cement and steel consumption in the months ahead.