New Delhi: India’s economy reported its weakest growth in more than six years at 5% in the June quarter and slowed for the sixth straight quarter, prompting the government to unleash a spate of stimulus measures to spur economic activity.
India had already lost the “fastest growing major economy" tag to China in the March quarter, when it grew at 5.8%. China’s economy grew 6.2% in the June quarter despite the ongoing trade war with the US. Indonesia grew at 5.05% in the same period.
India’s latest GDP growth number, which missed the 5.7% rate estimated by economists by a wide margin, may prompt the Reserve Bank of India (RBI) to further reduce its full-year growth forecast. It also creates ample room for the central bank to respond to the sustained economic slowdown with deeper interest rate cuts. It has already cut the repo rate by a cumulative 110 basis points this year.
“Quarterly GDP estimates show that India’s GDP growth, while high, has shown some slowdown. This is due to both endogenous and exogenous factors. Impact comes, especially, from global headwinds due to deceleration in developed economies, Sino-American trade conflict etc.," said Krishnamurthy Subramanian, chief economic adviser in the finance ministry.
Most analysts, however, said India’s problem lies in the sharp decline in consumption demand even as investment demand continued to remain weak. Private consumption expenditure further decelerated to an 18-quarter low of 3.1% in the June quarter, while investment demand picked up slightly at 4% from 3.6% in the preceding three months.
The near collapse of manufacturing growth at 0.6% in the June quarter against 3.1% growth in the preceding three months also reveals the dismal state of the industrial sector.
“Manufacturing growth is the chief reason for the low level of performance and the high level of layoffs. The problem here seems to be more on the demand side," said CARE Ratings chief economist Madan Sabnavis.
India’s auto sector has seen a slump in sales for nine consecutive months till July, while stagnant rural wages have led to a fall in demand for certain manufactured food items.
Among services sectors, only the trade, hotels and communication segment has grown faster in the June quarter at 7.1% than the preceding-quarter growth of 6%. Both financial services (5.9%) and public administration services (8.5%) have decelerated in the June quarter. The only sector that has registered a robust pickup is electricity, growing at 8.6% in the June quarter from 4.3% in the March quarter.
Though data released separately by the controller general of accounts on Friday showed government expenditure has picked up in July, cumulative capital expenditure in the April-July period at 31.8% of the 2019-20 budget estimate remains below the capex during the same period a year ago at 37.1%. As a result, the government was able to contain its fiscal deficit during April-July at 77.8% of the full-year target against 86.5% in the year earlier.
There is no quick-fix solution to the downturn, which has been in the making for the past few years, said Devendra Kumar Pant, chief economist at India Ratings. “While the fiscal space to undertake countercyclical measures are very limited, we believe the government would undertake some measures to provide short-term boost to the economy," he added.
RBI has projected India’s GDP growth for FY20 at 6.9%—in the range of 5.8-6.6% for the first half of 2019-20 and 7.3-7.5% for the second half. While most analysts and financial institutions have estimated growth rate between 6.5% and 7% for 2019-20, Moody’s has pegged GDP growth at 6.4% for the same period.
