Will GDP growth sink below 26-quarter low of 4.3%?

New Delhi: Indian economy is staring at a dismal GDP print, below 5% in the September quarter, with some forecasters even apprehending it may fall below 4.3% recorded in January-March quarter of 2013.

The weaker-than-expected economic data emerging from India points to a deepening slowdown in Asia’s third-largest economy, where private consumption, investments and exports have all taken a hit.

National Statistical Office will release the second quarter GDP growth data later on Friday. While Care Ratings, ICRA, Edelweiss expects the economy to have expanded at 4.7% in Q2, DBS and Nomura are on the lower band of the forecasts with projections of 4.3% and 4.2% respectively. New Delhi based think tank NCAER has projected GDP growth at 4.9% for both the second quarter as well as for the full financial year ending 31 March.

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

The weak GDP growth in Q2 is expected to have been caused mainly by grim industrial output data which contracted 0.4% during the quarter against 3% expansion in the preceding three months.

Heavy rainfall in August-September 2019 along with a delayed withdrawal of the monsoon, constrained activities in the mining and construction sectors, and also contributed to a lower demand for electricity from the agricultural and household sectors. In addition to the latter, muted industrial activity reduced the demand for electricity generation.

Aditi Nayar, Principal Economist, ICRA Ltd said: “With subdued domestic demand, investment activity, and non-oil merchandise exports weighing upon volume expansion, manufacturing growth is expected to decelerate further from the marginal 0.6% in Q1 FY2020. To some extent, lower raw material costs would bolster earnings, and may prevent manufacturing GVA from slipping into a contraction in Q2 FY2020.”

The only silver lining for the Q2 GDP data could have been a sequential pick-up in government expenditure. Fiscal policy support which had been missing in Q1 due to the general election, is now clearly visible in Q2 with higher expenditure by both Centre and states in both revenue and capital expenditure. Combined capital and consumption expenditure of central and 20 states government in Q2 grew 37.8% (Q1: -18.3%) and 20.1% (Q1: 4.1%) respectively, according to calculations by India Ratings.

ICRA Ltd in a report said the services sector growth is expected to remain steady at 6.9% in Q2, in line with the performance in Q1. Several lead indicators of the trade sector recorded a contraction in Q2, such as sales of commercial vehicles (-35.0%), air cargo traffic (-4.7%), railway revenue carrying freight (-3.7%), and diesel consumption (-0.2%). “Moreover, the pace of growth of commercial paper, corporate bonds and bank credit to large industries and services eased considerably to 6.7% at end-September 2019 from 9.6% at end-June 2019. However, the profitability metrics of the banking sector improved to an extent in Q2 FY2020, led by lower provisioning and higher treasury gains, which should bolster the growth of financial, real estate and professional services,” it added.

Ongoing agrarian distress and dismal income growth so far, coupled with subdued income growth expectation in urban areas have weakened the consumption demand considerably. Even the festive demand has failed to revive it and this is reflected in the current data of non-food credit, auto sales and select fast moving consumer goods.

While the government has taken a host of supply-side measures, further slowdown in the economy may force the government to take demand side measures.