India’s economic slowdown intensified in the second quarter of 2019-20, with gross domestic product (GDP) growing at 4.5%, half a percentage point slower than in the previous three months and 2.5 percentage points lower than in the same quarter a year ago. At its core, Indian industry is cooling rapidly, with industries like coal, steel, cement and electricity having contracted in October. Eight core infrastructure industries have not grown in the first seven months of this year. Manufacturing, led by the automobile industry, has contracted, and mining stopped growing in the second quarter. Energy utilities and construction saw their growth rates almost halving from the same quarter a year ago. Another three months of declines will officially qualify as a manufacturing recession. The chill has spread even to the services sector, where heightened government spending masked widespread sluggishness in transport and communications that has been captured by other indicators like freight hauled and diesel consumption. Financial services and real estate, facing a credit squeeze, also posted weaker numbers. The picture in services would have been grimmer had government spending on items like salaries not spurted. Agriculture suffered from unseasonal rain and its growth during the quarter also more than halved from the same period of 2018-19.
This picture becomes more worrisome with the government having notched up the full year’s budgeted fiscal deficit by October. There is no fiscal wiggle room left: spending is already over budget and the year’s tax revenue projections appear grossly overstated. Consumption has seen something of a revival, as was to be expected in a festive-season quarter, but investment activity refuses to budge. It’s at a standstill. Recently announced tax giveaways are yet to work their way into the economy, it seems. Naturally, expectations will soar of a policy rate cut by the central bank when it meets later this month, but easing the availability of money under current conditions is a bit like pushing on a string. The Narendra Modi government has displayed a low tolerance of inflation in its previous term, yet reviving a sputtering economy might require stronger stuff than interest rate cuts that lose their way before reaching the borrower. It may be time to review the medium-term fiscal glide path and draw up a bigger stimulus package to pull the economy out of its trough. Consumers need more spending power and producers reason to invest.
At the current rate of growth, India will become a $5 trillion economy in a decade from now, which would be almost twice as long as the government wants. Our growth trajectory has already dipped below that of China, and unless a recovery is made, flows of capital to one of the world’s fastest growing emerging markets could suffer. Stock markets may have been exuberant of late, but given the rash of dismal indicators of the real scenario out there, that cannot be taken as a sign of an uptick around the bend. If global capital re-rates the India story, our job scarcity could worsen. Our policy establishment has yet to fully address the structural constraints that hold growth back. We can’t rely on domestic demand alone for faster growth. Unless major reforms are achieved that grant market forces more leeway, especially in sectors riddled with rigidities, the economy may not accelerate satisfactorily even if a cyclical upturn comes along.