Friday, November 29, 2019

Indian economy continues to slow down

Indian economy continues to slowdown. The latest estimate of economic activities by the government shows that GVA growth was 4.3% in the second quarter (July-September 2019) of fiscal year 2019-20. GDP growth at producers’ prices was 4.5%, the lowest in the last 25 quarters (quarterly GDP grew by 4.3% in Q4 FY2013). In terms of GVA growth (basic prices), this is the lowest quarterly growth rate since the availability of quarterly data (2011-12 constant price series).

Growth in all sector slowed down compared to Q2 FY2019. Agricultural output is estimated to increase by 2.1%, much lower than 4.9% in Q2 FY2019 but slightly higher than in the first quarter. However, industrial output slumped the most. It is estimated to grow by just 0.5% in Q2 FY2020, far lower than 6.7% in the corresponding quarter in last fiscal. Similarly, services sector is estimated to grow by 6.8%, which is also lower than the previous quarters. 

Within industry sector, manufacturing output actually contracted. It is expected to grow at a negative 1% compared to 6.9% in Q2 FY2019. Mining and quarrying output is expected to grow by 0.1%, which is better than negative 2.2% growth in Q2 FY2019, but lower than 2.7% in Q1 FY2020. Construction is continuing to slowdown too with growth of just 3.3%, also lower than the growth rates in the corresponding quarter in previous fiscal years. Electricity, gas and water supply activities are also slowing down. 

Within services, all activities are nosediving expect for public administration and defense related services. 

If we look at expenditure side of GDP data (which is basically GVA plus taxes minus subsidies), then we will see a drastic fall in gross capital formation (basically investment). It consists of gross fixed capital formation, change in stock and valuables. Gross capital formation growth is expected to be just 0.5%, the lowest in the last 22 quarters. GFC contracted (negative growth of 4.9% in Q4 FY2014). There is an improvement in net exports because exports growth remained stable but imports growth decreased slightly. Private consumption growth is almost stable but public consumption growth is picking up, albeit slowly. Essentially, the 4.5% GDP growth (producers’ prices) attributable to slight pickup in consumption but a drastic slowdown in investment. 

So, whats happening? Consumption demand is still weak, domestic credit is tight (partly contributed by the mess in non banking financial institutions) and investment in construction & infrastructure is slacking, weak external demand is slowing down exports and manufacturing, and consumer as well as investor sentiment is not that great. Core industrial output is slumping. It appears the structural reforms such as GST, bankruptcy law and slashing of corporate taxes are not yielding results in the short term (and they are not expected to do so). What is needed right now is fiscal policy that stabilizes the economy and brings it up to the growth sustained in the past. This requires more and faster government spending in sectors that can give high return (infrastructure investment) or some kind of fiscal transfers in rural sector (agricultural households) or significant efficiency enhancement of public capital investment. This might help stimulate demand in the short-term. However, this risks increasing fiscal deficit. There is a trade off, and managing is both good economics and art of managing consumer and investor expectations. 

The RBI will most likely go for another round of rate cut.