New Delhi: The Indian economy grew at the slowest pace in six years at 4.5 per cent in the July-September quarter, increasing pressure on the Narendra Modi government to announce fiscal measures to revive demand in the economy.
This is the sixth consecutive quarter to register falling growth, led by a contraction in manufacturing and deceleration of growth in construction, electricity and some service sectors.
The Indian economy had grown at 5 per cent in the first quarter of the 2019-20 financial year, which means GDP growth in the first half of the fiscal was at 4.8 per cent.
The growth rate was 5.8 per cent in the final quarter of the previous financial year, led by a fall in consumption and investment.
The numbers do not come as a surprise, as a string of data released over the last few months indicated a sharp contraction in manufacturing activity, exports and sluggish demand. Contraction in factory output and fall in automobile sales all indicated that the GDP numbers for the July-September quarter would be lower than the previous quarter.
Along with rising inflation, these growth numbers will again bring to the fore concerns of stagflation — a situation where persistent high inflation is combined with stagnant demand.
Data released by the National Statistical Office showed that while manufacturing contracted by 1 per cent in the July-September quarter, agriculture grew by 2.1 per cent, construction by 3.3 per cent and electricity generation by 3.6 per cent.
Gross fixed capital formation — a key indicator of investment demand in the economy — grew at only 1 per cent in the September quarter as against 4 per cent in the June quarter and 12 per cent in the year-ago period. Private final consumption expenditure grew 5.1 per cent in Q2, marginally higher than the 3 per cent recorded in Q1, but lower than the 9.7 per cent growth in Q2 last year.
Data indicates that government final consumption expenditure helped in supporting falling growth. Government final consumption expenditure grew by nearly 16 per cent in the quarter, up from 9 per cent in the first quarter and 11 per cent in the year-ago period.
Nominal GDP growth, or GDP growth including the price effect, was at 6.1 per cent in the quarter, nearly half of the 12 per cent recorded in the year-ago period.
Sunil Kumar Sinha, principal economist at India Ratings and Research said the slowdown in GDP growth is largely on account of the slump in consumption expenditure and degrowth in exports, with government expenditure growth stemming the fall in GDP numbers.
Sinha said the gross fixed capital formation growth at 1 per cent shows that the “economy is passing through a declining growth momentum and there is no easy way out”.
He added that in the current domestic and global macro environment, the government will have to do the heavy lifting to support growth.
What RBI is expected to do
The sharp slowdown in growth is likely to prompt another rate cut by the Reserve Bank of India in the monetary policy announcement due on 5 December. Economists expect a 25 basis points rate cut, despite retail inflation numbers for October exceeding the inflation target of 4 per cent mandated by the Reserve Bank of India.
The RBI has cut key policy rates by 135 basis points since February this year while simultaneously paring its growth forecast for 2019-20 by 1.3 percentage points to 6.1 per cent. The central bank is expected to lower the growth forecast for 2019-20 again on 5 December.
Aditi Nayar, principal economist at ICRA Ltd, said that the RBI’s monetary policy committee is likely to reduce the repo rate by 25 basis points in its December review to support economic growth, looking through the vegetable price-led uptick in the CPI inflation in October 2019.
Economists expect the full-year GDP growth to slow down to around 5 per cent. Many have advocated an increase in government spending and a fiscal boost through personal income tax rates to revive the economy.
India, which was the fastest growing major economy until a few quarters back, now lags behind China, which grew at 6 per cent in the quarter ended September.
Atanu Chakraborty, secretary of the Department of Economic Affairs, said in a press conference after the release of the GDP numbers that growth is likely to pick up from the third quarter of the fiscal.
This report has been updated with details from the NSO report and quotes from economists.
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