Cutting GDP growth to 6.3% in fiscal 2020


Feeble first quarter stunts full-year GDP growth forecast


Fiscal 2020’s first quarter gross domestic product (GDP) growth estimate at 5% - the slowest in 25 quarters - corroborates that India’s economic slowdown is deeper and more broad-based than suspected. While on-ground indicators did suggest that the quarter would look worse than the previous one (at 5.8%), the extent of fall has caught everyone by surprise.


A plunge in domestic private consumption demand, slump in manufacturing, halving of merchandise exports growth, and a high-base effect from last year have gnawed away at first-quarter growth.


Private consumption growth – the bulwark of India’s growth story in recent years – registered a scant 3.1% in the first quarter, a four-year low. The last couple of times private consumption fell this sharply was in the first quarter of fiscal 2013 (-0.9%) and third quarter of fiscal 2015 (2.1%), as per the new GDP series (see Box 1).


With over 55% weight in GDP and 7.6% annual growth, on average, in the past five years, the importance of bolstering private consumption cannot be over-emphasised. In the past few years, households had dipped into their savings and leveraged themselves to support private consumption. However, first quarter data shows, they have not been able to sustain the momentum.


How does the future look?


There are mixed signals for the second quarter (Chart 1). The first two months of the quarter (July and August) on average have weaker PMIs (purchase managers’ index) for manufacturing, compared with the first quarter, while forservices it is somewhat stronger. Meanwhile, export growth turned positive in July. However in some sectors such as automobiles, demand stayed sluggish,as sales continued to tank. Similarly, monsoon, though normal,has broughtits share of uncertainty. Rains caught up in August, but the rapid recovery meant excess rains in several regions leading to kharif crop losses. Also, a few regions are still reeling under rainfall deficiency. But healthy groundwaterand reservoir levels bode well for the rabi crop, which could still improve the overall prospects for agricultural production this fiscal.


Nevertheless, given the twin trouble of slack private consumption and manufacturing in the quarter, we believe the remaining quarters are unlikely to over reach to take the full year number to our earlier forecast of 6.9%. Therefore, we revise down our growth forecast for fiscal 2020 to 6.3%, from 6.9% estimated earlier. That is under the assumption that the second quarter will see some mild pick-up in growth, which continues through the year. We expect growth to get some lift from the low base effect that will now set in (second half fiscal 2019 GDP growth was at 6.2%). An easing monetary policy, improved transmission of rate cuts, and the government’sminimum income support scheme to farmers would also feed into consumption. The recently announced steps by the Finance Minister will also address some pain pints and support sentiment.