November 30 2019
GS Paper III
GDP growth plunges to 4.5%, lowest since 2012
- Recently India Ratings and Research (Ind-Ra) revised the Q2 rate down to 4.7% with the consumption expenditure growth to slow.
- It has revised downwards its growth projection for the second quarter of the current financial year to 4.7% and the full-year growth estimate to 5.6%, on Tuesday.
- The new projection suggests that second-quarter FY20 GDP growth is likely to be 4.7%.
- According to the officials at Ind-Ra, the 5.6% GDP growth rate for the full year will require the government to shoulder a large part of the investment burden adding that keeping to the fiscal deficit target for the year could result in an even lower growth rate.
- This is the fourth revision and has come in after the agency had revised its FY20 GDP growth forecast only a month ago to 6.1%.
- The agency blames the ongoing agrarian distress and dismal income growth so far, coupled with subdued income growth expectation in urban areas for the considerable weakening of the consumption demand.
- It is a troubling situation as 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.
- Investment expenditure growth, as measured by gross fixed capital formation (GFCF), is also expected to moderate to 6% in FY20 from the earlier forecast of 7%. It was 10% in the previous year.
- Despite a favorable base effect, declining growth momentum suggests that the second half of FY20 will be weaker than previously forecast.
According to the fresh announcement made by the government on Friday, the Growth in the gross domestic product (GDP) in the July-September quarter hit a 25-quarter low of 4.5%.
The lowest GDP growth in six years and three months comes as Parliament has been holding day-long discussions on the economic slowdown, with Union Finance Minister assuring that the country is not in a recession and may not ever be in one.
GVA dips to 4.3%
Growth in gross value added (GVA) also dipped to 4.3% in Q2 of 2019-20 from 4.9% in Q1, and 6.9% in the Q2 of last year.
According to the data released on Friday,
- The Manufacturing sector contracted 1% in the second quarter of the current financial year, compared with robust growth of 6.9% in the same quarter of the previous year.
The manufacturing sector saw an overall contraction of 0.2% in the first half (April to September) of the current financial year compared to a growth of 9.4% in the first half of last year.
- The Agriculture sector saw growth coming in at 2.1% in the second quarter of this year compared with 4.9% in Q2 of last year. The sector grew just 2.1% over the first six months of the year compared with 5% in the first half of the previous year.
- The Services sectors measured, only the ‘Public Administration, Defence & Other Services’ category saw growth quicken in the second quarter of this year, to 11.6%, compared with 8.6% in the same quarter of the previous year.
The ‘Financial, Real Estate & Professional Services’ category saw growth slow to 5.8% in Q2 of 2019-20, compared with 7% in Q2 of the previous year.
Some officials have hope for the GDP growth to pick up from the third quarter of FY 2019-20 as the fundamentals of the Indian economy remain strong. They further highlighted the fact that the International Monetary Fund has projected India’s GDP growth at 6.1% in the financial year 2019-20 and 7% in 2020-21 in its October 2019 report.
Private final consumption expenditure, the closest proxy in the data to a measure of consumption demand, grew 5.06% in the second quarter of this financial year, compared with a growth of 3.14% in the first quarter.
However, the growth in the second quarter this year is still significantly lower than the growth of 9.79% recorded in the second quarter of the previous year.
Gross fixed capital formation, which is a measure of the level of investment in the country by both the government and the private sector, grew only 1.02% in the second quarter of this financial year, compared with a growth of 4.04% in the first quarter, and drastically lower than the growth of 11.8% seen in the Q2 of last year.
Core sectors contracts
Activity in the core sectors of the economy contracted for the second consecutive month, by 5.8% in October, in large part due to contractions in the electricity and coal sectors.
The Index of Eight Core Industries contracted in October compared with a contraction of 5.1% in September.
- Within the index, the coal sector contracted for the fourth consecutive month, by 17.6%, compared with a contraction of 20.5% in September.
- The electricity sector contracted for the third consecutive month, by 12.4% in October, compared with a contraction of 2.6% in the previous month.
- The crude oil sector also continued its streak of contraction, with activity in the sector contracting 5.1% in October compared with a contraction of 5.4% in the previous month.
- The natural gas sector contracted for the seventh consecutive month, by 5.7% in October compared with a contraction of 4.9% in the previous month.
- The refinery products sector was one of the two sectors that witnessed growth in October, with its growth accelerating to 0.4% from a contraction of 6.6% in the previous month.
- The fertilizers sector also saw accelerating growth coming in at 11.8% in October, compared with 5.4% in the previous month.
- The steel sector contracted 1.6% in October compared with a contraction of 1.5% in September.
(Please note: These statistics with regard to FY and Q1, Q2, etc. will not be asked in the exam. However, it becomes a crucial part of preparation to be aware of how the economic impairment and slowdown hinders the country’s developmental statistics)
GS Paper III
Recognize real fiscal deficit, put cash in people’s hands; Fiscal deficit hit 102% of estimate; Ex-RBI Chief Rangarajan favors cash recap of banks
India’s fiscal deficit in the first seven months through October stood at INR 7.2 trillion, or 102.4% of the budgeted target for the current fiscal year 2019-20.
Net tax receipts in the April-October period was INR 6.83 trillion, while total expenditure was INR 16.55 trillion.
The fiscal deficit or the gap between expenditure and revenue was at INR 7,20,445 crore as on October 31, 2019, according to the data released by the Controller General of Accounts (CGA).
The deficit was at 103.9% of 2018-19 Budget Estimate (BE) in the corresponding month a year ago.
The government has estimated the fiscal deficit for the current financial year at INR 7.03 lakh crore, aiming to restrict the deficit at 3.3% of the gross domestic product (GDP).
In September, the government decided to lower tax rate for corporates and has pegged that it will have an impact of INR 1.45 lakh crore on its revenue mobilization.
Suggestions to stabilize
- The immediate suggestions are to consider a switch over from bonds to cash for recapitalization of banks.
The mode of recapitalization now is through issue of bonds and the banks gain from these bonds is the interest income. Infusion of funds into the banks will have a much more profound effect than issuing the bonds. According to the Ex-RBI chief Rangarajan, it will take 8 years for the dream of the Prime Minister’s $5 tn Indian economy.
He says, even if growth picks up next year, it needs to be substantial and it will take 2-3 years to get back the growth of higher than 7%. He also suggested the immediate addressing of the NPA issue and to all levels of risk management, including strengthening of early warning systems.
- The government needs to acknowledge its true fiscal deficit so that it can increase its expenditure and put money in people’s hands in order to stimulate demand and investments in the economy, economists said in reaction to the 25-quarter low GDP growth figure.
- The government has to step in and save the non-government sector as it cannot defend itself.
They need to recognize that there is a real, genuine problem on the demand side, and there is a problem with people’s incomes, and they need to conduct expenditures that will prop this up.