India’s economic growth fell to a 26 quarter low in the July-September quarter at 4.5% and economists are now revising full year GDP growth forecasts down to sub-5.5%, a significant contraction from the 7% forecast put out by the government in the Economic Survey.
In fact, with such low growth numbers coming in for Q2, India is back to the growth rate last seen during the UPA II regime. Government’s own data in Parliament last week showed how the economy has slowed over successive quarters of last fiscal and the first half of this fiscal: GDP was growing at 8% in the April-June period of 2018 but then went to 7%, 6.6% and 5.8% in the remaining three quarters of the fiscal year. In the first quarter of 2019-20, we grew at 5% and now at 4.5%. So growth rate has nearly halved in six quarters.
Not only is the continued contraction in the economy a big headache for the second term of Modi government, no answers are forthcoming on how the prime minister’s dream of making India a $5 trillion economy over the next few years will be realized with such dismal growth rates. To become about double its present size.
The government has quoted World Economic Outlook database to say that the size of the Indian economy was $2.72 trillion at the end of 2018-19 — the Indian economy obviously needs to grow at roughly double the growth rate, but how will that happen? As per the Economic Survey 2018-19, to achieve the objective of becoming a US$ 5 trillion economy by 2024-25, India needs to sustain a real GDP growth rate of 8%.
Even if we were to leave aside the prime ministerial dream of becoming a $5 trillion economy, should the deepening economic slowdown worry the common man? Government data has shown that a slowing economic engine has already meant record low job creation (at an over four-decade low), dwindling income of farmers, large scale additional job losses in sectors such as automobiles and information technology and lately, rising prices.
But if one were to look at things from the perspective of Finance Minister Nirmala Sitharaman, then India is still not doing too badly. She told Rajya Sabha on Wednesday that India was not in recession though growth had come down and “it won’t be a recession ever”.
Sitharaman quoted various data points to show how the economy had done far better under the first term of the Modi government than in the second term of the UPA. That growth rates improved during the first term of the Modi government is not really a matter of dispute and the government needs to focus on boosting economic growth now instead of harping back its past glories.
According to Q2 data released on Friday, nominal GDP growth fell to 6.1% against 8% in Q1 while GVA growth dipped to 4.3% from 4.9%. The manufacturing sector contracted at -1% in Q2, farm sector growth rate fell to 2.1%. Also, earlier on Friday, another set of government data showed that the output of eight core infrastructure industries contracted by 5.8% in October, underlining the severity of the economic slowdown.
Analysts have time and again pointed out that the government needs to do much of the heavy lifting to prevent further sagging of economic growth through bold reforms (land and labour reforms mostly) and through a combination of monetary and fiscal easing.
The Reserve Bank of India (RBI) has been doing its bit by slashing interest rates in five successive monetary policies despite inflation rearing its ugly head once again in recent months. On its part, the government too has announced a slew of measures to boost private investment such a drastic reduction in headline corporate tax rate; it has also announced sector-specific measures and is also working on easing systemic liquidity.
But there is no visible move to boost private consumption. The government has taken ample number of measures on the supply side but is seen doing precious little to boost demand. Reacting to the Q2 GDP data, former PM Manmohan Singh said the current state of the Indian economy was “unacceptable”.
“The sharp decline of GDP from 5% in Q1 to 4.5% in Q2 is worrisome. Mere changes in economic policies will not help revive the economy.” Pointing to the “palpable climate of fear in our society” as the reason behind the drastic fall in growth rate, Singh said government's current policies have driven industrialists, bankers, policymakers and regulators into a state of stasis.
Former Economic Affairs Secretary Subhash Chandra Garg told a television channel that the 4.5% GDP growth number confirmed that there was “deeper” slowdown in the economy and there was a “good likelihood of the fiscal deficit not being contained at anywhere between 3.3% to 3.5% but inching closer to 4% this fiscal.”
He also dismissed the opinion of some analysts which quoted Q2 data to say that even the lower GDP growth was largely due to a healthy increase in government spending, with private investments remaining muted.
Garg said that since the increase government expenditure was minimal during Q1, the total expenditure by the government in the first six months of the fiscal remained largely as per expectations. Data showed ‘Government Final consumption Expenditure’ rose by 15.4% in Q2 versus 10.9% in the same quarter of last fiscal.
Meanwhile, analysts are now predicting another round of rate cuts by the RBI, which is scheduled to hold its next monetary policy meeting on December 5, to help kick start consumption demand in the economy. This, despite a lower than expected transmission of these rate cuts by banks.
And FICCI president Sandip Somani has said that in the coming months, the singular agenda for the government and RBI should be revival of the economy. “We expect greater stimulus and counter-cyclical measures from the government and further easing of the monetary policy by the central bank. Additionally, there is a need to look at some stronger measures to ease the log-jam in sectors like housing and real estate, NBFCs, telecom and automobiles and we hope that some more measures will be announced at the earliest.”
(Author is a senior journalist. Views are personal)
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