If you look at the chart above, the trend line clearly indicates a downward bias. In fact, between June 2018 and September 2019, the GDP growth has virtually halved. But, that was expected after the core sector and IIP showed negative growth for 2 months in succession. So, how exactly did the GDP components pan out?
Agriculture and manufacturing disappoint
Broadly, the services sector did a lot better than agriculture and manufacturing. If you look at the services that gave a GVA of above 4.3%, it included trade, hotels, transport, communications, financial services, realty and public administration. Manufacturing at (-1.1%) was the big disappointment even as mining was almost flat and agriculture and forestry grew at just about 2%. The government has been targeting agricultural growth at a minimum level of 4% to meet its target of doubling farmer incomes in the next 3 years.
The big question mark remains over manufacturing. With pressure of demand mounting, the manufacturing sector saw negative (-1.1%) compression against 6.9% positive growth in the previous fiscal. The unorganized sector faced de-growth of (-0.4%) compared to positive growth of 5.6% in the previous year. This is evidently one sector that has borne the brunt of GST and the lag effects of demonetization as also the crisis in NBFCs and the liquidity shortfall. Even sectors like electricity and construction that have strong externalities, saw sharp compression in growth in the September quarter. The biggest drag on the GDP is visible from the fall in private final consumption expenditure (PFCE), which fell from 9.8% last year to just 5.1% this year. What would really concern the policy makers is the negative growth in gross fixed capital formation (GFCF) at (-3%) compared to 11.8% last year.
What does this mean in terms of policy measures?
From a policy perspective there are five things that emerge from the GDP numbers.
- RBI would most likely be inclined to cut rates further as it had indicated in the minutes of the Monetary Policy Committee. The MPC is committed to keep rates low till growth momentum returns.
- The full impact of the cut in corporate tax rates would be realized in the next two quarters. But looking at the core sector and IIP numbers, there could still be challenges.
- The government may look to simplify the 15% concessional tax for new manufacturing and look to make it simpler and all-encompassing. That would be a sentimental game changer for Indian companies.
- Government cannot relent on infrastructure spending even if it means wider fiscal deficits. The government may look to adopt pump priming as a strategy to give a quantum push to growth.
- The government cannot afford to wait on GST reforms much longer. Unless the rates are rationalized, structure simplified and leakages plugged; it may be hard to push GDP growth in a meaningful way.
The annualized GDP at the end of the first half stands at 4.75%. Even if India manages to grow at 6% in the last two quarters, the full year growth may struggle to cross 5.3%. A lot will depend on how policy measures shapes up in the next couple of quarters. India Inc really needs an answer to the GDP puzzle!