After peaking in the Mar-18 quarter, the GDP growth has fallen by over 450 basis points. The strain on GDP growth began with the IL&FS default, creating stress on NBFCs. Two rounds of rate hikes only worsened matters. Of course, the actual situation turned for the worse from January 2020 when COVID-19 came to dominate the macro narrative.
Limited impact of COVID-19 on the demand front
It may be recollected that the total lockdown began around the last week of March 2020. However, the impact on manufacturing output was visible from January itself. The sharp fall in GDP growth in the fourth quarter had its impact on full year GDP growth. As a result, the GDP growth for FY2019-20 tapered to just 4.2% compared to 6.1% for fiscal 2018-19. Due to weak growth in GDP, the per capita income on a nominal basis remains at below $1800 per annum.
The big challenge for Indian policy makers will be on the China comparison front. While China has also taken deep cuts due to COVID-19, the clear advantage that Indian enjoyed in terms of GDP growth over China appears to be waning. This could have larger implications for the attractiveness of India as a preferred investment destination. Of course, the government has already announced an aggressive Rs.21 trillion stimulus package and that should help India tide over the crisis and get growth back on track.
What do the high frequency data points indicate?
MOSPI has clarified at the outset that the numbers could be subject to modification later due to the lack of clean data. However, the pressure on the GDP numbers in the fourth quarter and for the full year is evident from high frequency indicators.
The starkest indicator is the sale of commercial vehicles that has seen a sharp fall into negative territory in the fourth quarter as well as for the full year. But there are some pain points for industry that is visible in the sectors with high externalities. For example, cement and steel have a major role in boosting construction and factory demand. Both the sectors have seen growth dip sharply. While the cargo handled at seaports saw limited impact, the impact on air cargo and rail cargo was a lot steeper. Consequently, bank credit and bank deposits have also taken deep cuts in the fourth quarter. Overall, the high frequency indicators hint at real pressure and one can safely assume that this pressure will only be more acute in the June quarter. The MOSPI report indicates that the nominal GDP growth for the full year was closer to 7% while India needs to consistently grow nominally above 11% to make a solid growth impact.
What does the GVA indicate for FY20?
A better way to look at national income is to look at GVA instead of GDP. GVA is GDP adjusted for the impact of indirect taxes and subsidies and hence gives a better indication of value added by products and services. Firstly, there is good news on the agricultural front. AgriculturalGVA growth improved from 2.4% last year to 4% in 2019-20. This 4% has long been the agricultural target that India was aiming at. This has been largely supported by the robust Rabi crop late last year. Manufacturing disappointed with growth falling from 5.7% to just 0.03% in the FY20. The real pain was seen in the services sector which accounts for nearly 60% of India’s GDP. Services like utility services, construction, trade, hotels, transport, communications and financial services took deep cuts in FY20. Public administration and defence was one segment that saw growth improve to 10% from 9.4% last year. Overall, GVA growth for FY20 came in at 3.9% compared to 6% in FY19.
Could it get worse before it gets better?
Considering that the economy has been under lockdown for the whole of April and May and, perhaps, part of June; the GDP growth for the June quarter could actually get worse. While agriculture is unlikely to be affected, the impact on manufacturing and services could be deeply negative. With PMI Manufacturing falling to 27 and PMI Services falling to 5.4 for the month of April 2020, the June quarter could be a testing quarter. The bigger challenge would be manage the revival from the September quarter onwards. Like Diego Maradona, the policy makers would certainly be hoping for the proverbial Hand of God!