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GDP growth drops to 4.5%, the weakest pace in over six years

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GDP growth drops to 4.5%, the weakest pace in over six years

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The Gross Domestic Product (GDP) growth for the second quarter (July-September) of the financial year 2019-20 dropped to 4.5 percent.

GDP growth drops to 4.5%, the weakest pace in over six years
The Gross Domestic Product (GDP) growth for the second quarter (July-September) of the financial year 2019-20 dropped to 4.5 percent, the weakest pace in more than six years, due to weak consumer demand, slowing factory activities and negative impacts of the prolonged monsoon, according to data released by the government on Friday.
The economy had expanded at 5 percent in the first quarter of 2019-20, its slowest annual pace since 2013. The FY2018-19 ended with an overall GDP growth rate of 6.8 percent, which was marginally lower compared with the year before.
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Economists said the drop in growth could prompt the Reserve Bank of India to cut its repo rate by 25 basis points to 4.9 percent at its meeting next week, although investors are skeptical about how effective monetary policy can be in boosting growth in the current scene.
The Narendra Modi government, given a second term by voters in May, has taken several steps including cutting corporate tax in September and speeding up privatisation of state-run firms to boost investments and bolster growth.
India needs to grow at around 8 percent a year to create enough jobs for the millions of young people joining the labour force each year, yet many economists see the current slowdown continuing for another year or two, underlining the case for urgent reforms.
"At this point in time, direct fiscal intervention and/or cut in personal income tax rates to put in more money in the hand of consumers appears to be the only short-term solution," said Kunal Kundu, India economist, Societe Generale, Bangalore.
The previous low was recorded at 4.3 percent in the January-March period of 2012-13. The GDP growth was registered at 7 percent in the corresponding quarter of 2018-19.
According to the data released by National Statistical Office (NSO), the gross value added (GVA) growth in the manufacturing sector contracted by 1 percent in the second quarter of this fiscal from 6.9 percent expansion a year ago. Similarly, farm sector GVA growth remained subdued at 2.1 percent, down from 4.9 percent in the corresponding period of the previous fiscal.
Construction sector GVA growth too slowed to 3.3 percent from 8.5 percent earlier. Mining sector growth was recorded at 0.1 percent as against 2.2 percent contraction a year ago.
Electricity, gas, water supply and other utility services growth also slowed to 3.6 percent from 8.7 percent a year ago. Similarly, trade, hotel, transport, communication and services related to broadcasting growth was also down to 4.8 percent in the second quarter from 6.9 percent a year ago.
Financial, real estate and professional services growth slowed to 5.8 percent in the Q2 FY2019-20 from 7 percent a year ago. On the other hand, public administration, defence and other services reported improvement with an 11.6 percent rise during the quarter under review from 8.6 percent a year earlier.
On a half-yearly basis (April-September 2019), GDP growth came in at 4.8 percent as compared to 7.5 per cent in the same period a year ago. "GDP at constant (2011-12) prices in Q2 of 2019-20 is estimated at Rs 35.99 lakh crore, as against Rs 34.43 lakh crore in Q2 of 2018-19, showing a growth rate of 4.5 percent," an NSO statement said.
Gross Fixed Capital Formation (GFCF), which is a barometer of investment, at constant (2011-2012) prices, estimated at Rs 10.83 lakh crore in Q2 of 2019-20 as against Rs 11.16 lakh crore in Q2 of 2018-19.
In terms of GDP, the rates of GFCF at Current and Constant (2011-2012) prices during Q2 of 2019-20 are estimated at 27.3 per cent and 30.1 per cent, respectively, as against the corresponding rates of 29.2 per cent and 32.4 per cent, respectively in Q2 of 2018-19.
"Growth rates of GFCF at Current and Constant Prices are estimated at (-) 0.9 percent and (-) 3.0 percent during Q2 of 2019-20 as compared to 16.2 percent and 11.8 percent during Q2 of 2018-19," it added.
Macroeconomic data released earlier this month also indicated a severe slowdown in the economic activities. Industrial production shrank by 4.3 percent in September, registering the weakest performance in seven years due to output decline in manufacturing, mining and electricity sectors.
Extended monsoon seasons, particularly heavy rains in October and November, have damaged crops in several parts of India. This has also resulted in rising prices of vegetables such as onions and tomatoes in the last two months, accelerating food inflation to nearly 8 percent in October from a year ago.
The RBI has reduced interest rates by a cumulative 135 basis points this year to 5.15 percent and it is expected to cut the repo rate in December as well for the sixth time in a row. According to a Reuters poll, the RBI cut the repo rate by 25 basis points to 4.90 percent at its December 3-5 monetary policy meeting.
Sameer Narang, chief economist at Bank of Baroda said, "The heavy lifting has been done by public administration and defence. State governments have also spent. In June, the state governments spend was negative 6.5 percent and by September, it has turned around to be positive 20 percent plus. So, that is where the kicker has come from. More important thing is that the states and the Centre have to continue to spend in the next few months to maintain this momentum. Otherwise, given the overall credit crunch in the economy, growth may slip down lower. So, that is the underlying message that we get from this data."
Indranil Pan, chief economist at IDFC First Bank said, "The critical issue here is of the manufacturing which actually is on a contraction. We were expecting a slight positive in manufacturing. As expected, the public sector expenditures have done the heavy lifting. Thankfully, the finance and real estate we were looking at a much lower number of about 5 percent and that has come out at 5.8 percent. If I look at the whole data set that has come out, obviously the critical issue also will be the private consumption expenditure because that is where the challenge for the Indian economy is. Private consumption expenditure is better than the 3.1 percent that we had seen."
"Going forward, I think we continue to see relatively lower numbers on the private consumption expenditure compared to what we had been used to. However, that gives us a hope that we might still end the full year with about 5 plus than a sub 5. So, the private consumption expenditure, in my opinion, is a positive sign if it has recovered in Q2 to a certain extent compared to Q1," Pan said.
Ajay Srivastava, CEO of Dimensions Corporate Finance Services, said, "I think the market is signalling very clearly that there is absolute lack of risk appetite and therefore, there is no willingness to lend money to any risky sector at all at this point of time. It is all about personal loans, loans to suppliers of MNCs and guaranteed money etc. The treasury bill rate, the repo rate is lower as banks have nowhere to lend the money but to take the money and park it in the T-Bills. It is a fact that no one wants to lend money and that is where the conundrum lies that how does the government revive itself when it is not able to get money to the productive sectors?"
Nilesh Shah, managing director at Kotak Mahindra AMC said, "The number is in-line with market expectation. Our focus should be on how we take this up to the potential growth rate of India and clearly there is a heavy lifting required from the government, from the fiscal policy, from the monetary policy. I think our effort should be on figuring out what steps we need to take in the short term, in the medium term so that this growth rate of 4.5 percent becomes the bottom and we could move higher from next quarter onwards."
(With inputs from PTI)
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