India's GDP will grow at 5.1 per cent, says Crisil. Kotak Securities pegs it at 4.7. The festive month of October was the worst in the current cycle, so growth will weaken further to 4.5 per cent, concludes Motilal Oswal.
Quarterly growth rate of 4-5 per cent seems to be the latest norm, but no, the above figures aren't sequential estimates. These are projections for the full fiscal FY20, which translates to a little over a half of the potential 8 per cent growth. Let that sink in.
To understand what's happening with our economy, imagine a cart climbing uphill, with three wheels going backwards and one moving forward. You get the picture.
GDP is measured via production, income or expenditure approach and though each method relies on a set of separate indicators, look any which way, they are all flashing red.
Agreed, a few components like agriculture and government spending are outliers doing all the heavy lifting, yet the final national income output is growing at an undesirable pace.
In India, production approach, measuring the sum of value added of all economic activities, plus indirect taxes minus subsidies on products, is considered to be firmer. Let's look at key elements, their contribution to GDP, their performance and the road ahead.
Private consumption:
Otherwise known as consumer expenditure, it measures money spent on goods and services including food to housing to electricity, hotels and restaurant services. During the September quarter, its share in GDP stood at 56.3 per cent -- the largest of all components and hence a key driver of growth. Worryingly, its contribution to GDP is steadily declining over the past few quarters as consumers are keeping a tight leash on spending. From 76.4 per cent in September 2018, private consumption's contribution to GDP fell to 62.4 per cent this year. Similarly, growth rate of private consumption plunged from 9.8 per cent in Q2 last year to 5.1 this year. The good news though is, consumer spending grew from 3.1 per cent during June quarter and is expected to fare better in Q3 given the festive season.
Investment:
It includes investment on equipment, spending by households on new houses (not included in private consumption) and others. After consumer expenditure, investment comprises the next big pie accounting for 33.6 per cent of the GDP as on September 2019. But if there's one aspect that you could put the entire blame on (for slowdown), it will be investments, whose growth rate fell from a mighty 11 per cent in September 2018 to a 22-quarter-low of 0.5 per cent this year. That's not all. The biggest shocker is the contribution of investments to GDP, which fell with a giant thud from 53.1 per cent in Q2, FY18 to -- hold your breath -- 3.8 per cent! This explains how precariously credit is flowing around, or rather, stopped in its tracks, in Asia's third-largest economy.
Government consumption:
It comprises government expenditure (centre, states and local) on goods and services, wages and salaries but excludes social security payments, farm subsidies and interest on debt. It accounts for 13.1 per cent of GDP as on September 2019 and is the sole spinning wheel in India's economic applecart. During Q2, FY20, government consumption grew at a six-quarter high of 15.6 per cent as against 8.8 per cent in Q1. Interestingly, its contribution to the GDP too rose sharply from just about 17.8 per cent as on September 2018 to a whopping 40.8 per cent this year, making up for the reducing investments. While favourable base effect increased the pace of government spending, lower short-term rates due to lower policy rates and easier liquidity conditions could provide some support to growth during the rest of FY20, the government's fiscal space to support economic activity is limited given the tax revenue foregone due to corporate tax cuts and shortfall in tax collections.
Exports/imports:
Exports and imports of goods and services together account for 44.2 per cent of the GDP. During the September quarter, exports contracted to 0.4 per cent as against a growth of 5.7 per cent in the previous quarter. A year before, exports grew at a healthy clip of 12.7 per cent. The impact of declining exports, was, however, negated by contracting imports at 6.9 per cent.
GVA:
Gross value added (GVA) is the difference between output and intermediate consumption. GDP includes not only the sum of the gross value added of all resident producers but also various taxes on products, depending upon the precise ways in which output, inputs and imports are valued. Broadly, ten components including agriculture, industry, mining, manufacturing, utility services, construction, services, trade, financials and other services are used in arriving at GVA. Among these, services accounts for the largest pie at over 58 per cent share in GVA, followed by industry and agriculture at 31 and 11-12 per cent respectively.
Agriculture:
Though a significant part of India's rural workforce are engaged in agriculture and allied activities, its share in GVA is a mere 12.9 per cent as on September, 2019. In the first six months of FY20, agriculture leaned against the wind registering a growth (albeit modestly), while other components declined. But a disturbing picture emerges if you compare growth over last year. If it clocked a respectable 5 per cent in H1, FY19, this fiscal, it stood at less than half at 2.1 per cent. Heavy rainfall in August-September along with a delayed withdrawal of the monsoon constrained not only farming activities but also affected mining and construction sectors.
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Industry:
Industrial activity at a lowly 0.5 per cent in Q2, FY20 punctured all hopes of a growth recovery. It stood at 2.7 per cent in Q1, and 6.7 per cent a year before. Manufacturing, which accounts for almost 3/4th of industrial activity contracted 1 per cent in Q2 as against growth of 0.6 per cent in the previous quarter. Other components such as mining and quarrying, electricity, gas and water supply and construction too slowed down during Q2. Delayed monsoon, which affected farming and mining activities in turn led to lower demand for electricity from agricultural and household sectors. Muted industrial activity further reduced the demand for electricity generation. In sync with the distress in real estate, construction growth slowed to 3.3 per cent in Q2 from 5.7 per cent in Q1.
Services:
Thanks to increased government spending, services sector growth moderated marginally to 6.8 per cent in Q2, FY20. Within services, while growth in trade, hotels, transport, and communication and in financial, real estate, and professional services slowed to 4.8 and 5.8 per cent respectively, growth in public administration, defence and other services rose by 11.6 per cent amid a revival in government spending. Overall, though the services' pie fared better in Q2, FY20, it's lower than 7.3 per cent seen the previous fiscal and the potential 10 per cent growth achieved during the good years of FY15 and FY16.