GDP growth slows to 4.5% in Q2 as manufacturing, services disappoint

Private consumer spending grew by 5 per cent year-on-year, improving slightly from the previous quarter

The economy posted its weakest growth in more than six years as manufacturing activity contracted by 1 per cent in the September quarter. Gross domestic product (GDP) rose 4.5 per cent from a year ago, down from 5 per cent in the previous quarter, the data released by the National Statistical Office on Friday showed. 

Two successive quarters of below 5 per cent growth have cast a shadow on the economy’s performance in the fiscal year, analysts said. 

Worse, nominal GDP growth slipped to 6.1 per cent, the lowest in nearly two decades. Growth in government revenues and middle-class salaries is largely in line with nominal GDP growth.

Growth in investment (gross fixed capital formation), at a mere 1 per cent, was the slowest since the December 2014 quarter. Though tax cuts for companies would help in reviving investment, the investment rate in Q2 stood at 27.6 per cent, the lowest in 11 quarters. 

Former prime minister Manmohan Singh expressed concern over the economic situation. “This is clearly unexpected and the aspirations of the people are that the country grows at 8-9 per cent per annum,” he said at an event here. 

Agriculture grew at 2.1 per cent, refusing to go up much despite monsoon recovery in September. But nominal growth in the farm sector stayed above 7 per cent. This gives a grim picture of sectors other than agriculture, said Pronab Sen, former chief statistician of India.

“While farm prices were inflationary, non-farm sectors suffered a severe setback in terms of price realisation. The real cost of borrowing has gone up, while the debt-servicing ability has declined across sectors,” he told Business Standard.

Nominal GDP growth is now below the rate at which the government borrows to finance its deficit, at 6.5 per cent. This is quite a serious blow to the economy, experts said.

“This would mean that the government’s debt-to-GDP ratio will rise now. More importantly, the economy growing slower than the borrowing rate would act as a disincentive to potential investors,” Arjun Jayadev, professor of economics at Azim Premji University, told Business Standard. 

Even as the services sector propped up the growth number, its growth at 6.7 per cent was the lowest since March 2014 (excluding construction). 

But spending by the government, facilitated by the rollout of funds after the Union Budget was presented on July 5, helped growth. Government consumption expenditure grew by 15.6 per cent. 

Private consumer spending (by households and businesses) grew 5 per cent year-on-year, improving slightly from the previous quarter.

Experts said though a rate cut in the upcoming monetary policy meeting seemed a certainty now, green shoots were hard to find, and they worry further growth spiralling down could not be ruled out unless there is a boost from the fiscal side. 

“The slowdown has deepened and is now expected to remain more extended than previously anticipated. Optimism levels of businesses and consumers have fallen,” said Arun Singh, lead economist at Dun and Bradstreet India. 

Several economists echoed this view. 

“The data shows that the economy is passing through a declining growth momentum and there is no easy way out. The current domestic and global macro environment and the government will have to do some heavy lifting to support growth,” said Sunil Kumar Sinha, India Ratings.

While corporate tax cuts would dent government revenues, enhanced divestment and dividends from state-owned enterprises could help the government — to some extent — to boost public spending. 

Construction too failed to pick up pace, growing just 3.3 per cent in Q2.