Low manufacturing with little support from govt spend pulled economy down

The chief culprit for economic growth decline was manufacturing sector. It grew by just 0.6% in the April-June 2019 quarter, compared to the double digit growth of 12.1% in the same period of 2018

The economic growth numbers for the April-June 2019 period were widely expected to indicate further deceleration. Yet, when these numbers were released on Friday, there was surprise all around. 

The gross domestic product (GDP) for the first quarter of 2019-20 grew by just 5 per cent, a six-year low. The gross value added (GVA) at basic prices grew at an even lower rate of 4.9 per cent. A year ago in April-June 2018, GDP growth was 8 per cent and GVA growth was 7.7 per cent. 

The surprise, however, lay in the extent of the deceleration and its causes. 

For the second successive quarter, India's GDP growth stayed below 6 per cent, from 5.8 per cent in January-March 2019 to 5 per cent in April-June 2019. This is the first time that India's GDP growth stayed below 6 per cent in two successive quarters since the Modi government's formation in 2014. Worse, a below-5 per cent GDP growth rate was narrowly escaped and the GVA print was already below the 5 per cent mark. 

The chief culprit for the economic growth decline was the manufacturing sector. It grew by just 0.6 per cent in the April-June 2019 quarter, compared to the double digit growth of 12.1 per cent in the same period of 2018.

Queering the pitch were also the agriculture sector, that grew by just two per cent (down from 5.1 per cent in the same quarter a year ago) and the construction sector, which grew by 5.7 per cent, compared to 9.6 per cent in the same quarter of 2018.

In the past, a decline in the manufacturing sector growth has been compensated by a sharp rise in government expenditure. For instance, in April-June 2017, the manufacturing sector contracted by 1.7 per cent. Yet, the overall GDP growth was estimated at 6 per cent. And this was largely possible because of a 14.8 per cent rise in public administration, defence and other services (representing government expenditure in general).

In the April-June 2019 quarter, however, government expenditure grew at 8.5 per cent and could not make a difference to the overall GDP rate. The government's tight leash on expenditure in its attempt to rein in the fiscal deficit at a time its tax revenues have slowed down has had an impact on the GDP numbers for the last quarter.

The sector that saw a healthy rise in the last quarter was electricity, gas, water supply and other utility services. It clocked a growth rate of 8.6 per cent, compared to 4.3 per cent in the previous quarter and 6.7 per cent in the same quarter a year ago. This sector is now showing signs of a revival, led to some extent by an increase in power consumption. Other services like trade, hotels, transport and communication maintained their pace of growth at 7.1 per cent in April-June 2019, better than 6 per cent in the previous quarter and a shade lower than 7.8 per cent in the same period of 2018.

The stress in the financial and real estate sectors continued to be reflected in the growth numbers estimated at 5.9 per cent for the last quarter, compared to 9.5 per cent in the January-March 2019 quarter.

One area of concern was how consumption expenditure fared in the first quarter of 2019-20. Government final consumption expenditure inched up from 9.9 per cent of GDP in the January-March quarter of 2019 to 11.8 per cent in the April-June 2019 quarter.

However, private consumption expenditure showed a dip from 56.8 per cent of GDP to 55.1 per cent in the same period. The decline in the share of private final consumption expenditure in GDP is an indication that consumption demand in the economy is still a cause for concern. Indeed, it is still falling.

A positive signal that emerges from the otherwise gloomy growth numbers is in the area of gross fixed capital formation. As per cent of GDP, gross fixed capital formation or the investment rate in the economy was estimated at 32.5 per cent, a little higher than 30.7 per cent estimated for the January-March 2019 quarter. If this trend can be maintained, perhaps the GDP print for the coming quarters may look up.