Record industrial slump to restrict GDP growth to 5% this year

NSO sees investment growth at 0.97%, lowest in 15 years

India is set to clock economic growth of 5 per cent in the current fiscal year, sharply down from last year’s achievement of 6.8 per cent, showed the data released by the National Statistical Office (NSO), on Tuesday. 

This will be the lowest pace of growth since 2008-09 (FY09), the year of the global financial crisis. The estimate is, however, in line with the Reserve Bank of India’s (RBI) projection for the year. 

Importantly, manufacturing is expected to grow at 2 per cent in FY20, the lowest since at least FY06, and would make the current industrial slowdown the worst in nearly two decades. Similarly, investments are projected to grow at only 0.97 per cent — the lowest in at least 15 years. 

In fact, investments as represented by gross fixed capital formation (GFCF at constant prices) were slated to contract by 0.5 per cent in H2FY20, the sharpest decline in about two decades. The share of investments in the economy has reduced to one-fourth in two decades, from one-third. The investment rate (or rate of GFCF to GDP in nominal terms), at 28.1 per cent, is slated to be the worst since FY05. 

Industrial activity and investment had not declined to such a low even in the year of the financial crisis and the subsequent years during, which the Indian economy was among the “fragile five”. 

This points to rising uncertainty regarding economic growth and jobs, especially in FY21. 

In nominal terms, India’s gross domestic product (GDP) is expected to grow at 7.5 per cent, a multi-decade low, suggesting that tax revenues and individual incomes may remain under stress. 

State Bank of India reduced its annual growth forecast from 5 per cent to 4.6 per cent, after the release of the NSO data. 

“The NSO estimate has a shelf life of two months, and is used only for Budget arithmetic. At this pace, GDP in FY25 would be close to $4.5 trillion, short of the $5-trillion target,” the bank said in its report, authored by chief economist Soumya Kanti Ghosh.

Services activity will grow at 6.8 per cent this year, pulling the overall economic growth up and saving it from dropping below 5 per cent. This, too, is a deceleration from 8.1 per cent in FY18 and 7.5 per cent in FY19.  

Given that the data for H1FY20 has already been published, the annual estimates give an idea about the economic performance in the second half. Construction will grow as poorly as at 1.8 per cent, in H2.

From October-March FY20, private consumer spending is projected to grow at 7.3 per cent, faster than the disappointing 4 per cent in the first half. However, the pace of government spending is set to weaken to 8.5 per cent. 

 Annually, while the former will grow at 5.8 per cent, growth in the latter is expected to be 10.5 per cent.  While this indicates that measures taken after the Union Budget to boost consumption are taking shape, experts discounted this projection, especially for consumption. “Markets should discount this number, as private consumption is estimated as a residual variable in the statistical analysis,” said Ghosh. 

Sunil Kumar Sinha, principal economist at India Ratings, said the private consumer spending estimates are not sacrosanct. “The assumption relating to private consumption looks unrealistic if festival demand is taken as an indicator,” he said.

Banking on a healthy rabi output, economists expect rural sentiment to improve around March. “A small turnaround could be underway, as good farm output from the rabi season would boost rural sentiment. Further, the decline in electricity consumption is getting arrested, goods and services tax revenues are healthier than before, and port traffic has jumped in December,” said Aditi Nayar, principal economist at ICRA. 

However, this turnaround would clearly not be investment-led, she added.