Hard path to growth: How the next 6 months look for India's economy

The signals for the economy are not positive: overall demand is yet to pick up; the share of total exports in India's GDP is declining, and industrial output pattern remains worrying

With the first half of 2019-20 having presented a dismal picture of the Indian economy, speculation is rife on whether the remaining six months would be better or worse. Let us assess the prospects of each of the key sectors of the economy in the second half of 2019-20 — overall economic growth, foreign trade, industrial output and retail inflation.

The first quarter of 2019-20 saw economic growth at a six-year low of 5 per cent. The Reserve Bank of India (RBI) estimates that growth, or the rise in the gross domestic product (GDP) in the second quarter, should see an improvement to 5.6 per cent. Thus, the first half of the current financial year, according to the RBI’s projections, would see GDP grow by 5.3 per cent.

What about 7 per cent growth?

Yet, the RBI projects that the full year’s growth would be about 6.1 per cent. What does that mean for the economic growth trajectory during the second half of the year? Well, if the RBI’s forecast turns true, the Indian economy should see a two-percentage-point spurt to about 7 per cent in October-March of 2019-20, compared with 5.3 per cent in the April-September period.

Theoretically, that kind of a jump in the growth rate is possible. But achieving that in the current situation would be a challenging task.

Consider that a 0.5-percentage-point drop in the global output rate over the base projections (which is what is now being feared) would mean a 0.2-percentage-point cut in the Indian economy’s growth rate. India’s exports are nowhere near recovery. Government expenditure, which has often held the key to a bump in economic growth, may turn weak in the second half, if the government fulfils its promise of staying true to the fiscal deficit target of 3.3 per cent of GDP. The financial sector is still not out of the woods. Construction activities are yet to recover, thanks to a stress in the shadow-banking sector, which meets the bulk of its financing requirements.

The government announced a series of measures to help the economy recover. But most of those measures were aimed at improving the supply side of the economy by trying to boost investment. Outcomes of such supply-side measures are not immediate and they take time before the economy can enjoy their benefit.

The demand-side measures have been few. Though the government has transferred more cash to farmers through the PM-Kisan scheme and spent more than 80 per cent of the annual outlay for the national rural employment guarantee programme in the first half of the year, overall demand in the economy is yet to pick up. And unless that demand revives, fresh investments may not take place, with industry’s overall capacity utilisation level still at only about 75 per cent.

So, the economic growth challenge is not likely to be met easily in the short run. An increase in the GDP growth rate to over 7 per cent in the second half of the year would be a difficult target to achieve, also because of the performance of foreign trade.

India’s merchandise exports continued to remain a cause for concern. They fell by 6.57 per cent in September 2019 to $26 billion. Worse, even imports of goods, at $37. billion, fell by a higher margin of 14 per cent. The performance confirmed the trend witnessed in the first half of the current financial year. The April-September 2019 period saw exports falling by 2.4 per cent to $1604 billion and imports also contracted by 7 per cent to $243 billion during these months.

It’s true that India’s merchandise trade deficit shrank as a result, but this was no comfort. A fall in imports was a bigger problem as it hurt the manufacturing sector and undermined chances of a recovery in jobs. A bigger decline in imports indicated a slowing demand for industrial products which offered no solace for prospects of economic growth.

Services exports, however, helped the blow somewhat with a continued rise. Overall exports — merchandise and services — rose by 2 per cent to $267 billion in the April-September  2019 period, even as overall imports fell by 3 per cent to $312 billion in the same months. India’s overall deficit, at $45 billion, is not a big concern at present, but the bigger problem lies in exports.

Remember that export growth is a critical factor for reviving the Indian economy. In the last few years, the share of total exports in India’s GDP has been declining. Historically, India’s high growth years have seen a corresponding rise in its share of exports in GDP. If exports do not recover in the remaining six months of the year, the possibility of which is quite strong, the prospects of economic growth for the second half of 2019-20 cannot be very bright. A growth rate of 7 per cent in the October-March period looks a tall order.  

Industrial output worry

A more worrying feature of the Indian economy is noticeable in the industrial output pattern witnessed in the first five months of the current financial year. In the April-August period of 2019, industrial growth slipped to 2.4 per cent, down from 5.3 per cent in the same months of 2018. The manufacturing sector, which accounts for more than three-fourths of industrial output, recorded 5.5 per cent growth last year and dropped to just 2.1 per cent this year in the same period. And capital goods output contracted by 7.9 per cent this year, compared to an increase of 7.7 per cent. With capital goods in the contraction mode and manufacturing still showing tepid growth, the chances of any revival of industrial output in the remaining months of the year appear very remote.

Retail inflation, however, inched up to 3.99 per cent in September 2019, compared to 3.7 per cent in the same month a year ago. Retail food inflation in September 2019 saw a higher rise at over 5 per cent, compared to just 0.5 per cent in September 2018.The RBI has stated that the headline retail inflation, measured by changes in the consumer price index, moved in a narrow range of 3.1 per cent and 3.2 per cent between June and August. “While food inflation picked up, fuel prices moved into deflation; and inflation excluding food and fuel softened in a broad-based manner in August, and offset the firming up of food prices,” the RBI statement of October 4, 2019, had noted.

Citing a 0.2 percentage point rise in inflation expectations of households for the one-year-ahead horizon, the RBI has stated that this was perhaps in response to the rise in food prices in recent months. Manufacturing firms also see weak pricing power in the third quarter of the year; that means that their selling price outlook remains benign. Even though retail inflation is expected to inch up to 3.5-3.7 per cent for the second half of the current year, the risks on the price front are very manageable.

Such an outlook may be good news for consumers, but for prospects of economic growth, the signals are not positive. A recovery in the growth rate in the second half of the current financial year looks extremely unlikely.

What this means is that India's GDP growth in 2019-20 may see deceleration for a third year running. After declining from 8.2 per cent in 2016-17 to 7.2 per cent in 2017-18, India's economic growth slid again to 6.8 per cent in 2018-19 and may now go below 6 per cent in 2019-20.