GDP numbers raise some serious questions about the state of the economy

The GDP growth number for Q1-FY20 was not expected to be satisfactory with estimates being in the region of 5.5%. However, the 5% growth, which is now a six-year low, does raise some serious questions about the state of the economy, given that prima facie our economy does seem to be one of the best performing economies in the world. The problem remains unchanged with the manufacturing sector being the drag. Support has tended to come more from the services segments, which is now a regular feature of the profile of growth.

Low index of industrial production (IIP) growth coupled with less than 5% growth in corporate sector topline has been indicative of a low economic performance in the quarter. The principal challenges continue to be low growth in consumption and investment, which have worked against any momentum being picked up. The investment rate for this quarter has been lower at 29.7% against 30% last year. Here, too, it has been more of the government spending in infra which has provided support. Private sector investment has been lacklustre.

Most of the sectors have witnessed lower growth rates. Agriculture has posted growth of 2% against 5.1% last year. This may not be too worrisome as the first quarter is associated more with residual Rabi harvest and it would be Q3 and Q4 that would drive the final number. Given the good monsoon and a relatively stable acreage picture so far, there should be some reversal here.

Manufacturing growth has been just 0.6% against 12.1% last year. While the base effect has pushed it down, the slowdown in the auto and durable goods segments is quite palpable and is getting reflected slowly in other sectors, too. The industries that have done well like cement and steel find reflection in construction activity, which has witnessed an increase of 5.7% (9.6% last year). Here, it is the government push along with housing which has kept the rate up.

The two service sectors which have been significant contributors to GDP growth i.e. trade, communication etc. and finance, real estate etc. have registered growth of 7.1% and 5.9% respectively. The fickle GST collections and unsteady state of the NBFC segments have to be reversed for a turnaround in these segments. Banks appear to have access to liquidity but are less willing to lend for projects and prefer the retail route.

Can we juxtapose the recent reforms announced by the government against this performance?

The measures announced last week which address issues of the corporate sector and doing business environment will definitely help to an extent in the medium-term. Auto stocks were not too enthused in the market. The foreign direct investment (FDI) framework that has been introduced will work with a lag and may not be significant in terms of propping investment. The bank mergers announced along with the new governance structures and capital infusion may be seen more as housekeeping that will make the PSBs stronger but may not be able to reverse the trend in GDP growth presently.

The critical part of the story will be the kharif harvest and rural income that can add to consumption demand. Private investment would trail government effort, and the latter needs to spend what was targeted in the next three months and not wait till the end of the year. If some of the RBI surpluses can be used for spending on infra, it should be done. Otherwise, the recovery path will be slow with speed breakers. Statistically, the base effect will push back growth in Q2, too, and hence, we could have another quarter of low growth before there is a turnaround. H2 would be critical and all the pieces have to fall in place.