GDP data: All three engines driving economic growth are stalling

Though the GDP growth print of 4.5 per cent for the second quarter of FY20 is dire news for the Indian economy, the CSO’s latest numbers are unlikely to have shock value for the markets. Many high-frequency economic indicators — the IIP, the index of eight core industries, non-oil imports and flow of commercial credit — have been telegraphing the sharp deceleration in economic activity since July. Consensus estimates had pegged the growth rate at 4.3-4.7 per cent. While the Indian economy has lived through similar weak spells in the past (there were multiple quarters of sub-5 per cent growth in FY09 and FY13), what makes this downturn more worrying is the exceptionally low nominal growth rates, which have halved from 11 per cent in FY19 to 6.1 per cent in the latest quarter. As India heads into its so-called demographic sweet spot over the coming decade, it badly needs healthy nominal GDP growth to sustain job and income creation.

The other striking aspect of the latest data is that all three engines that drive the economy appear to be stalling. Growth in GFCF (Gross Fixed Capital Formation), after perking up from 9.3 per cent to 10 per cent between FY18 and FY19, dwindled to 2.5 per cent in the first half of FY20. PFCE (Private Final Consumption Expenditure) has collapsed from 7-8 per cent growth in the five years to FY19, to 4 per cent in the first half of this fiscal. Yes, GFCE (Government Final Consumption Expenditure), which had slowed to 9.2 per cent in FY19, rebounded to 12.3 per cent in the first half, doing much of the heavy lifting on the GDP. But sustaining this pace of government spending for the rest of the year appears a tall ask, given the Centre’s struggles with GST collections and recent giveaways on corporate tax. While the concerted decline in economic drivers calls for multi-pronged efforts to arrest it, stimulus measures so far have focussed mainly on an investment revival. Had the consumption slowdown not materialised, the 135-basis point cut in policy rates, generous bank recapitalisation and sharp cuts in corporate tax rates could have decisively kick-started India’s private investment cycle. But with pervasive evidence of demand weakness across both urban and rural India, private investors may now bide their time.

While the reasons for the investment slowdown hobbling the economy are well-understood (cutback in credit, high real interest rates), policymakers seem to be relying mainly on guesswork to explain why consumption, too, has dropped. On this score, the NDA regime has done the economy a signal dis-service by seeking to bury all adverse data about the state of job and income markets, post-demonetisation. Resolving a crisis of this magnitude calls for a frank and constructive debate on the economy, both within and outside of the government. Shooting the messenger can only delay resolution.