Why CSO’s 7.5% nominal GDP growth estimate for FY20 appears optimistic

The Central Statistics Office (CSO) may have pegged the nominal GDP growth (in its first advance estimate) for the current FY20 fiscal at a more believable 7.5 per cent, from the Centre’s tall 11 per cent growth estimate in the Budget. But the growth rate still appears optimistic, given that the CSO has projected a significant improvement in consumption and manufacturing growth in the second half of the fiscal. A strong government consumption in the second half also appears a tough task, given the Centre’s limited fiscal space.

CSO has projected the real GDP growth for FY20 at 5 per cent, a substantial fall from 6.8 per cent reported in FY19. Sharp decline in growth of gross fixed capital formation (GFCF), private final consumption, manufacturing and construction has led to the growth slowing down to multi-year low in FY20. Fiscal deficit based on CGA’s figures upto November 2019 and CSO’s GDP estimate can well touch the 4 per cent mark this fiscal!

17-year low

The CSO’s nominal GDP growth projection of 7.5 per cent for FY20, is the lowest since 2002-03 (as per Sudipto Mundle committee report). After averaging about 11 per cent over the past five years, nominal GDP growth in the current fiscal has fallen sharply owing to sharp decline in gross fixed capital formation and private consumption. Slackening industry growthand significant decline in mining, construction, electricity and trade have also hurt growth.

In real terms, GDP growth is seen plummeting to 5 per cent in FY20 — lowest since 2008-09 when it fell to 3-odd per cent. A sharp contraction in growth in gross fixed capital formation (GFCF) is of particular worry. Growth in GFCF is projected to fall to 1 per cent in FY20 from 10 per cent in FY19. Private final consumption is pegged to fall to 5.8 per cent from 8.1 per cent last fiscal. Manufacturing, electricity and construction is expected to grow at 2, 5.4 and 3.2 per cent respectively (sharply lower from 6.9, 7 and 8.7 per cent last fiscal).

While rise in food prices should aid growth in agri GVA at current prices (to 9.8 per cent in FY20 from 4 per cent in FY19), mining is projected to see a contraction (-1.6 per cent YoY) from a robust 16.9 per cent growth last fiscal.

Better second half?

While the growth projected for the current fiscal is far from comforting, what is worrying is the fact that the CSO has pegged higher growth in the second half in certain segments and that appears a Herculean task. For instance, after falling to 4.1 per cent in the first half, growth in private consumption (in real terms) is expected to scale up significantly to 7.3 per cent in the second half. Ground indicators such as auto retail sales suggest only a mild recovery in the December quarter. Hence, the CSO’s estimate implying a sharp recovery in the fourth quarter, appears a tough task (remember the BS-VI transition can lead to some pain in the fourth quarter).

Also, the CSO expects manufacturing activity to recover substantially in the second half (from -0.2 per cent in the first half to 4.1 per cent in second half), which also seems difficult.

What aided growth in the first half of the fiscal was the sharp growth in government final consumption expenditure. While the CSO assumes growth in government spending to fall in the second half (to 8.5 per cent from 12.3 per cent in the first half) it still appears optimistic, given that the fiscal deficit is already at 115 per cent of the budgeted figure (according to CGA data up to November 2019). This limits the scope for further government spending this fiscal. It may be recalled there was a ₹1.45 lakh crore compression in expenditure in FY19 (from the budgeted) to meet the fiscal deficit target and government spending had grown by a mere 3.5 per cent in the fourth quarter of last fiscal.

Interestingly, the Centre’s recently released National Infrastructure Pipeline report had estimated nominal GDP growth at 8 per cent for FY20. The CSO estimating a lower 7.5 per cent suggests further downside risk to economic growth.

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