The Central Statistics Office (CSO) released Second Advance Estimates of GDP for 2019-20 and quick estimates for the December 2019 quarter on February 28, 2020. These estimates together make two big revelations about the Indian economy. First, the worst is not yet over for the economy. And second, the current economic slowdown started well before the NBFC crisis and hence requires a better prescription than just liquidity injection in the system.
The CSO kept its real GDP growth estimate for 2019-20 unchanged at five per cent and pegged the third quarter growth at 4.7 per cent. Finance Minister Nirmala Sitharaman did not find the December quarter growth poor and she saw it as an indication of stability. But, the growth indeed was the lowest in the last 27 quarters. It also showed sequential deceleration from the preceding quarters. The Economic Affairs Secretary Atanu Chakraborty claimed that the economy has bottomed out. But, the numbers spoke otherwise.
The CSO revised the growth estimate for the first quarter of 2019-20 upwards from five per cent to 5.6 per cent and for the second quarter from 4.5 per cent to 5.1 per cent. With the third quarter growth being pegged at 4.7 per cent, the implied growth for the fourth quarter works out to be 4.7 per cent. This is no better than the third quarter and does not indicate any bottoming out, particularly when the base for the second half of 2019-20 was much lower than that for the first half.
The data also reveals that the country’s current growth is standing on the crutches of government spending and on the virtue of its falling import bill. Government spending grew cumulatively by 11.3 per cent during the first three quarters of 2019-20. Excluding the government spend, India’s growth drops to 5.2 per cent for the June 2019 quarter, four per cent for the September 2019 quarter and 3.9 per cent for the December 2019 quarter. If we exclude external trade, then the growth drops even further to 4.8 per cent for the June 2019 quarter, 1.8 per cent for the September 2019 quarter and 2.9 per cent for the December 2019 quarter.
Private consumption and investment demand, the two main pillars of the Indian economy, have shown signs of weakness. Investment demand shrank y-o-y by 4.1 per cent in the September 2019 quarter and by 5.2 per cent in the December 2019 quarter. Private consumption accounts for around 56 per cent of India’s GDP and gross fixed capital formation accounts for another 31 per cent. Unless these start growing at a brisk pace a sustainable revival in the overall economic growth is not possible.
The Reserve Bank of India has been trying to revive the economy for over a year now by infusing liquidity in the market through various measures including sharp rate cuts. The apex bank hoped that easy availability of affordable credit would spur investments in the country. But, it could not taste success. The growth in bank credit, on the contrary, more-than-halved from around 15 per cent in January-February 2019 to 6.4 per cent by the first fortnight of February 2020.
The revised GDP numbers precisely reveal why the monetary policy was ineffective in dealing with the slowdown.
CSO’s earlier estimates showed that real GDP growth stood strong at eight per cent till the June 2018 quarter. The growth suddenly slumped to seven per cent during July-September 2018, the quarter when NBFC crisis erupted in India. It decelerated rapidly thereafter to 6.6 per cent in the December 2018 quarter and 5.8 per cent in the March 2019 quarter. It weakened further to five per cent in the June 2019 quarter and 4.5 per cent in the September 2019 quarter.
The revised estimates, however, show that the slowdown started well before the IL&FS default happened in September 2018. The GDP growth dropped from around eight per cent to 7.1 per cent in the June 2018 quarter itself. It decelerated further to 6.2 per cent in the September 2018 quarter and stabilised around 5.6 per cent in the subsequent three quarters, the time when the NBFC crisis were actually at their peak. The GDP growth then declined to 5.1 per cent in the September 2019 quarter. It slowed down further to 4.7 per cent in the December 2019 quarter instead of reviving as projected by the First Advance Estimates of CSO.
Thus, the revised estimates show that the current economic slowdown started well before the NBFC crisis and hence its counter cannot be infusion of liquidity alone.
The revised estimates suggest that the second half of 2019-20 would not be better than the first half. In fact, it is likely to be worse. The first half clocked a growth of about 5.3 per cent. The second half according to the government’s own estimates would be 4.7 per cent. The worst is not over, we have not bottomed out yet of the slowdown.