Further fall in GDP
- By Sharmistha Dutta /Gross Domestic Product /10 months ago /31
Economists expect a further fall in GDP: Following a very sharp contraction in industrial production in September and with very less chances of recovery, economists are seeing growth slowing down to 5% in the current financial year. The reduction in industrial production is much more than it was expected to fall.
While the GDP data for the second quarter will be released on November 29, according to estimates, the growth during the July – September may have dropped from 5% to 4.2%. This has increased pressure on the government to take more and effective steps to revive and increase demand. According to Ecowrap which is a monthly report by the Economic Research Department of State Bank of India (SBI), “The second-quarter GDP growth rate is likely to slip to 4.2% on account of low automobile sales, deceleration in air traffic movement, flattening of core sector growth and declining investment in construction and infrastructure.” This report had earlier estimated a full year growth at 6.1% but it reduced the same to 5%. SBI is also expecting some rate cuts in the December monetary policy review by RBI. But, this will not be a welcome measure and SBI is cautioning against the same.
The economy grew at its slowest pace in the last six years, only by 5% in June quarter. As per the data released on 11th November 2019, industrial production reduced by 4.3% in September. This is the worst ever performance since October 2011. The industrial growth from April to September 2019 was 1.3%. It was 5.2% from April to September 2018. And these numbers have triggered downgrades sharper than the ones announced after first quarter GDP estimates in August.
Kotak Mahindra Bank note claimed it expected GDP for the second quarter to be 4.7% and for full year to be 5%. Indicators suggest the economic activity has worsened in the second quarter, inspite of an increase in government spending, after a disappointing start to first quarter of financial year 2020. There has also been a slowdown in consumption and investment. The weakness in the real estate and financial sectors are also feeding into one another. CRISIL chief said that the “recovery will be gradual as the current downturn is accompanied by clean-up in the financial sector.”
All hope is still not lost
Demand for power reduced to 13% in October, diesel consumption has contracted, car sales have not changed even after the festive season has come and gone. A quarterly survey by National Council of Applied Economic Research (NCAER) showed business confidence falling sharply by 15.3% from July to October and this at a six-year low. Advance indicators show weak consumption and investment and depressing estimates. Most high frequency indicators are weak. Business and consumer sentiment indicators are gloomy as well. Any improvement in the second half will be modest and gradual.
Siddhartha Sanyal, chief economist and head of research, Bandhan Bank pegged a financial year 2020 growth at 5.5%
Abheek Barua from HDFC Bank is being optimistic about the second half of the fiscal year. He said “There are structural issues in automobile but sectors such as FMCG (fastmoving consumer goods), pharma, chemical seem to be doing well looking at the corporate results.”
The above mentioned though was seconded by rating agency CARE’s chief economist Madan Sabnavis.
While HDFC bank expects the second quarter to grow at 4.8% and a full year growth at 5.8% for the financial year 2020. Sabnavis, on the other hand, is expecting the GDP to be at 4.5% and 6.2% respectively because the statistical bias would diminish.
Even, Kotak is supporting the optimism of Barua and Sabnavis. They expect economic activity to improve in this period due to a favorable base effect and lower policy rates amid easier liquidity conditions and government spending.
How rate cuts act as the stimulus
Sharp rate cuts are being expected in December policy review:
- The central bank has already cut policy rates by135 basis points in the current year and they had forecast a 5.3% rise in GDP in the July-September quarter.
- In its last policy review the RBI had cut its growth forecast for the year to 6.1% from 6.8% estimated earlier.
The State Bank of India is however against the measure of using rate cuts as these are unlikely to kick start immediate revival and also result in potential financial instability. The increase in consumption caused by debt- financing did not work well before in the overseas market. It cannot help India either. “Much of the reluctance about use of fiscal policy in India currently appears from the fact that the monetary policy space is still adequate. This we believe could be counterproductive,” said the SBI report authored by Soumya Kanti Ghosh, group chief economic advisor.
“A more aggressive fiscal and monetary response is needed to arrest the downturn,” Edelweiss said.
A few measures adopted by the government to revive the economy include measures like a cut in corporate tax rate to 15% and a special allotment of Rs 25,000 crore to complete the real estate projects that have been placed on hold.