GDP growth plunges to 4.5%, lowest since 2012

Headline : GDP growth plunges to 4.5%, lowest since 2012

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  • Growth in the gross domestic product (GDP) in the July-September quarter hit a 25-quarter low of 4.5%. The previous low was 4.3 per cent during January-March 2012-13.
  • The growth rate has now slowed for the sixth consecutive quarter, declining by 3.6 percentage points during this period.
  • In terms of quarterly growth, India has lost the tag of the fastest growing economy to China which posted a growth of 6% in the September quarter, the slowest pace in 27-and-a-half years as expansion was hurt by the US-China trade war.


Other metrics

  • The nominal GDP growth rate, which accounts for inflationslowed further from the first quarter to 6.1 per cent in July-September from double-digit level of 12 per cent in the corresponding period last year.
  • Growth rate in terms of Gross Value Added (GVA), which is GDP minus net product taxes and reflects supply-side growth, has slowed to 4.3 % in July-September as against, 4.9% in Q1 and 6.9 % a year ago.
  • Gross fixed capital formation, which is a measure of the level of investment in the country by both the government and the private sector, grew only 1.02% in the second quarter of this financial year.
  • This is significantly lower compared with a growth of 4.04% in the first quarter and the growth of 11.8% seen in the Q2 of last year.


Sectoral performance


  • The manufacturing sector contracted 1% in the second quarter, compared with a robust growth of 6.9% in the same quarter of the previous year.
  • The first decline in the manufacturing sector in nine quarters, highlights the lack of demand in the economy. This is in line with the contraction in factory output and core sector numbers.
  • Separate data released showed the eight core sectors which account for 40% of the index of industrial production, contracted 5.8% in October, its sharpest slide in the new data series with 2011-12 as the base year.


  • The ‘Financial, Real Estate & Professional Services’ category saw growth slow to 5.8% in Q2 of 2019-20, compared with 7% in Q2 of the previous year.
  • Among the services sectors measured, only the ‘Public Administration, Defence & Other Services’ category saw growth quicken in the second quarter of this year, to 11.6%, compared with 8.6% in the same quarter of the previous year.
  • While sharp growth in central and state government spending supported the performance of public administration, defence and other services, the Centre also recorded sharp rise in revenue expenditure.


  • Expansion in the agriculture, forestry and fishing sector — a key sector for job creation in rural economy — fell to 2.1 per cent down sharply from 4.9 per cent last year


Consumption growth

  • Private final consumption expenditure, grew 5.06% in the second quarter of this financial year, compared with a growth of 3.14% in the first quarter.
  • However, the growth in the second quarter this year is still significantly lower than the growth of 9.79% recorded in the second quarter of the previous year.


Reasons for the slowdown

  • The global economy is facing a slowdown and this has hurt demand for India’s exportswhich have slumped in recent months.
  • Further, the government points that, intensive efforts to bring about transparency, prevent leakages and improve governance would have also caused some transitory disruptions.
  • The Reserve Bank of India and the government have been unable to address two critical needs of the industry, namely, cost of credit and availability of credit.

Slowdown of credit flow from NBFCs

  • When state-owned banks turned risk averse and almost closed the lending few years ago due to mounting bad loans, the companies turned to non-banking finance companies.
  • NBFCs borrowed heavily from banks to on-lend to individuals as well as small companies. But after IL&FS collapse, NBFCs have virtually stopped lending to the wholesale segment.

Banks reluctance in passing on the rate cuts

  • RBI has on its part tried to ease lending by cutting down the key lending rate. Since the beginning of this calendar year, it has cut the key policy rate continuously.
  • The cumulative cut of 135 basis points over the last nine months has translated into a meagre 29 basis points (just over a fifth), with banks being reluctant to pass on the rate cuts.
  • Due to which, cost of credit continues to remain high for most companies and the worst affected are small and medium enterprises.



Disruption of Corporate plans

  • Companies across sectors — from those making tractors to toothpaste — had, over the last two decades, been primed to plan for a trend growth rate of 8 per cent.
  • Investments were made, loans taken, capacities built, and people employed accordingly. This normalised assumption has taken a big hit and has the potential to significantly disrupt the plans of the Corporate India.

Subdued government finances

  • If the growth in collections from Goods and Services Tax and Direct Taxes is extrapolated for the full year, the Central government will have a shortfall of a remarkable Rs 2.7 lakh crore in 2019-20.
  • For the states, the tax shortfall cumulatively could be as high as Rs 1.7 lakh crore. Meanwhile, till October end, the fiscal deficit has already breached 100 per cent of its full-year target.
  • With declining household savings and lower buoyancy in government’s revenue collections, there will be limited fiscal space to spur economic growth.
  • The slowdown is also expected to adversely affect income growth which, in turn, would further dent consumption demand.


Government’s response

  • The Economic Affairs Secretary has said that the fundamentals of the Indian economy remain strong and GDP growth is expected to pick up from the third quarter of FY 2019-20.
  • He further highlighted the fact that the International Monetary Fund has projected India’s GDP growth at 6.1% in financial year 2019-20 and 7% in 2020-21 in its October 2019 report.
  • The government will stick to maintaining the fiscal deficit at 3.3 per cent by March-end 2020, and there will be no expansion in market borrowings.
  • It also expects privatisation of state-owned enterprises such as BPCL, Container Corporation of India Ltd and Shipping Corporation of India Ltd could enable the government generate resources to help demand-side of the economy.


Way ahead

  • The Reserve Bank of India (RBI), scheduled to announce its bi-monthly monetary policy statement on December 5, is expected to continue its accommodative monetary policy stance with another repo rate cut to support growth.
  • The NPA issue needs to be addressed by paying adequate attention to risk management, including strengthening of early warning systems.
  • Further, the Centre will have to take measures to boost demand, as the supply side has already been addressed through reduction in corporate tax rates. Lower taxes in the hands of consumers could likely boost growth.

Recognition of true fiscal deficit

  • One major structural problem that the government has created for itself, is the non-recognition of the true fiscal deficit, which has tied up expenditure.
  • The government needs to acknowledge its true fiscal deficit so that it can increase its expenditure and put money in people’s hands in order to stimulate demand and investments in the economy.

Recapitalisation of banks through cash

  • Former Governor of Reserve Bank of India (RBI) C. Rangarajan has said that it is time to consider a switch over from bonds to cash for recapitalisation of banks.
  • His suggestion comes in the backdrop of ₹2 lakh crore worth of recapitalisation of banks over the past three years and the government announcing plans for a ₹70,000 crore capital infusion for public sector banks a few months ago.
Section : Economics