The GDP growth rate plummeting to 5 percent came as a big shocker to the economy. Even the growth pessimists didn’t see the growth dipping to 5 percent for the first quarter of FY20. The ramifications were felt in the stock market, with SENSEX and NIFTY falling by over 2 percent each on Tuesday , 3 September 2019. On the same day, the rupee has also witnessed one of its sharpest falls against dollar closing at 72.4.
Coming to the GDP data, the growth rate of 5 percent is one of the lowest rates in the last 25 quarters. On the previous fiscal year, GDP grew at 8 percent in the first quarter. By definition, GDP is the total value of goods and services produced within the country. The four major components of GDP are Consumption (C), Government spending (G), Investment (I) and Net Exports (NX) (GDP=C+G+I+NX). At constant prices, the YoY growth rate of private final consumption expenditure declined to 3.14 percent from 7.31 percent a year ago. Similarly, Gross Fixed Capital (GFCF), which is a proxy for the investment rate in the country has declined from 13.28 percent to 4.04 percent during the same period. Exports declined from 10.16 percent to 5.70 percent, whereas imports of goods and services declined from 11.04 percent to 4.24 percent during the same period. Only government spending has picked up during this period from 6.55 percent to 8.85 percent.
Gross Value Added (GVA) which is a better measure of economic activity also declined to 4.94 percent from 7.68 percent a year ago. Sector-wise analysis of GVA shows that the growth rate of the agricultural and industrial sectors declined from 6.5 percent and 8.1 percent in June’18 to 2.04 percent and 2.74 percent respectively in June’19. Within the industry sector, the growth rate of manufacturing sector stands at 0.58 percent in the first quarter of FY20.
With the GDP numbers in hand, one cannot deny the fact that the economy is slowing down. The automobile industry is badly hit by the slowdown. The passenger vehicles sales dropped to 30.9 percent (YoY) in August’19 consecutively for the tenth month. FMCG sector also slowed down in Q1. FY20 with 6.2 percent growth against 9.9 percent in the previous quarter. However, some major FMCG companies have also registered robust volume growth during the current quarter.
On the other hand, the debate is still going on whether the slowdown is cyclical or structural. RBI, in its annual report, argued that the slowdown is cyclical. However, the report also stressed the need to address the issues in land, labour, and agricultural marketing in an urgent manner. Central Bank has taken several measures to lift the credit growth in the economy. In the last few weeks, the government has also initiated various measures to lift the sentiments. Nevertheless, considering the present slowdown there is a need to initiate some bold reforms. It is expected that the results of all these measures will be positively reflected and GDP growth will climb up in the coming quarters, aided by the base effect.
Posted on 19 September 2019