India’s Economic growth is likely to have slipped below 7% in FY19, the lowest in the past five years, because of a disappointing fourth quarter. That could prompt a further cut in interest rates by the central bank and renewed efforts by the incoming government to drum up demand and private investment.
The January-March quarter growth may have slumped to 6-6.3% against 6.6% expansion in the preceding one, pulling down the growth rate for the fiscal year.
In its second advance estimate for FY19 in February, the statistics office had estimated growth at 7%, implying 6.5% growth in the last quarter.
PROVISIONAL ESTIMATES TO BE RELEASED ON FRIDAY
Provisional estimates for FY19 will be released on Friday, a day after Prime Minister Narendra Modi takes the oath of office for a second five-year term at the head of his council of ministers.
China’s economy, in comparison, grew 6.4% in the quarter ended March.
“The economy is facing tighter financial conditions, weak global and domestic demand, with private consumption slowing materially,” said Kotak Mahindra Bank economist Upasna Bhardwaj.
Kotak Mahindra Bank expects fourth-quarter GDP growth of 6% and that for the full year at 6.9%.
“Leading economic indicators for the fourth quarter like IIP (index of industrial production), PMI (purchasing managers’ index), infrastructure index, auto sales and cargo have shown moderation in momentum,” said Shubhada Rao, chief economist at Yes Bank, pencilling in 6.2% growth for the quarter. “Global demand also remained soft amidst uncertainty on the trade war.”
The US and China have been unable to resolve their differences over trade and have imposed tariffs on goods.
The new government faces the task of quickly boosting consumer demand to revive growth while undertaking more structural measures to get private investment moving.
The moderation is in line with an expected slowdown in the second half of the financial year due to a decline in consumer demand even as investments remained muted. The index of industrial production (IIP), a quantity-based measure, grew 3.6% in FY19 with full-year manufacturing growing 3.5%.
Several other high-frequency indicators — automobile sales, rail freight, petroleum product consumption, domestic air traffic and imports (non-oil, non-gold, non-silver, and non-precious and semi-precious stones) — indicate a slowdown in consumption, especially private consumption, despite low inflation in the economy. Passenger vehicle sales grew at their slowest in five years, at 2.7% in 2018-19.
The reduction in government spending to meet the fiscal deficit target of 3.4% of GDP may also have contributed to the demand slowdown. Public spending and consumption had been propping up growth amid weak private investment and exports.
State Bank of India (SBI) has projected fourth-quarter GDP growth at 6.1% while value-added growth could be at 6% or slip marginally below that to 5.9%. Axis Bank forecast 6.1% GDP growth while HDFC’s estimates are 6.1-6.2% for the March quarter.
Lacklustre industrial growth and material declines in auto sales will show up in the growth numbers, said Crisil chief economist DK Joshi. “Agriculture was not particularly strong in 2018-19 and will grow below trend.”
The liquidity constraint on nonbanking finance companies (NBFCs) sparked by the default at Infrastructure Leasing & Financial Services (IL&FS) has also hit consumer demand and contributed to the slowdown, experts said.
“Services growth will likely remain tepid given stresses in automobile sector and real estate, and lower government expenditure,” saidB Prasanna, group head, global markets – sales, trading and research, ICICI Bank.
RATE CUT HOPES
Most of the economists surveyed expect the Reserve Bank of India (RBI) to cut rates in its June 6 policy announcement to give a boost to demand, given that inflation is still comfortable.
“With limited fiscal space, the outlook continues to look bleak, thereby providing sufficient case for a 50 basis point rate cut in the future,” said Bhardwaj of Kotak Mahindra Bank. A basis point is 0.01 percentage point.
SBI expects a sharper rate cut (35-50 bps) in the forthcoming policy. “Interestingly, RBI for the first time could use the rate change in non-multiples of 25 bps as a first step towards providing second-generation signals to market of future policy stance,” SBI said in a research note.
The RBI has said it expects India’s economy to grow 7.4% in FY19. It has shifted its focus from inflationary concerns to maintaining growth momentum, cutting rates twice in succession by 25 bps each to shore up the economy.