India Registers Lower Than Expected Growth Rate Of 5.4% In Q2

Despite a good monsoon, the acute slowdown in the key manufacturing sector in the second quarter directly impacted the country’s growth rate. The sector grew at just 2.2 per cent during the July-September period of the current fiscal, compared to 14.3 per cent in the same months last year. For instance, retail sales of vehicles fell in the second quarter.

Overall, capital expenditure of the government too showed a contraction of (-)15.4 per cent during April-September period this financial year, owing to the general elections held in April-May.

A study by Ind-Ra showed India’s capex would need to be increased by 52.04 per cent to touch the budgeted target of Rs 11.11 lakh crore during the second half of the fiscal, but that “appears to be a daunting task”.

"Though the GDP growth rate is being widely described as a shocker, it was coming. It is fairly representative of the state of the economy.... It was written all over with low capital expenditure and weak private sector investment and tepid consumption," Subhash Garg, Former Finance Secretary told The Secretariat. 

"It will more interesting to see how things pan out in the second half. Though the situation may be better, challenges remain," he pointed out.

Garg added that the growth rate for the full fiscal year could even fall below the 6 per cent mark. 

A State Bank of India report has already lowered its growth projections to less than 6.5 per cent for the current financial year.

The Reserve Bank of India, which maintained a growth rate of 7.2 per cent is likely to revise its estimates too in its next monetary policy committee meeting. In its November bulletin, RBI projected India’s growth rate at 6.7 per cent for the second quarter and 7.6 per cent in the third quarter. Earlier, the central bank projected a 7.4 per cent in the fourth quarter.

However, past experience shows that the government does push infrastructure spending in the last two quarters of any financial year and this year the push will be more, given the slowdown in growth.

The gross value added (GVA) grew by 5.6 per cent in the seccond quarter, compared to 7.7 per cent in the corresponding period last year. GVA growth in the first quarter was 6.8 per cent. Emkay Global Financial Services in its report said that the gap between GDP and GVA growth has remained negative and this trend may continue as subsidies growth is likely to exceed that of indirect taxes.

Meanwhile, according to government statistics, private final consumption expenditure (PFCE) — the total amount spent by households and non-profit institutions on goods and services — grew by 6 per cent in the second quarter, while it was 6.7 per cent in the first half. In the corresponding period of the previous financial year, PFCE grew 2.6 per cent.

For India, the good news is that the manufacturing sector has picked up momentum from the third quarter. Sales of passenger vehicles too showed a steady growth in October — coinciding with the festive season.

RBI’s Projections Way Off The Mark

While the RBI had projected an annual growth rate of 7.2 per cent, the Economic Survey — the government’s own report card — had pegged a 6.7-7 per cent GDP growth rate.

Last month, RBI Governor Shaktikana Das reiterated that India’s growth story remained intact as its fundamental drivers — consumption and investment demand — gained momentum. “Prospects of private consumption, the mainstay of aggregate demand, look bright on the back of improved agricultural outlook and rural demand,” he said.

Interest Rate

The slowing growth rate has prompted Union ministers, including Nirmala Sitharaman and Piyush Goyal, to call for an interest rate cut. The RBI has maintained the repo rate — the rate at which banks borrow from the central bank — at 6.5 per cent for 10 consecutive times. With India’s retail inflation based on consumer price index (CPI) inching upward to 6.21 per cent — a 14-month high — from 5.49 in September, which is way above the RBI’s comfort level, the central bank will find it difficult to reduce rates.

Though the RBI will have much to chew over at its next meeting over the interest rate. The next monetary policy committee (MPC) meeting is slated to be held in the very next mnonth and it will be interesting to see what stand each of the members take, amid the slowing growth rate and rising inflation.

"The government will have to take proactive steps to ensure that growth does not slip even as we see signs of recovery, but the GDP growth rate of less than 5.5 per cent is a wake-up call," said a senior analyst who is attached to a rating agency.

Surely, it will also have to rechart its growth projections for the current financial year. That apart, the government would have to substantially increase its spending, something which policy makers say will be signalled through the next budget.

India Inc., will eagerly await both the interest rate decision as well as the decision to push government's own infrastructure spending as that could spell a way out of its own balance sheet difficulties. 

(Read our projection about falling growth rate, here)