FY20 GDP: First Advance Estimate Pegs Growth At 5%

The Indian economy is expected to grow at its slowest pace since 2008-09, in response to weakening consumption and stagnating private investment.

Gross Domestic Product is expected to grow by 5 percent in 2019-20 compared to 6.8 percent last year, according to the first advance estimates released by the Central Statistics Office today.
Gross Value Added, which strips out indirect tax and subsidies, is expected to grow at 4.9 percent compared to 6.6 percent last year.

A Bloomberg poll of 22 economists estimate GDP at 5 percent in FY20. This is similar to the growth rate projected by the Reserve Bank of India.

GDP growth fell to 5 percent in Q1 and 4.5 percent in Q2, averaging 4.8 percent in the first of the financial year. The 5 percent expected growth for the full year builds in a modest pick-up in the second half of the year.

Nominal GDP Growth & Implications For Fiscal Deficit

More importantly nominal GDP is seen growing at 7.5 percent compared to 11.2 percent in the previous financial year. The nominal GDP growth forecast as part of the first advance estimates is much lower than the 12 percent growth used by the government for its fiscal calculations when it presented its budget in July.

• At the time, fiscal deficit was pegged at Rs 7,03,760 crore. This, as a percentage of expected nominal GDP of Rs 211 lakh crore, worked out to 3.3 percent of GDP.
• With nominal GDP now likely to settle at Rs 204.42 lakh crore as per the advance estimates, the fiscal deficit will rise to 3.44 percent of GDP if the absolute level remains unchanged.

Weaker nominal growth has eaten away some of the leeway granted by the FRBM Act, said Saugata Bhattacharya, chief economist at Axis bank. That, along with the reported cuts to expenditure by the government in response to the drop in nominal growth and fiscal deficit, means that risks to growth in the current financial year are to the downside, he said.

Soumyakanti Ghosh, chief economic adviser of the State Bank of India highlighted that the 7.5 percent nominal GDP growth is a 42-year low. He added that real GDP growth could see a downward revision and fall to 4.5 percent this fiscal year compared to the first advance estimate of 5 percent. As a consequence of weaker growth, fiscal deficit for the full year is likely to be closer to 3.8 percent after also taking into account the revenue shortfall, Ghosh said.

GDP Estimates: Key Trends

Among key sectors, manufacturing growth is seen falling to 2 percent even as government-spending supported public administration remains strong.

• Agriculture sector is estimated to grow at 2.8 percent in FY20 compared to 2.9 percent in FY19.
• The mining sector growth is likely at 1.5 percent compared to 1.3 percent in the previous year.
• Manufacturing is seen growing at 2 percent compared to 6.9 percent.
• Construction growth is seen at 3.2 percent in FY20 compared to 8.7 percent.
• Trade, hotel, transport, communication is estimated to grow by 5.9 percent as compared to 6.9 percent last year.
• The financial services sector growth is seen at 6.4 percent compared to 7.4 percent in the previous financial year.
• The public administration segment, supported by government spending, is seen growing at 9.1 percent compared to 8.6 percent.

The GDP data, when analysed from the expenditure side, suggests weakness in private consumption and a sharp fall in investment. Double-digit growth in government spending will continue to support the economy, the data suggests.

• Gross fixed capital formation, which reflects private investment, is estimated to grow 0.97 percent in FY20 compared with 10 percent in the previous year.
• Private final consumption expenditure, reflecting consumer spending, is seen rising by 5.8 percent in FY20 compared with 8.1 percent last year.
• Growth in government final consumption expenditure is pegged at 10.52 percent compared with 9.2 percent last fiscal.

While the economy remains, there are some signs of stability in recent data.

The pickup displayed by various lead indicators in November-December 2019 is encouraging, and portends a modest improvement in economic growth in the second half of FY20, said Aditi Nayar, principal economist at ICRA. Moreover, the year-on-year rise in rabi sowing amid healthy groundwater and reservoir levels, bodes well for agricultural growth and rural sentiment, she added.

Watch | Discussion on GDP growth estimate for FY20