Growth in the Indian economy is expected to have moderated further in the April-June 2019 quarter, with high-frequency indicators and corporate commentary suggesting weakness in consumption in urban and rural areas.
India’s GDP growth rate in the first quarter of 2019-20 is expected to fall to 5.7 percent from 8 percent a year ago, according to a Bloomberg poll of 30 economists. GDP growth rate in the January-March 2019 quarter stood at 5.8 percent.
Should growth remain below 6 percent, it would be the first time since 2013 that India has seen two consecutive quarters of sub-6 percent growth.
Growth in Gross Value Added is estimated to moderate to 5.5 percent in Q1 FY20 from 5.7 percent in Q4 FY19, according to 16 economists polled by Bloomberg. GVA strips out the impact of indirect taxes and subsidies, providing a better indicator of underlying economic trends.
India Ratings and Research Pvt. Ltd. expects Q1 GDP growth at 5.7 percent and points out that this would be the fifth consecutive quarter of slowing growth. The ratings agency has revised its growth forecast for FY20 to 6.7 percent from 7.3 percent earlier.
“A slowdown in consumption demand, delayed and uneven progress of the monsoon so far, decline in manufacturing growth, inability of Insolvency and Bankruptcy Code to resolve cases in a time-bound manner, and rising global trade tensions adversely impacting exports, are likely to keep growth subdued in FY20,” India Ratings said in a note earlier this week.
Shubhada Rao, chief economist at Yes Bank Ltd., estimates that Q1 GDP growth rate may fall as low as 5.5 percent. “While there is some degree of inevitability in the current phase of domestic growth slowdown on account of weakening of global growth impulses, the impact appears to have been accentuated by few domestic factors,” Rao said.
Pressure Points For The Economy
Concerns about the slackening economic momentum have emerged from data and commentary that suggests that consumption—a bulwark of the Indian economy—is weakening.
Consumption growth in Q4 FY19 stood at 7.2 percent compared to 8.4 percent in the preceding three-month period. Since then, output of discretionary consumption items, like cars, has declined. Quarterly earnings data from consumer staples companies has shown weaker volume growth as well.
Put together, many fear that sluggishness in urban consumption is adding to already weak rural consumption. “We believe the most crucial factor that is reinforcing the demand slowdown is slow growth in rural wages,” said Soumya Kanti Ghosh, chief economist at State Bank of India. The modest wage growth, along with stagnating per capita income growth and declining household savings, may keep consumption expenditure under pressure, Ghosh said.
Should consumption growth slacken, any hopes of a pick-up in private investment would dim even further. A recent survey from the Reserve Bank of India showed that seasonally adjusted capacity fell 1.1 percentage points to 74.5 percent in Q4 FY19. Weak demand could lead to weaker capacity utilisation.
Sectoral Trends
Among key sectors, economists expect some improvement in the manufacturing sector compared to the preceding quarter when growth had fallen sharply to 3.1 percent.
The Index of Industrial Production grew at a slightly faster pace in the April-June period compared to the three months prior. This could imply slightly stronger growth for manufacturing. Electricity growth, too, could lend some support to overall industrial growth. Weakness in construction, however, could balance out any mild uptick in other industrial sectors.
“Industry (excluding construction) is likely to witness a mild pick-up, growing by 3.8 percent year-on-year, up from 3.4 percent previously, supported by strong growth in electricity production,” Nirmal Bang Institutional Equities said in a note. “Electricity production grew by 7.2 percent year-on-year in first quarter of FY20 from 1.5 percent in the previous quarter. Manufacturing, as measured by index of industrial production, grew by 3.2 percent year-on-year, up from 0.2 percent year-on-year in the previous quarter.”
The services sector, meanwhile, is expected to see slower growth of close to 7 percent compared to 8.2 percent in the previous quarter. Agriculture growth could pick up to 1.5 percent in Q1 FY20 compared to a de-growth of 0.1 percent in Q4 FY19.
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