GDP Fine Print: What Economists Make Of The Data

The Indian economy grew at its slowest pace since 2013, with GDP growth falling to 4.5 percent and GVA growth plunging to 4.3 percent. The data showed that private investment remained near-stagnant, while consumption growth showed a modest pick-up compared to the first quarter.

Economists now expect full-year GDP growth to be even lower than the 6.1 percent forecast by the Reserve Bank of India and see continued monetary policy easing. They expect growth to stablise but remain weak over the course of the year.

Edited views from conversations and reports by economists below:

GDP Growth: From 8 Percent....To 4.5 Percent

Kaushik Das, Chief India Economist, Deutsche Bank

“We had a forecast of 4.5 and we have got that number, but it is nothing to be cheerful about. India’s potential growth is about 6.5-7 percent. So, we’ve been growing below that in the last two quarters and going forward also the recovery is going to be shallow. It’s not like growth would jump back to 6.5 percent anytime soon. So, probably this year at best we will achieve 5 percent average growth, which is going to come down from 6.8, which is not good at all.”

Rahul Bajoria, Chief India Economist, Barclays

“This quarter we saw the GDP ex-government and ex-farm sector decline to about 3.2 percent. This is the weakest number in almost a decade. It was quite clear that the private sector, both from a consumption and an investment perspective, was showing signs of a lot of stress and that has come through in the numbers. Having said that, we do see some signs of aggregate demand starting to stabilise. Our sense is that the third and the fourth quarter numbers for the fiscal year are going to be marginally better and you will see even sequentially growth is starting to show some signs of improvement.”

Decade-Low Nominal GDP Growth

Kaushik Das, Chief India Economist, Deutsche Bank

“We have nominal GDP growth at 6 percent, and I am not saying nominal GDP will stabilise at 6 percent, it should go up close to 8.5-9 percent in this year. But whenever nominal GDP growth is lower than your nominal interest rates (10-year bond yield is at 6.5) you will have debt-GDP ratio increasing. That is a source of concern. And we have done this study where we have seen that India’s debt sustainability hinges mostly on having good quality and high growth. Nominal GDP growth, typically, in India has been much higher than the nominal interest rates or real growth has been higher than the real interest rates. If that metric does not hold, then you will have debt-GDP ratio first flattening out and then starting to rise, which is the case in many advanced countries.”

Rahul Bajoria, Chief India Economist, Barclays

“At the aggregate level when you have the nominal GDP growth at around 6 percent, it is going to create a lot of pain. This gels well with the data that RBI had put out earlier about flow of funds themselves being negative from a year-to-date perspective and reflects the pain that has come through from a working capital perspective. Hopefully, going forward in the next six months, we are going to see conditions normalise and that should help nominal GDP growth improve at the margin.”

The Pain Points In The Economy

Indranil Pan, Chief Economist, IDFC First Bank Research

“The continued growth erosion was led by contraction in manufacturing and slower growth in ‘trade and transportation’ services. From the expenditure side, the slowdown was led by softer growth in investment, while private consumption expenditure growth showed a welcome but surprising pick-up. For the full year FY20, we now see GDP growth at 5 percent with a much weaker H2 recovery penciled-in.”

Soumyakanti Ghosh, Chief Economist, State Bank of India

“On the expenditure side, with exception of government consumption, there is no component that has not decelerated in the first half of FY20. The first half data which suppressed the seasonal fluctuations if any in first two quarters, shows secular drop in demand at current prices. The capital formation had an alarming drop from H1 FY19 growth of 16.7 percent to 4 percent in H1 FY20 (1 percent  in Q2 FY20 from 4 percent in Q1 FY20). Private final consumption expenditure seems to have recovered  in Q2 FY20, and this in itself is a pleasant surprise.”

Siddhartha Sanyal, Chief Economist, Bandhan Bank

“The consumption basket is close to two-thirds of the economy, which typically that gives us a growth rate of 7-8 percent. And, that gives the big stability that we always talk about in the case of India's GDP growth. This has created a lot of uncertainty in the minds of forecasters and policymakers as the number had dropped to 3 percent for a while. We need to figure out how stable that number will be in the coming quarters even if it is better at this juncture. The numbers may look slightly better in the next few quarters due to a favourable base effect but we really need to keep a close tab on it.”

Policy Action Ahead?

Kaushik Das, Chief India Economist, Deutsche Bank

“My belief is that the government will try hard to meet the fiscal deficit target, which will give some stability to the bond market and therefore if RBI continues to cut rates, there would be transmission, given that RBI will also keep liquidity flush in the system. This cycle, we need to depend more on monetary policy. With fiscal policy, you also have to remember that it is not like you do some stimulus and tomorrow you will see growth going back— it takes a lot of time for growth to come back.”

Rahul Bajoria, Chief India Economist, Barclays

“I think the monetary policy transmission is going to improve going forward. We have seen, as far as marginal lending rates are concerned, they have declined by roughly 40 basis points since the start of the cutting cycle.

On the fiscal side, there has been a very strong revealed preference from the government to front-load spending, if you look at where the government consumption numbers are. So, in a way they are running a counter-cyclical fiscal policy support for the last 3-4 months. In fact, the fiscal numbers that came out earlier today for the month of October, you can again see government spending being relatively high.”