Story behind the GDP growth rate falling to 5%.

A storm took the Indian Economy on August 30, 2019, when the Central Statistics Office (CSO) revealed that the real GDP growth in Q1 of the current fiscal has dropped to a six-year low of 5%. While this issue has created a lot of resentment against the government, renowned economists and politicians are calling it "all-round mismanagement" by the Modi Government. We must understand both the statistical picture and the causes behind the statistics. 

The fall in major sectors and indicators- A statistical picture

In the March quarter of FY 19, the GDP growth rate had already fallen to 5.8%. The growth rate in Q1 of FY 20 had further presented a dismal picture, with significant sectors witnessing disastrous falls.

The manufacturing grew at just 0.6% as against 12% for the same quarter of FY 19, indicating subdued demand and investment.

The nominal GDP (which is a measure of growth rate without adjusting for inflation), rose just 8%, the least since FY2002-03, indicating a deep slowdown.

Private Consumption which makes 55-58 percent fell to an 18 quarter low of 3.1% from 10.6% of the March quarter, indicating worsening sentiments.

Private spending grew at 3.1%, one of the slowest rates since the new national accounts series began in 2012. Investments (gross fixed capital formation) grew at 4%
 

Sector-wise growth (in %)

FY20

FY19

Agriculture,forestry,fishing

2.0

5.1

Mining

2.7

0.4

Manufacturing

0.6

12.1

Utilities

8.6

6.7

Construction

5.7

9.6

Trade, hotels, transport

7.1

7.8

Financial, real estate, and prof. services

5.9

6.5

Public Administration, defense

8.5

7.5

Why is this happening?

Plummeting Manufacturing Sector- The biggest culprit: The country’s manufacturing sector activity declined to its 15 month low in August, all thanks to the slower increase in sales, output, and employment. The Purchasing Manager's Index (PMI) indicated the most stagnant growth in sales in the last 15 months, which further deteriorated the production growth rate and job prospects. 

 Plummeting Automobile Sector: The auto sector continues to witness a slowdown in sales due to several reasons such as liquidity crunch, changing of emission standards, high goods and services tax (GST) .

Falling Inflation leading to low private consumption: Yes, you heard it right. If high inflation hurts consumers, low inflation hampers Indian companies and farmers. Falling inflation together with a weak monsoon did not allow farmers to produce more (due to low food prices and unsupportive weather), leading to lower incomes and lower consumption. This subdued the agricultural sector. It also had a direct impact on the company’s ability to earn a higher salary, which induced wage cuts. Wage cuts further dampened consumption — another indicator of inflation i.e., the GDP deflator, from 4.3% to 2.8%. 

Global Factors: Global factors such as the US-China Trade war dampened worldwide demand for domestic goods. This worsened the output production as a whole. If the US-China Trade War escalates further, exports are going to be affected severely, which will lower the prospects of an improved GDP. 

Conclusion

Now that India has lost the tag of the fastest growing economy to China (growth rate: 6.2%), we believe that with the right measures, it is not impossible to revive the economy and bring it on the growth track.

To stimulate demand and revive sentiments, further rate cuts by the Reserve Bank of India (RBI) are the need of the hour. 
Recently, the RBI decided to transfer Rs 1.76 lakh crore of its surplus funds to the government as dividends. These dividends could be effectively used to recapitalize Public Sector Banks(PSB's). The infusion of cash, together with the rate cuts, should bolster lending and revive Investments. The dividends released by the government can further make up for the shortfall of the falling tax revenues, which have been falling due to weaker growth.

Auto companies can be provided with incentives to invest in Electric Vehicle Technology. This would stimulate investments.
Reduction in income taxes, for instance, for the lowest slab rates would also encourage private consumption, which has been struggling in the present. 
Productivity can be improved if the government lowers the cost of doing business down. Flexibility in labor laws can also be an advantage for maximum output. 

To know more about what’s happening with the economy, continue reading our blogs. 

                                                                                          - Gaurja Newatia

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Posted On: 04 Sep 2019 Home / Investing / Story behind the GDP growth rate falling to 5%.