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  • Vinay Nair

India's GDP Growth Plummets Hard

Winter may have come and gone, but springtime doesn't seem to have arrived for the Indian economy.

Even as the average Indian packs away his warm clothes and prepares for a new season, the GDP growth rate is continuing to send shivers down our spines. For economists and interested observers like myself, there is no respite from the dark and gloomy days of the Indian economy, still crumbling under the weight of demand side problems.

The GDP growth rate of the third quarter of 2019 dipped to 4.7%, as per the recently released data, with little hope for short term recovery.

As it stands now, there barely seems to be any light at the end of the tunnel for our struggling economy's steadily falling growth prospects. In the quarter before this, the Indian GDP had registered a growth of 5.1%, and many had hoped that the festive season of the third quarter would propel the growth rate higher. However, crushing all our dreams of a modest recovery, the growth rate has now slumped to a seven year low, leaving policy makers stumped about how to untangle this mess.

When the growth rate of quarter 2 slowed to 5.1% in FY 2019, many had thought that this meant that the economy was bottoming out. The widespread hope was that the Indian economy, which had once been the fastest growing in the entire world, had reached rock bottom, and it would only be upward and onward from here.

In fact, this theory was far from unfounded, particularly in the light of the fact that India usually experiences a resurgence in the last quarter. India's key festivals occur around this time, and this traditionally leads to high rates of retail purchase. Everything from heavy consumer durables to fast moving consumer goods are bought and sold more extensively than usual around this time, both because of the pan-India celebratory mood and the rural population's  higher purchasing power after the kharif season. However, this time around, the festive cheer failed to spread to the major sectors of the Indian economy, paving the way for a disastrous decline. Several of the high frequency indicators used to assess economic health clocked up optimistic numbers in the first couple of months, but soon enough, this quarter went the same way as the ones that had come before it, only worse.

Manufacturing Sector

The manufacturing sector has been one of the hardest hit since the signs of the slowdown surfaced. This time too, it failed to stage a resurgence, registering a 0.2% year on year de-growth. Even though this value is slightly better than the quarter before this, which saw the manufacturing growth fall to a negative of 0.4% year on year, it still does not represent a tangible step in the right direction. The automobile sector continues to suffer, with inventory piling up and the consumers refusing to shell out any hard cash and make purchases. The market confidence remains at a woeful low, and the supply side measures and bank reform remain inadequate to weed out the basic problem.

The manufacturing side has always been a backbone of the Indian economy, contributing to as much as 17% to the overall gross domestic product of our country. However, this sector has been suffering for a while now, not necessarily due to any supply side mishaps, but because of demand side disturbances. Regardless of how many tax cuts and benefits the government extends to this sector now, it is unlikely to stage a comeback till the end consumers are willing to pay up and purchase. However, with the growth outlook steadily deteriorating, and socio-political conflicts engulfing key pockets of the nation, it is unlikely that consumer confidence will be boosted any time soon.

Agriculture, Mining and Quarrying

The agricultural sector has been instrumental in keeping the GDP growth rate afloat this quarter, if not at a remarkable high. The 3.5% growth rate in this sector comes as a relief after the previous quarter's growth rate of 3.1%. Another sector that has contributed to saving the face of the Indian economy, at least somewhat, has been the mining and quarrying sector, which grew at a rate of 3.2% this year. This growth rate is particularly remarkable since it only grew at 0.2% in the quarter before this.

While these numbers are quite reassuring, especially in the face of the landslide that seems to have affected our economic outlook of late, they are not enough to guarantee short to mid term growth. Even though the uptick in the agricultural sector is likely to boost farm income and improve purchasing powers of the largest chunk of the Indian populace, the simmering tensions and the continued lack of confidence has meant that the agricultural prosperity did not extend to the manufacturing sector. The consumers, even when they are earning enough, are not queuing up to buy from the manufacturing majors, allowing the demand side problem to drag down key sections of the supply side as well.

Growth Outlook of Other Major Sectors

The utility service sector has registered a de-growth of 0.7%, while the construction sector has witnessed an extremely low growth rate of 0.3%. The professional service sector has thankfully done quite well, rising by as much 7.3% this quarter, upward from the growth of 7.1% registered in the second quarter of 2019. Utility services, on the other hand, fell by 0.7%, while the construction industry grew at a modest rate of 5.9%. Gross fixed capital formation, a metric that influences investments in the economy, dipped heavily, contracting by as much as 5%. I could go on and on with the statistics, but if you are someone who has been following economic news for some time now, you would already know that we are now in dire straits. When I first had a look at these numbers after they were released, my heart naturally sank, especially because the terrible situation in the manufacturing sector bodes rather poorly for the startup ecosystem, rate of  investments in the country. After I had managed to come to terms with the short term outlook, my eventual concern was how this situation would pan out in the medium term. Unfortunately, analysing the situation from a mid-term perspective was not much more reassuring than looking at these disappointing growth rates.

What's Next for India's Growth Prospects?

After the GDP data was just released, much of the analysis was directed at answering whether the Indian economy had finally bottomed out. From the disastrous numbers we have on our hands, it would sure seem so, but I am not sure. In the short to medium term, there are not a lot of measures that can reverse the widespread damage that has already eaten into our economic fabric. In the next six months, even if the policies announced in the Union Budget 2020 begins to bear fruits, they would hardly be enough to resurrect our ailing economy. In the absence of urgent demand side measures, such as individual tax cuts, and broader structural reforms, such as governmental disinvestment, there seems to be little hope at the moment. Supply side policies and encouragement to startups are all well and good, but they mean next to nothing if there isn't enough consumer confidence boosting the flow of goods and services in the country.

If the Indian economy was not moving towards a comatose state fast enough, the outbreak of Coronavirus in China, a leader in the global economic sphere, and India's neighbour, has only worsened the outlook. The stock markets around the world have been quivering in concern, and the Indian market has been no different. The public share market has undergone a massive crash only recently, and experts are bracing themselves for a harsher fall when the market reopens on Monday. The likes of Mukesh Ambani have lost billions of dollars in a few minutes' time, and leading companies have been pushed to the brink of their existence. With leading telecom companies like Vodafone dithering in the face of falling market value and key banks having a terrible time at the share market, the employment numbers of India are also likely to go downhill. Once the employment rate falls further, it will be a Herculean task to resume consumer confidence and revive their purchasing power.

Clearly, everything seems to be going awfully wrong with the Indian economy, with only the agricultural and service sectors standing out as beacons of hope. But be as they may, the manufacturing sector is still key to India's growth story. Finance minister Nirmala Sitharaman would really have to pull up her socks this time around, and figure out something that works, and works fast!




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