GDP Growth – Sept’19 Performance Analysis

GDP growth rate for the quarter ended Sept’19 (Q2’FY20) has turned out to be worse than Q1’20 (June’19) as per the data released by MOSPI today. Worse, gross fixed capital formation (FCF), measure of future productive capacity, declined by sharp 3%, reversal of 7% over previous quarter. Despite the government’s push to prop up the economy, reflected in government final consumption expenditure going up by 15.6%, the economy continues to lose momentum. Here is a brief analysis of the GDP data.
GDP for the quarter has grown by 4.5% against growth of 5% in previous quarter and 7% in same quarter previous year. (Difference between previous quarter, which is Q1’20 or June’19, and same quarter previous year, which is Q2’19 or Sept’18, must be noted carefully). In absolute terms, GDP for the quarter stands at Rs 36 lakh crore (constant price) and Rs 49.6 lakh crore (current price) (implying inflation impact of roughly 4.4 p.a.). More worrying is the fact that slowdown is impacting more segments. This is reflected in the fact that only three out of eight different sectors recorded above average growth against five sectors in the previous quarter. Further, all the sectors except government driven public administration have recorded a decline in growth rate over Q1. While this segment recorded growth of 11.6%, financial services group grew by 5.8%, next best and trade by 4.8%. Construction sector lost significant momentum, with growth declining from 5.7% in Q1 to 3.3% this quarter. The worst is performance of manufacturing whose GVA fell by 1% after a nominal growth of 0.6% in Q1’20, whereas mining, the perennial laggard, grew by just 0.1%.

While GDP remains the big brother, it is the GVA (Gross Value Added) which is the backbone on which GDP stands. The GDP calculation begins with estimation of GVA for eight different segments. (To understand this better, please click here – and To this, total taxes received by the government minus the subsidy paid (or value added by government) is added to arrive at GDP. While there is often a debate on which is the more appropriate measure – GDP or GVA; GVA is the better measure for gauging the healthy of individual segment whereas GDP serves as the right barometer for the entire economy.

Even though GDP at constant price is the correct measure to gauge the economy as it eliminates the impact of price rise, the calculation begins from the current price. This is so because all market data is available on current price basis only. (To that extent, constant price estimation is only a theoretical exercise). Figures are then deflated by appropriate price indices which are, again, an estimate. Constant price figures are, thus, subjected to two estimations and therefore, could suffer higher underestimation/overestimation. Shifting to producers’ price index (PPI), which gives more accurate estimate of price, is being deliberated upon. (Click here to read more on PPI – he inadequacy of data was admitted by the government this week only in the Parliament.

GDP is also calculated from the expenditure side and is classified as Private final consumption expenditure (PFCE) having share of about 56%, Gross fixed capital formation (GFCF, 32%) and Government final consumption expenditure (GFCE, 12%). The three segments have recorded growth of 5.1%, -3.0% and 15.6% respectively. The decline in GFCF is more worrying having collapsed from an average of over 12% over five quarters between Q3’18-Q3’19. (The performance despite sharp reduction in interest rate possibly lends credence to the hypothesis that investment decisions are not very closely linked to interest rate). For PFCF, it is a revival of sorts from a low of 3.1% in Q1 and if this does persist, it may take some pain away from the government.

Closer analysis of GFCE reveals some interesting trend. GFCE grew by a sharp 15.4% during the five quarters after demonetization (March’17-March’18), possibly a conscious decision by the government to prop up the economy. This boosted the GDP growth rate from 6% in June’17 quarter to 8.1% in March’18. With growth picking up, possibly, the government reduced its spending which declined to average of 9.2% in the next five quarters (June’18 – June’19). And this led to a decline, even sharper, from 8% in June’18 to 5% in June’19. It would be safe to assume that the revival in government spending from 8.8% in the previous quarter to 15.6% in this one would continue for next few quarters. A high government spending, however, is going to have a two-pronged impact on the government’s fiscal estimates – One, higher than planned spending in absolute terms and second, higher deficit as a percent of GDP due to lower than projected increase in GDP. The only hope is that sharp decline in interest rate would reduce its interest outgo (which corresponds to over 25% of total expenditure) and thereby, provide some fiscal space.

While this is the most challenging time for this government’s 5½ years regime, economy has seen much worse phase than this in last 10-12 years. This includes FY10-12 when fiscal deficit averaged 5.8%. So, the need is to keep up the sentiments and focus on capacity building. Some of the measures could be incentivising capital expenditure through may be, accelerated depreciation, incentivizing exports and so on.

(Image courtesy of ASI survey)

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