Is Indian economy heading towards slowdown?

The estimates for the second quarter have shown that the GDP growth rate has reduced to 7.1% from the robust growth of 8.2% witnessed during the first quarter.

Heading for a slowdown?

• Gross value added (GVA) for the five of the eight sectors reflected a slowdown from the first quarter. Only utility services, public administration, defence and other services, and trade, hotel, transport, communication and broadcasting services bucking the trend.
• GVA growth in agriculture, forestry, and fishing eased to 3.8%, from 5.3% three months earlier.
• With distress in the farm sector, below-normal monsoon rains and a shortfall of over 8% in rabi sowing, the outlook for rural demand remains challenging for the next couple of quarters.
• Growth in private final consumption expenditure slowed down to 7%, compared to 8.6% in the first quarter. This shows the demand weakness in the hinterland.
• Even though manufacturing sector has posted a 7.4% expansion, there was a cause of concern because the momentum has almost halved from the June quarter’s 13.5% and has slipped back nearer to the year-earlier level of 7.1%.
• The data of index of industrial production reveals that growth in manufacturing output remained stagnated at 4.6% through August-September. When viewed in conjunction with the weakness in car and two-wheeler sales, it suggests acceleration may be some time away.
• The fiscal deficit has crossed the budget estimate for the full year in the first seven months

Limelight’s for the economy:

Not every finding is suggesting a less-than-encouraging picture. There are points which are painting an encouraging picture:

• Gross fixed capital formation (GFCF) has expanded by a robust 12.5%, building on the first quarter’s 10% increase, and constituted 32.3% of GDP.
• Non-food bank credit has shown signs of a recovery. There was a discernible prospect of an investment revival.
• RBI research paper shows that improvement in investment activity is being driven by cyclical factors and the trend may last up to 2022-23 when the investment rate as measured by the GFCF is estimated to increase to 33% of GDP.

The same research paper has also pointed out that gross fiscal deficit as a key pressure point, given that borrowing by the government invariably crowds out investment demand. Multiple uncertainties are looming on the global trade and growth horizon. With elections approaching, India’s economic managers must be at their best to keep the momentum from sliding.