The National Statistical Office (NSO) data reveals a drastic 26-quarter low in India’s Gross Domestic Product (GDP) growth rate. Notably, the second quarter (July-September) of the financial year 2019-20 saw only a 4.5% increment. This poor performance has not been witnessed since six years and three months ago when a disheartening 4.3% was recorded between January-March 2013. Consequently, India has yielded its title as the fastest growing economy to China that recorded a 6% growth within the September quarter.
Underlying Causes of the Declining GDP
A myriad of factors has precipitated this downturn in GDP growth. Key among them is the manufacturing contraction coupled with weak investments and reduced consumption demand. Globally, economies are experiencing economic sloth and, consequently, the demand for Indian exports has plummeted over the preceding months.
Detailed Analysis on Sectoral Performance
Various economic sectors have contributed to this decline. For instance, the Gross Value Added (GVA) has staggered down to 4.3% during the Q2 of 2019-2020 from an impressive 6.9% recorded in the corresponding quarter of 2018-2019. Within the manufacturing sector, growth has plummeted drastically by 7.9%, recording a 1% contraction compared to a 6.9% growth experienced around the same time the previous year.
The agriculture, forestry, and fishing sector also suffered a slowdown, posting a 2.1% growth against a 4.9% recorded in the previous year. ‘Financial, Real Estate & Professional Services’ experienced a slow growth of 5.8% in Q2 2019-20, down from 7% the previous year. Concurrently, private final consumption expenditure, a measure of consumption demand, grew by a meager 5.06%, down from 9.79% the previous year.
Gross fixed capital formation, an indicator of governmental and private sector investments, only grew by 1.02%, a significant drop from 11.8% in 2018.
| Sector | Growth in Q2 2019-20 | Growth in Q2 2018-19 |
|---|---|---|
| Manufacturing | -1% | 6.9% |
| Agriculture, Forestry & Fishing | 2.1% | 4.9% |
| Financial, Real Estate & Professional Services | 5.8% | 7% |
| Private Final Consumption Expenditure | 5.06% | 9.79% |
| Gross Fixed Capital Formation | 1.02% | 11.8% |
Indicators of Current Economic Slowdown
Several events have hinted at the impending economic slowdown. The collapse of Infrastructure Leasing & Financial Services (IL&FS) in September 2018 was a major red flag. The perilous state of the financial sector is highlighted by the surging number of Non-Performing Assets (NPAs).
Amidst these setbacks, efforts by the Reserve Bank of India to cut key policy rates such as the Repo rate have not benefitted consumers. Furthermore, the plight of small and medium enterprises intensifies as the cost of credit continues to soar.
Recommendations for Economic Recovery
Reviving the economy calls for a focus on accelerating manufacturing output and spurring an investment resurgence. A potential solution is increased government spending. However, this goes against the government’s fiscal deficit target of 3.3% of GDP, hence posing a significant challenge.