India's GDP Growth Drops to 4.5% in Q2 FY '20, Slowest in Over 6 Years

Lower growth this quarter was primarily due to lower output in the mining and construction sectors. Manufacturing growth also slumped in Q2.

New Delhi: India’s economy grew at its slowest pace in six years for the second quarter of this fiscal year, according to official data released by the government on Friday evening.

Gross domestic product (GDP) growth rose just 4.5% for the quarter ended September 2019, in a development that reinforces concerns that the Indian economy is slowing down and unlikely to record 6% growth for the whole fiscal year. 

In ‘gross value added’ (GVA) terms, the economy grew at 4.3% compared to 4.9% in the previous quarter.

Lower growth this quarter, government data shows, was primarily due to lower output in the mining and construction sectors. Manufacturing sector growth also slumped compared to Q1.

The numbers that were released on Friday are in line with market expectations: most analysts had sharply cut their projections and predicted that Q2 growth would be between 4.2% to 4.7%.

Growth is down compared to the 5.0% recorded in Q1 FY ’20 and the 7% that the Indian economy hit one year ago in Q2 FY ’19.

Indeed, what appears to have helped boost growth in this quarter is expenditure by the government. Government final consumption expenditure (GFCE), grew by 15.6% in Q2, compared to 10.9% in the same period last year.

Of equal concern is the fact that nominal growth in the second quarter, which includes the impact of price changes, stood at 6.1%  versus the 8% that was recorded in Q1.

Financial Quarter GDP growth 
Q1 2018-19 (April-June) 8.0%
Q2 2018-19 (July-Sep) 7.0%
Q3 2018-19 (Oct-Dec) 6.6%
Q4 2018-19 (Jan-March) 5.8%
Q1 2019-2020 (April-June) 5.0%
Q2- 2019 – 2020 (July-Sept) 4.5%

The last time that quarterly data slipped below the psychologically significant 5%-mark was in Q4 of FY ’13, when GDP growth was recorded at 4.3%.

A separate set of government data, released by the industry department on Friday evening, also showed that eight infrastructure sectors contracted for the second consecutive month by 5.8% in October 2019. In September 2019, the ‘core sector’ had shrunk by 5.1%.

“Manufacturing growth contracted, while both private consumption and investment stayed weak. Some support from government spending was expected, given combined central and state expenditure grew 22.5% y/y in Q2 FY20 vs. 1.3% in Q1. Thus, GVA excluding ‘Public Administration, Defence and Other Services’ is much lower at 3.2% (4.5% in Q1), essentially reflecting the high government contribution to the headline number,” said Sreejith Balasubramanian, Economist – Fund Management, IDFC AMC, in a statement.

“Given this, and with the just-released index of eight core industries falling 5.8% y-0-y in October, bottoming-out of growth could be further down the road and recovery is unlikely to be V-shaped as consumer demand, credit supply and risk appetite remain lacklustre. This and the falling core-CPI should allow the RBI focus more on growth, while a major fiscal stimulus is hindered by the lack of available household financial savings.”

$5 trillion goal slipping away?

An hour after release of the quarterly GDP data, former finance secretary Subhash Chandra Garg curiously tweeted out that the Narendra Modi government’s goal of a $5 trillion economy may be delayed by a year due to the current slowdown.

Garg was transferred out of the finance ministry earlier this year, following alleged disagreements over certain issues. He then applied for voluntary retirement from the Indian Administrative Service and left the government officially just a few weeks ago.