Quarter 2 GDP numbers were released today. Sharper slowdown at 4.5% in Q2. My take on the state of economy at this juncture.

Economic Slowdown Gets Deeper

CSO released second quarter GDP growth numbers today. GDP growth in real terms slipped to a decade low of 4.5%. GDP growth for the first half 2019-20 is now only 4.6%. Growth has slipped by 2.7% compared to the first half growth last year. India has rarely witnessed sub 5% quarterly growth ever since economic reforms were initiated in 1991 to make India a market economy. Leading indicators of October, including the core industries numbers released today, suggest that growth slowdown is likely to continue in the third Quarter as well. Several institutions expect India’s growth for 2019-20 to be below 5%. It looks most likely to be the case in the light of what is happening in the economy.

Technically India is not in a recession as defined in the context of advanced economies which grow at only 0-3% normally. For the emerging market leader economy of India, which has grown in excess of 7.5% per annum for 20 years, a full year growth of less than 5% of is more like a recession than a slowdown.

India has rightly declared its ambition to be a $5 trillion dollar economy by 2024-25 and a $10 trillion dollar economy by early 2030s. The goal of $5 trillion dollar economy by 2024-25 seems to have slipped by a year given this year’s tepid growth of less than 5%.

The number I pay most attention, in the growth context, is the proportion and growth of fixed capital formation in the economy. It represents investments. Investments drive not only growth but put incomes in the hands of factors of production in the year when the investment takes place. Capital formation also enhances capacity of the economy to produce goods and services for many years to come. Unfortunately, rates of gross fixed capital formation which was rising in last three years, while still being lower than the capital formation growth rates of earlier part of the twenty first century, (9.3% and 10% in last two years of 2017-19) slipped quite precipitously at .9%. This is the most tell-tell sign of fundamental causes of deepening slowdown.

Sector wise investment slowdown data is not made available as part of GDP Press Release. It is, however, quite evident that Real Estate (GVA in the construction sector at current prices has grown in Q2 at only 4.2% and for the financial services, real estate and professional services at only 6.1%). There appears to be a widespread stalling of investments in housing, especially the residential segment, roads and telecommunications where investment growth is simply collapsing. There is also tapering off and slowing down of investment in power and railways. I don’t see turn-around of investment cycle in residential real estate space unless there is a shake-up in the existing firms which have become over leveraged and insolvent as their cost of projects far exceed their expected revenues from sale of properties. Additionally, the fundamental business model of residential housing would need to be changed to be modelled on the lines of commercial real estate. In the power sector (October growth at negative 13%!), financial viability at the distribution and supply end will have to be structured, otherwise this is likely to drag generation and transmission into sickness very soon. The private sector thermal generation is gasping for life even now and renewables power generation has also now gone into slowdown.

Much has been made out of consumption slowdown. Consumption growth at 5.1% is still not good evidence of consumption story getting restarted or credit offtake taking place. There is continued distress in rural economy thanks to lower incomes of farm produce and lower wages on account of slowdown in construction. This has pulled down demand for durables materially and has also affected current consumption demand. So long as there would be overhang of excessive production of farm produce vis-à-vis domestic consumption demand and export, there would be pricing pressures lowering farm income despite higher announced minimum support prices (MSP). Rural distress rooted in farm prices might get relieved, ironically, if there is degrowth in farm production. Rural labour income will see leg up only when construction sector revives.

Global industrial production is rapidly acquiring the characteristic of agriculture goods production. With population stabilizing, a greater part of the population acquiring middle income status and over production capacity in many industrial goods, there is lesser profitability and wages growth in industrial goods production globally. Impact of this is not fully reflected in India, but there would be underlying tendency for Indian industry to be affected by these trends.

There is big underlying momentum in Indian economy. Population is still growing at a fast clip with youth population rising at a very high rate providing both labour supply and consumption demand growth. There is enormous infrastructure deficit to be made up which would require trillions of dollars of investments over next 10-15 years. Digital transformation of the economy is still to get initiated and mainstreamed. If we get our act right, we will be a $10 trillion economy by early 2030s.

The path to $5/10 trillion economy is to get the investment engine revved up, which will revive incomes of factors of production and which in turn will also help revive credit demand.

Subhash Chandra Garg