GDP Performance 2019-20; Below Par For The Course

2019-20 GDP Performance: Well Below Par for the Course

CSO announced the advanced estimates for the 2019-20 GDP today. India is expected to grow only at 7.5% in nominal terms; much less at only 5% at fixed prices. The year 2019-20, which was expected to be a high growth year of about 11% nominal growth, has delivered a much lower performance. It gives a big jolt to the ambition of making India a $5 trillion economy by 2024-25. It is becoming harder to do so.

Manufacturing Growth

Growth is generated by utilisation of productive capacities created and making investment for new productive capacities. Unfortunately, both slipped during the year. Capacity utilisation in the manufacturing sector in the September quarter had fallen to 10-year low at less than 69%. This was especially disappointing as the manufacturing capacity utilisation was a multi-year high at 76% in the last quarter of 2018-19. The data of capacity utilisation for Q3:2019-20 are still not available. Leading indicators available from electricity consumption, growth of core industries and industrial production indicate a situation for the third quarter which is grimmer than the first six months of the year. The electricity demand growth contracted heavily in October by over 12% and was lower by about 6% in November. In December, electricity consumption seems to be just about the same as last year, making the third quarter electricity consumption lower by about 6%. The growth of core industries (minus 5.8% and 1.5% in October and November 2019) made the Index of Eight Core Industries flat for the first eight months in November 2019. Similar is the story for growth of manufacturing captured by Index of Industrial Production (IIP). October, for which the data are available, IIP was lower by 3.8%. IIP has been declining since August 2019. When the November data becomes available, positive IIP growth of .5% for the first seven months of the year 2019-20 would also go into the negative.

In the light of performance of manufacturing brought out above, it is no surprise that CSO has projected a GVA growth of only 2% for manufacturing for the year. Last year, CSO had projected growth of 8.3% for manufacturing while releasing their first advance estimates, which came down to 6.9% in the provisional estimates. What a major loss of growth momentum this represent. For manufacturing, 2019-20 is turning out to be a year wasted.

Investment or Capital Formation Growth

This would have been unrealistic to expect investment in creating new capacities when existing manufacturing capacity utilisation was so low. However, the infrastructure and real estate sectors do grow sometimes when new manufacturing capacities are not being added. Unfortunately, the real estate sector, barring the commercial real estate, is in doldrums. Hardly, any new capacities are being added. Even the ongoing projects are stalled in many cases. Pace of road construction awards have also gone down substantially. Therefore, infrastructure investment has also been slackening this year.

It is no surprise to see that the gross fixed capital formation (GFCF) which represents the investment in the economy has not grown at all. GFCF in 2019-20 at Rs. 45.93 lakh crore in constant prices grew by a pathetic Rs. .45 lakh crore over the GFCF of Rs. 45.48 lakh crore in 2018-19 at growth rate of princely 1% only. This must be one of the lowest growth rates of investment in many years. Last year in the advanced estimates, the growth of gross fixed capital formation for 2018-19 was projected at 16.3%, following on the growth in such fixed capital formation of 9.8% in 2017-18. Consequently, the GFCF as a proportion of GDP has fallen from 32.3% to 31.1%, a fall of 1.2% in one year.

Such disappointing manufacturing and fixed capital formation growth performance needs to be taken very seriously. A more comprehensive sectoral analysis for each of the manufacturing and infrastructure sectors is needed for getting the right policy, credit and investment decisions made for growth to come back next year.

Performance of Services

Services make up more than 60% of the GDP now. A percent less growth in services makes difference of more than .6% in India’s GDP growth rate. Services sector therefore is of prime importance for India’s economy and her people. While increasing use of digital technologies is doing to services in terms of labour employment what automation did to manufacturing, limitless expansion of services is possible which could generate considerable employment and also growth in GDP for a country like India.

Services growth also slackened in 2019-20.

Amongst the services, financial, real estate and professional services group is the biggest group. In 2018-19, the contribution of this group of services in total GVA was 22%. This group’s GVA exceeded the GVA of entire manufacturing sector, which was about 21%. Reflecting slowdown/ stalling in real estate sector and drastic reduction in credit growth, the GVA growth in this group has come down to 6.4%. The GVA growth for this group last year was 7.4%.

Services group comprising trade, hotels, transport, communication and services relating to broadcasting GVA also exceeded GVA of manufacturing last year. This group of services should have been much less affected by the slowdown in the economy. However, GVA growth in this group has also got reduced by 1% and has come at 5.9%. Last year it was 6.9%.

Indian policy makers and businessmen pay much more attention to manufacturing. If they pay equal attention to policy issues and the business opportunities in these two groups, India’s growth story can flourish.

Third large group in the services stable is that of public administration, defence and other services. This represents largely the Government expenditure on establishment and services delivered. The GVA of this group of services is the only group which has seen a notable rise this year, growing from 8.6% to 9.1%.

Slow down in real estate and capital formation is reflected in drastic reduction in the GVA growth of construction sector. The GVA of construction had grown by 8.7% last year, much higher than total GVA, which was 6.6%. This year, construction GVA has grown by only 3.2%, much lower than the lowly overall GVA growth of 4.9%. This segment of GVA is giving tell-tale evidence of where the big problem in the economy is.

Electricity, gas, water supply and other utility services has smallest share in the GVA at only 3.02 lakh crore out of total GVA of 135.40 lakh crore in constant prices. Growth rate in this group of services has also come down from 7.0% last year to 5.4%.

Overall services grew from Rs. 83.54 lakh crore in 2018-19 to Rs. 88.83 lakh crore in 2019-20 in constant prices terms, growing by 6.33%. Last year in 2018-19, services GVA had grown by 7.68%. Services also has seen lower growth of as much as 1.35%. A notable fact of growth dynamics this year is that almost 84% of GVA growth has been contributed by services as agriculture, mining and manufacturing are almost in a state of suspended animation, growing at 1.5% to 2.8% only. As a result, share of services in the economy 65.62%.

India needs to pay much more attention to the services sector as our growth salvation lies in services much more than manufacturing.

Consumption

Private consumption, measured by Private Final Consumption Expenditure (PFCE), represents the consumption dynamics of the economy. There has been lot of commentary on demand slowdown in private consumption space. This is reflected in the data released by CSO today. Private consumption grew by only 5.79%, much lower than last year when it had grown at 8.09%. Private consumption is driven by mostly the income growth and also by credit growth. It is no coincidence that when incomes grow, there is also more demand of credit and when incomes are seen as stagnant or growing very slowly, there is much less credit demand. As the economy was in largely in slowdown mode, deceleration is quite clearly captured in reduced private consumption growth.

Incidentally, as there is virtual collapse in the growth of capital formation, despite lower growth of private consumption, share of consumption in overall GDP has gone up from 56.95% to 57.38%.

Consumption dynamics differ from different groups of consumers. That is captured much better by growth rate of GVA at current prices. This represents incomes of these groups at current prices. GVA in agriculture grew at 9.8%, as compared to overall growth rate of GVA at 7.6% in current prices and only 4% in GVA of agriculture group last year. This reflects quite well increase in food and agriculture produce prices witnessed during the current year. This also signals that demand in rural economy would be coming back. The other major component of rural demand is the construction wages. Unfortunately, that has seen movement in opposite direction. Construction GVA in 2019-20 is estimated to grow only at 4.6% in current prices as compared to growth of 13.4% last year. Construction GVA is about half that of the agriculture GVA. This drop will still be pulling the rural demand in different direction than what increase in agriculture income will be contributing. It seems rural consumption story would move up, but slowly in next few months, until we see revival in construction industry.

The Government expenditure is captured in the Government Final Consumption Expenditure (GFCE) number. This recorded highest rate of GVA growth at 10.56%, which has also led to its share in total consumption going up to 11.27%.

Likely Provisional GVA/ GDP Outturn

The advanced estimates have been released when three months of the current financial year are still remaining. The CSO estimates are based on certain trends and assumptions. Previous year’s numbers also undergo change. These would be brought out in May 2020.

Agriculture is unlikely to undergo much change as the status of reservoirs, state of rabi sowing are fairly known. Likewise, mining which is, for various reasons, in a state of permanent disarray, is unlikely to see much change from what has been estimated.

Manufacturing growth at the end of October, as per IIP, is only .5%. Core industries have seen negative growth in November as well. 2% growth of GVA estimated by CSO is quite low. It might still go down a tad lower.

Electricity, gas, water supply and other utility services are estimated to grow at 5.4%. Electricity is the largest component of this group. Electricity growth at the end of December, for the nine months, is quite flat. It looks unlikely that electricity consumption, which is showing the signs of picking up in January, will make up so much that yearly growth might be 5.4% for this group. It is likely that this might come around 4%.

Construction GVA growth, given the state of affairs, seems to be fairly estimated at 3.2%. Likewise, the growth in Trade and Financial services group may also turn out to be closer to what has been estimated.

Government has recently issued directions for controlling and cutting down expenditure in last quarter, faced as it is with a tough fiscal situation. Most Government expenditure are not such which can actually be cut-down. It might result in some expenditures being incurred by means of payment from NSSF etc. or some may be postponed to the next financial year. In this case, the GVA growth estimated at 14.6% in current prices might turn out to be much lower than this.

On net basis, it seems there might be somewhat downward revision in the provisional GDP and GVA numbers when released.