As expected, the GDP growth data for 2QFY20 came out to be poor.
In the quarter ended September 2019, India's real GDP grew 4.5% and GVA grew
4.3%, the lowest rate of growth in 6years. The latest economic growth rate of
India is now lower than China, Indonesia, Myanmar, Vietnam, Philippines, and
similar to Malaysia.
The supply side data explains that the slowdown is pervasive and
all sectors of the economy are struggling. Industrial sector was stagnant with
manufacturing recording its first quarterly contraction in a long time.
Services grew less than 7%, the lowest pace in 2years. Despite above normal
monsoon, the agriculture growth at 2.1% was also lowest for the second quarter
of a fiscal in many years.
On the demand side, private consumption grew 5.1%, slightly
better than 3.1% in 1QFY20, but dismal in comparison to historical trends.
Investments grew barely at 1%. Both exports and imports contracted for the
first time since 2016. Import contraction of 6.9% despite weaker rupee further
highlights the poor demand conditions.
This poor GDP growth data was supported to a great extent by the
government expenditure which grew at 11.6%, highest rate in 6 quarters. Given
that the government has already surpassed its fiscal deficit target for FY20,
the tax collections continue to be sluggish and the nominal GDP is slipping at
a faster rate than real GDP, it would reasonable to assume that the slowdown
may persist for few more quarters at the least.
Regardless of what the government spokespersons and some
enthusiastic market analysts may say, it is highly likely that we may end up
FY20 with sub 5% growth. Given the fiscal challenges and intensifying global
slowdown and deflationary pressures, we may struggle to grow more than 6% in
FY21 as well, despite lower rates, taxes, and base effect and improving credit
availability.
Based on an informal survey of traders, SME and professional, I
am inclined to conclude that this sub 5% growth trend may persist for at least
next 3 to 4 quarters. The key feedback from the survey could be listed as
follows:
(a) The growth rate shall
slip further as the government continues to be in denial mode insofar as the
most important cause of slow down is concerned.
(b) Most respondents
highlighted that lingering effects of demonetization and serious faults in GST
processes are reasons for the slowdown.
(c) Demonetization has hit
the small businesses very hard. It has destroyed the traditional sources of
short term financing for traders and small businesses, increased the working
capital cycle, constricted the inventory holding and business expansion
capacity and increased the cost of doing business. Many of these SME businesses
were critical part of the supply chain of the larger businesses. It has
therefore affected the larger businesses also indirectly. Poor business
conditions for large number of small businesses have obviously impacted the
employment and consumption demand conditions. There is nothing to suggest that
these conditions shall correct on their own in near future.
(d) The implementation of
GST has been hasty and seriously flawed. More than 75% of GST assesses must be
facing problems of reconciliation, wrongful disallowance of credit, defaults,
harassment, corruption, and/or delayed (or no) refunds. A careful examination
indicates that the system is even more problematic and cumbersome than the
erstwhile Excise, VAT and Sales Tax regime. Unless the GST system and processes
are streamlined for seamless flow of credits and payments, any meaningful
acceleration in growth rate looks highly improbable.
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