An easing monetary policy, improved transmission of rate cuts, the government’s minimum income support scheme to farmers and the over-arching steps announced recently by India’s finance minister Nirmala Sitharaman is likely to address some pain points and support sentiment as we enter the end of the second quarter (July-August-September 2019).

There are mixed signals for the second quarter. The first two months on average have weaker PMIs (purchase managers’ index) for manufacturing, compared with the first quarter, while for services it is somewhat stronger. 

Meanwhile, export growth turned positive in July, demand in some sectors such as automobiles stayed sluggish, as sales continued to tank. Similarly, monsoon, though normal, has brought its share of uncertainty. 

Rains caught up in August, but the rapid recovery meant excess rains in several regions leading to kharif crop losses. Also, a few regions are still reeling under rainfall deficiency. But healthy groundwater and reservoir levels bode well for the rabi crop, which could still improve the overall prospects for agricultural production this fiscal, said industry analysts at Crisil, one of India’s largest credit rating agencies. 

The Indian economy has been grinding down given the twin trouble of slack private consumption and manufacturing in the quarter. 

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While on-ground indicators did suggest that the quarter would look worse than the previous one (at 5.8%), the extent of fall has caught everyone by surprise.  

A plunge in domestic private consumption demand, slump in manufacturing, halving of merchandise exports growth, and a high-base effect from last year have gnawed away at first-quarter growth.  
“Private consumption growth – the bulwark of India’s growth story in recent years – registered a scant 3.1% in the first quarter, a four-year low. The last couple of times private consumption fell this sharply was in the first quarter of fiscal 2013 (-0.9%) and third quarter of fiscal 2015 (2.1%), as per the new GDP series,” economists at Crisil explained.

With over 55% weight in GDP and 7.6% annual growth, on average, in the past five years, the importance of bolstering private consumption cannot be over-emphasized. In the past few years, households had dipped into their savings and leveraged themselves to support private consumption. However, first quarter data shows, they have not been able to sustain the momentum.  

Industry analysts are hopeful under the assumption that the second quarter will see some mild pick-up in growth, which continues through the year. “We expect growth to get some lift from the low base effect that will now set in (second half fiscal 2019 GDP growth was at 6.2%),” the economists at Crisil hoped. 

The Indian economy has been hit hard with drop in GDP growth due to sluggishness in private consumption, and this could be explained by a number of factors including a possible income slowdown and cost increases, amid other challenges in the automobile sector, slowing activity in real estate, and an overall dent to consumer sentiment. 

• Much of this cyclical slowdown has affected sectors that are large employment generators, suggesting that incomes and/or employment growth in these might have suffered 

• To add to this the fact that households have been dipping into their savings in the near past, while also leveraging themselves, indicates their ability to spend could be constrained.

Due to these engines failing to rev up, GDP growth dropped to a low of 5% in the first quarter of fiscal 2020 compared with 5.8% in the previous quarter.  

• The sharpest dip was seen in exports, where growth nearly halved to 5.7% from 10.6% in the fourth quarter of fiscal 2019. Private consumption growth nosedived to an 18-quarter low of 3.1%, down from 7.2% in the previous quarter. Not surprisingly, manufacturing sector flat-lined, showing 0.6% growth. 

Government consumption slowed to 8.8% from 13.1%, while investments growth held up, recording a mild uptick at 4% from 3.6%. A sharp slowdown in imports to 4.2% from 13.3% provided support. On-year, the trade balance of goods and services was, in fact, slightly lower.  

• On the supply-side, growth in gross value added (GVA) slowed to 4.9% in the first quarter of fiscal 2020, from 5.7% in the previous quarter. The slowdown was fairly broad-based. 

The sharpest slowdown was in the real estate, financial and professional services segment, which slipped to 5.9% from 9.5%. This reflected weakness in the banking and non-banking sectors, where overall credit growth has been sluggish and funding constraints to the real estate sector has slowed activity there. 

Services sector growth dipped to 6.9% from 7.1%. This was followed by manufacturing (0.6% vs 3.1%) and public administration and defence (8.5% vs 10.7%). Mining and construction activities, too, saw lower growth. 

• Agricultural growth, however, picked up to 2% in the first quarter, from -0.1% in the previous. So, while overall GVA growth fell by 80 basis points (bps) between the two quarters, excluding agriculture, it was 140 bps lower. Growth was also higher in the trade, hotels, transport and communication segment (7.1% vs 6%).