GDP growth falls further, long road to Recovery

04 December 2019

In a sixth straight quarter of decline, India’s GDP growth fell to 4.5% YoY in 2QFY20. While the deceleration has been broad based, Investment growth (measured as Gross Fixed Capital Formation) fell to 1% YoY in 2QFY20 (vs 4% in 1QFY20), even as Private consumption growth rebounded slightly to 5.1% YoY.

Manufacturing GVA (Gross Value Added) contracted -1% YoY after declining for the fifth consecutive quarter in 2QFY20. Industrial growth slowed down to 0.5% YoY in 2QFY20 from 2.7% YoY growth in the prior quarter, while agriculture growth remained steady.

Despite low tax collections, government expenditure increased 15.6% YoY (vs 8.8% in 1QFY20) supporting overall growth. In fact, excluding government expenditure, real GDP growth declined to 3.1% YoY in 2QFY20 – a post-2008 low.

Real GDP growth ex Govt. spending at post-2008 low

Source: CSO, CEIC, Citi Research

Rural consumption seems to have bottomed out, buoyed by the recent rise in food prices. However, given the unpromising monthly activity indicators and severe risk aversion in the private sector, Citi analysts expect recovery to be slower than previously anticipated. They expect India’s GDP growth to average at 4.9% YoY in FY20, with a 4.8-5.0% YoY growth expected in 2HFY20. Monetary and fiscal policy reforms, combined with a favorable base, may aid GDP growth recovery in FY21 to 5.9% YoY, contingent upon a gradual rebound in investment, stabilization of private consumption, continued strong public expenditure and better exports.

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