Bigger banks need customers for government's growth booster to work

India's economic growth slumped to a six-year low of 5 per cent during the first quarter of the current financial year 2019/20, data released by central statistics office (CSO) showed. The gross domestic product (GDP) had grown by 8 per cent during the same quarter of financial year 2018/19.  

The continuing slowdown in the economy comes at a time when Finance Minister Nirmala Sitharaman is busy announcing stimulus after stimulus to reverse the slowdown. While the latest announcement was about merging public sector banks to create bigger entities to ease credit and refine corporate affairs rules and systems to make businesses more transparent and accountable, the CSO release hints that the problem primarily lies in decelerating private consumption. At constant (2011/12) prices, the private final consumption expenditure (PFCE) is estimated at Rs 19.74 lakh crore in Q1 2019/20 as against Rs 19.14 lakh crore in Q1 2018/19. As percentage of GDP, this comes out to be 55.1 per cent as against the corresponding rate of 56.1 per cent in Q1 2018/19. As percentage of GDP, the government final consumption expenditure (GFCE) did not fall, and was 11.8 per cent as against the corresponding rate of 11.4 during the previous quarter.

The CSO release indicates that manufacturing sector took a major hit during the quarter. The quarterly GVA at basic prices for Q1 2019/20 from the 'manufacturing' sector grew by 0.6 per cent compared to growth of 12.1 per cent in Q1 2018-19. Index of Industrial Production (IIP) Manufacturing registered a growth rate of 3.2 per cent during Q1of 2019-20 compared to 5.1 per cent during Q1 of 2018-19. The growth in agriculture sector - the mainstay of majority of Indian citizens - also fared poor. The quarterly GVA at basic prices for Q1 2019-20 from 'agriculture, forestry and fishing' sector grew by 2 per cent compared to growth of 5.1 per cent in Q1 2018-19. The crops including fruits and vegetables account for about 53 per cent of GVA in 'agriculture, forestry and fishing' sector, livestock products 32 per cent and forestry and fisheries 15 per cent.

"Q1FY20 GDP growth at 5 per cent (Ind-Ra estimate 5.7 per cent) was 25-quarter low. The growth slowdown was led by private final consumption expenditure, which grew 3.1 per cent only (18-quarter low). Investment demand also remained lacklustre and fixed capital formation grew 4 per cent (Q4FY19: 3.6 per cent). Only government expenditure provided support to growth and increased 8.8 per cent. While general elections in April-May 2019 had some impact on investment growth. Collapse of private consumption demand from 10.6 per cent in Q4FY18 to 3.1 per cent in Q1FY20 is real cause of concerns. Ind-Ra believes both structural and cyclical issues are plaguing Indian economy and in order to bring economy back to a respectable growth path both short-term and long-term measures are required," Devendra Pant, Chief Economist, India Ratings and Research (Fitch Group) says.

According to him, declining savings - especially household saving - is a major challenge for the economy and is leading to structural growth slowdown. "While the fiscal space to undertake counter cyclical measures are very limited, we believe, the government would undertake some measures to provide short-term boost to the economy. After agriculture, real estate/construction is the second largest employer and also has the huge backward and forward linkages with other sectors. So, reviving real estate sector will be crucial both from the investment as well as consumption point of view. The measures announced so far do indicate that government is taking steps to mitigate difficulties faced by the economy but these measures will play out only in the medium-term," Pant says. Ind-Ra believes there is no quick fix solution to the downturn, which has been in the making for past few years. "Hence, the recovery will also take its own time but the government hastened the recovery by implementing the announced measures quickly and adding few more which could address both cyclical and structural issues. Ind-Ra expects at least one more rate cut by the RBI to boost demand," he adds.

Finance Minister Nirmala Sitharaman has already announced stimulus to encourage growth in the automobile sector. She has also relaxed FDI norms in mining and single brand retail in the hope of seeing increased economic activity in these segments. The impact of her announcement could be visible in the coming quarters as production of coal was one sector where quarterly GVA at basic prices for Q1 2019/20 registered a growth of 2.7 per cent as against 12.9 per cent during the corresponding quarter the previous year.

If one ignores the comparison for a moment, the economic activities that registered a growth of over 7 per cent in Q1 of 2019/20 over Q1 of 2018/19 are 'electricity, gas, water supply and other utility services', 'trade, hotels, transport, communication and services related to broadcasting' and 'public administration, defence and other services'.

The minister has expressed her intention to announce more of such measures to stimulate the economy in the coming days. The slump in growth that belied most estimates is an indication of the tough task before her at the moment.

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