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A new low on GDP

Kashmir Times. Dated: 12/2/2019 4:27:50 PM

Economic growth below five percent shows that slowdown has intensified in a big way and worse is yet to come

The economic slowdown that has indicated that the Gross Domestic Product (GDP) is around 4.5 percent, the lowest in the past quarter of a century is a serious issue for those ruling the roost at the Centre. The rulers of the day particularly the NDA-government needs to give serious thought to the economic distress that has set in across the country triggering a distress in almost all the sectors of economy. It is also unfortunate that calculations on this have depicted that the economic slowdown is deeper than what has been thought so far. Growth has sunk to a low of 4.5 percent in the second quarter of the current financial year, falling well below the psychological 5 percent mark. The headline number, largely propped up by higher government spending, is well below the RBI's estimate of 5.3 percent, signaling the seriousness of the slowdown. Nominal GDP growth came in at 6.1 percent, almost half of what was expected in the Union budget, presented earlier this year before the General Elections. With high frequency indicators suggesting that the slowdown continues unabated - the eight core sectors contracted by 5.8 percent in October - meeting even the revised RBI target of 6.1 percent for the full year will be unlikely, despite the base effect kicking in. It has been seen that the growth in the second quarter was largely driven by higher government spending. Public administration and defence, which is largely government spending, grew by a healthy 11.6 percent in second quarter of the current financial year. Excluding it, gross value added by the economy grew by a mere 3.2 percent. Manufacturing and production activities have contracted, while construction and trade, hotels, transport and communication weakened further. The prospects going forward aren't any better. Government spending will come under pressure with its own revenues falling well short of expectations. Its gross tax revenues have grown by a mere 1.2 percent so far (April to October), while the budget had pegged revenue growth at 18.3 percent. The stress in government finances is already evident with the fiscal deficit (April to October) standing at 102.4 percent of the full year target of Rs 7.04 lakh crore. Sticking to the fiscal deficit target would mean cuts in spending, further intensifying the slowdown. However, any deviation, financed by higher borrowings, would lead to a hardening of interest rates, negating the impact of the rate cuts by the Monetary Policy Committee (MPC).
The sharper than expected slowdown restricts the options before the MPC, which meets next week. While retail inflation has inched upwards, largely on the back of higher food prices, given the deviation in growth from its own estimates, the MPC should continue with its loose stance, and opt for bigger rate cuts. On its part, the government has announced a series of measures to arrest the slowdown. But these need to be followed up with quick execution in the days to coeme. There is some talk about extending Non-Banking Financial Companies (NBFCs), a lifeline as was done in 2009. While this would help stimulate credit flow - RBI data attests to the severe slowdown in credit flow in the first half of this year - more needs to be done. Sector specific interventions will alleviate some of the pain, but for steady, and sustainable, growth, the deeper structural issues plaguing the economy need to be addressed. It is also to be noted that providing impetus to the agrarian and manufacturing sectors is the need of the hour for giving a boost to the economic growth. The policy makers also need to take into account that demonetization and GST implementation have also struck a severe blow to the economy of the country. The NDA-government is yet to acknowledge this factor for the economic slowdown.