On the services front, the sector grew at 7.4 per cent – a three-quarter high – having received significant support from the government spending. Services sector, excluding public administration, defence and other services, grew by 6.6 per cent. Meanwhile, manufacturing sector, which is the largest component of the industrial sector, continued to limp at -0.2 per cent, while construction grew at 0.3 per cent. As both are employment intensive sectors, there growth is critical for the generation of employment in the economy.
Further, the core gross value added (GVA) growth (excluding agriculture, public administration, defence and other services) has declined to 3.7 per cent in the third quarter of FY20 to hit its lowest level in the 2011-12 series. This suggests that the heavy lifting of the GDP growth
is done mainly by the government, which has its limitations due to absence of significant fiscal space.
The impact of rising inflation is being reflected in the nominal GDP growth, which has jumped to 7.7 per cent in the quarter under review, from 6.4 per cent in the September quarter. The inflation print in the fourth quarter is expected to log a similar trend as seen in the third quarter, which could result in the nominal GDP growth
in 2019-20 breaching the NSO estimate of 7.5 per cent. Although an inflation-led higher nominal GDP growth is an “inflation tax” on consumers, (but) from a fiscal point of view, this might lead to a boost in the tax collection going ahead. Furthermore, weak global demand conditions and coronavirus-led commodity price, especially crude, easing would continue to provide some relief in the form of low negative net exports.
With no clear sign of economic recovery is the short-run, classical response would have been a monetary policy action. However, with limited monetary policy space, India-Ratings and Research believes the Reserve Bank of India (RBI) will continue to focus on monetary transmission through long-term repo operation (LTRO)/operation twist as probability of a rate cut is low.
Disclaimer: Views expressed are personal. They do not reflect the view/s of Business Standard.