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Consumption growth print for Q3FY20 GDP not in sync with quarterly earnings

Weak global demand conditions and coronavirus-led commodity price easing would continue to provide some relief in the form of low negative net exports
The gross domestic product (GDP) growth rate for the December quarter of financial year 2019-20 (Q3FY20) came in at a 27-quarter low of 4.7 per cent. The numbers would have been much lower if the third quarter growth of FY19 was not revised downwards to 5.6 per cent (from 6.6 per cent earlier). The government has also revised upwards the GDP growth figures for Q1 and Q2 of FY20 to 5.6 per cent and 5.1 per cent, respectively from 5 per cent and 4.5 per cent earlier.

The growth in the third quarter was supported mainly by two factors – consumption (private and government) and low negative net exports. While the private final consumption expenditure grew sequentially from 5 per cent (Q1FY20) to 5.9 per cent (Q3FY20), this uptick in growth is not in sync with the quarterly performance of consumer companies, underlining that a large part of consumer demand is being supported by the unorganised sector. Within the consumption segment, it was the Government Final Consumption Expenditure (GFCE) – which grew at 11.8 per cent -- that did the heavy-lifting. Although it is lower than the second quarter growth of 13.2 per cent, it is higher than 7.0 per cent growth logged in the third quarter of the previous year. Besides, weak commodity prices due to a sluggish global economic recovery, too, helped the economy in the recently concluded quarter. Contraction in imports, which hit a 24-quarter low of -11.2 per cent, led to net exports/GDP declining to -1.4 per cent (-Rs 50,489 crore) in the third quarter of FY20 from - 3 per cent (- Rs 1,04,580 crore) in Q3FY19, and -2.1 per cent (- R 76,415 crore) in Q2FY20.

That apart, the slowing demand and large ideal capacities -- that has fallen to its lowest level (a contraction of 5.2 per cent) in the 2011-12 base series --  impacted the investment demand (fixed capital formation) in the recently concluded quarter.

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.

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