Nifty99000 100%

Sensex99000 100%


India’s GDP slows to a crawl: Is $5 tn economy a pipedream?

Author: Rajiv Singh/Tuesday, September 3, 2019/Categories: Exclusive

Rate this article:
India’s GDP slows to a crawl: Is $5 tn economy a pipedream?

India’s economy grew at 5% in Q1FY20, the slowest pace in the past six years due to weakness in manufacturing, agriculture, construction and mining sectors. An overall weakness in consumption also contributed to the sharp fall in growth rates.  It remains to be seen if India will meet the RBI’s growth estimates . RBI estimated that during fiscal 2020, GDP will grow at 6.9%, by growing in the range of 5.8% to 6.6% in the first half and 7.3 to 7.5% in the second half.

As of June 2019, the current slowdown has lasted for the past 18 months, the longest since 2006. While the indications of an impending slowdown were slowly cropping up around January 2018, the NPA crisis and corporate default saga aggravated the situation by making things worse for the financial services industry which resulted in evaporation of liquidity in the system. This affected two large sectors that rely on the financial services i.e. real estate and automobiles. It is expected that more than half of the decline in economic activity during the current slowdown was driven by consumption and approximately a third of the consumption slowdown was driven by slowdown in automobiles.

The slowdown was caused by a mix of both global and domestic factors. Globally, economic uncertainty caused due to US-China trade war and concerns over Brexit resulted in overall weakness which led to slowdown. On the domestic front, weakness in consumption has contributed to the slowdown. While the RBI has been on an accommodative path by reducing repo rate by 110 bps over the past four policy meetings since January 2019, banks’ reluctance to transmit this to the broader economy by refusing to cut the rates given the ongoing bad loan crisis and liquidity crunch made the situation worse.

The government had announced a slew of measures like capital infusion into PSBs, relief for FPIs on the proposed surcharge and some measures to address the problems in the ailing auto sector. Banks have also agreed to pass on the rate cuts by lowering lending rates. These measures are expected to improve the situation and boost demand. Another major positive factor is RBI’s decision to transfer Rs. 1.76 trillion to the government. This is expected to find its way into the economy as the government has the cushion to spend more to that extent.

The central government had announced a set of measures to address issues in auto sector, small businesses and eased norms that would provide more liquidity and flexibility to NBFC sector to uplift the weak consumer sentiment ahead of the festive season. Addressing the concerns of the auto sector and the financial services industry is crucial not just to improve the sentiment but also to provide the much-needed fuel to the ailing economy.

In a way, certain decisions made by the government in sectors like automobiles and its slow response in addressing the liquidity crisis in the BFSI sector has led to the current state of slower GDP growth. However, it is commendable that the government has acknowledged the slowdown in GDP growth and started fixing these issues. To address the issues in auto sector, it has announced measures like allowing additional 15% depreciation, putting on hold revision of registration fees hike till June 2020 and its decision to come up with a new scrappage policy resulted in improved sentiment. This is expected to push vehicle sales which had slumped to near two-decade low.

To provide the much needed fillip to the BFSI sector, the government has announced measures that are expected to increase transparency, better transmission of RBI rate cuts and improve overall lending environment in the economy. These measures include Rs. 0.7 trillion capital infusion into public sector banks, launch of repo-rate linked loan products to ensure faster transmission of rate cuts, NHB’s decision to provide additional liquidity of Rs. 0.3 trillion to housing finance companies and improved one-time settlement policy for MSME and retail borrowers. All these measures would not just free up the capital for additional lending but improve the overall liquidity situation in the economy.

Globally, weak oil prices despite Iran sanctions, adoption of loose monetary policy by major central banks across the globe to avert the recession concerns should improve global liquidity and keep the sentiment on a positive note. On the trade war front, our belief is that things will not turn for the worse as the US and China could find a win-win situation which could be a positive for the global economy.

Overall, while the government is doing a commendable job to improve the economic growth, these measures are incremental in nature. However, from a state of slowest growth in the last six years to making India a $5 trillion economy by 2024 calls for more structural reforms and increased government spending on infrastructure projects that are likely to have a long-lasting impact on the economy.  (The author is CEO Stock Broking, Karvy)


Number of views (3336)/Comments (0)

Leave a comment

Add comment



Ask the Finapolis.

I'm not a robot
Dharmendra Satpathy
Col. Sanjeev Govila (retd)
Hum Fauji Investments
The Finapolis' expert answers your queries on investments, taxation and personal finance. Want advice? Submit your Question above



The technical studies / analysis discussed here can be at odds with our fundamental views / analysis. The information and views presented in this report are prepared by Karvy Consultants Limited. The information contained herein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completeness thereof. This material is for personal information and we are not responsible for any loss incurred based upon it. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While acting upon any information or analysis mentioned in this report, investors may please note that neither Karvy nor Karvy Consultants nor any person connected with any associate companies of Karvy accepts any liability arising from the use of this information and views mentioned in this document. The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above mentioned companies from time to time. Every employee of Karvy and its associate companies is required to disclose his/her individual stock holdings and details of trades, if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling of shares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. All employees are further restricted to place orders only through Karvy Consultants Ltd. This report is intended for a restricted audience and we are not soliciting any action based on it. Neither the information nor any opinion expressed herein constitutes an offer or an invitation to make an offer, to buy or sell any securities, or any options, futures or other derivatives related to such securities.

Subscribe For Free

Get the e-paper free