Asia Economy

India's GDP growth falls to slowest pace since 2013

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Key Points
  • Growth in India's economic output slowed to 4.5% in the three months that ended in September, marking the slowest pace of expansion in six years.
  • The South Asian country is currently facing a number of challenges.
  • Apart from an economic slowdown, there is an ongoing crisis in the financial sector, which has hamstrung lending.
Roadside barber Ranjit (R) shaves a customer's beard under the flyover in Amritsar on September 22, 2019.
Narinder Nanu | AFP | Getty Images

Growth in India's economic output slowed to 4.5% in the three months that ended in September, marking the slowest pace of expansion in six years.

It was down from the 5% registered for the previous three months and missed market expectations.

On average, economists polled by Reuters had said they expected growth to be 4.7% for the period, or down from 7% for the same period in 2018.

The last time India's growth fell below 5% was in three months to March in 2013.

"High frequency indicators continued to trend lower in September, with industrial production clocking its worst decline in eight years," Sanjay Mathur, chief economist for Southeast Asia and India, and Rini Sen, an India economist, at ANZ wrote in a research note prior to the latest data release. ANZ has downgraded its full fiscal-year growth forecast from 5.8% to 5.1%, the note said.

India's fiscal year starts in April and ends in March the following year. Currently, India is in its fiscal year 2020, which ends in March next year.

The South Asian country is currently facing a number of challenges. Apart from an economic slowdown, there is an ongoing crisis in the financial sector, which has hamstrung lending.

Weakness in corporate earnings and profits are likely to weigh on business investments and job creation to keep its workforce employed. Recent policy reforms have left many small- and medium-sized businesses reeling.

Ratings agency Moody's recently downgraded its outlook on India's from "stable" to "negative," and cited growing risks that economic growth will remain "materially lower than in the past."

Growth recovery

Economists predicted that India's growth slowdown may bottom out by the end of 2019 and that it could see a gradual "stimulus-led" recovery in 2020, driven by a revival in consumption.

India surprised with a $20 billion fiscal stimulus package in September, which mostly focused on a corporate tax cut. Finance Minister Nirmala Sitharaman also sought parliamentary approval on Thursday to spend another $2.7 billion in addition to a budgeted 27.86 trillion rupees ($388 billion) in the current fiscal year that ends March 2020, Reuters reported.

Public spending has also picked up pace in recent months despite weak revenue collection.

"We think that the government is now more willing to push on the fiscal levers to support growth and expect the fiscal deficit to widen to 3.7% of GDP in (fiscal year 2020), compared to the budgeted target of 3.3%," Priyanka Kishore, head of India and Southeast Asia at Oxford Economics, wrote in a note this week.

She said there'll likely be a slow revival in consumption after data showed indicators such as personal loan growth, remained largely stable in September. Sales of cars and two-wheelers — which are proxy measures for urban and rural demand, respectively — declined at a much slower pace in October due to festive demand, Kishore said.

"We expect policy measures to increase the flow of credit to consumers and support the auto sector, helping to arrest the slide in consumption" from the December quarter onward, according to Kishore. She also predicted that India's manufacturing sector will likely improve in 2020 as the corporate tax cuts for new manufacturing companies yield results.

'Government's role to play'

To stem some of the challenges and support growth, the Reserve Bank of India has slashed interest rates by 135 basis points so far in 2019 and signaled that further easing is possible.

While the central bank is doing its part to boost the economy, it faces a problem with its transmission mechanism because Indian banks are hesitant to lend. They're struggling with large volumes of non-performing assets that are putting pressure on their balance sheets, which makes them reluctant to pass on the RBI's rate cuts to consumers.

"I think that's where more measures would be helpful," Radhika Rao, an economist at DBS Group, told CNBC's "Street Signs" on Friday. She explained that it's likely some measures from the central bank focusing on non-banking financial companies will emerge to provide those lenders with some relief and liquidity.

Beyond that, Rao said, "It's the government's role to play," which makes the annual budget announcement in February 2020 a crucial event.

"We do expect some personal income tax changes come February and, also, some more measures to stimulate demand under the premise that would perhaps draw ... the manufacturing sector back to health," she said, adding it could improve the investment outlook as well.

More measures to help stressed non-bank lenders could also be announced, according to Rao.