India GDP Q2 2019

India: Economic growth slumps to an over six-year low at the outset of FY 2019

In Q1 FY 2019, which ran from April to June, the economy grew 5.0% compared to the same period a year earlier, well below Q4 FY 2018’s 5.8% expansion and market analysts’ expectations of 5.7% growth. It also marked the slowest growth rate since Q4 FY 2012.

A significant slowdown in private consumption weighed on the overall reading in Q1 FY 2019: Annual private spending growth plummeted to 3.1% in the quarter, from 7.3% in Q4 FY 2018, as consumers faced tougher lending conditions from non-bank financial companies which collectively account for around one-fifth of new lending in India. More positively, government consumption remained strong despite decelerating (Q1: +8.9% year-on-year; Q4: +13.1% yoy) and fixed investment growth picked up steam (Q1: +4.0% yoy; Q4: +3.6% yoy).

On the external front, both exports and imports growth moderated in Q1 FY 2019. Nevertheless, as export growth (Q1: +5.7% yoy; Q4: +10.6% yoy) outpaced import growth (Q1: +4.2% yoy; Q4: +13.3% yoy), the external sector contributed 0.1 percentage points to overall economic growth, contrasting the 0.7 percentage-point subtraction in Q4 FY 2018.

In a bid to turn the tide against slowing growth, the government announced a series of measures in August. These included the merger of 12 of India’s 27 public sector banks into just 4, which should support lending activity in the medium-term, as well as the relaxation of foreign direct investment rules in the manufacturing, coal mining and digital media industries. Moreover, the government continued to press banks to pass on recent cuts in the Central Bank’s interest rates to borrowers. Overall, analysts at Nomura said the measures were “a positive signal from the government that outside of monetary policy, which can only aid a cyclical recovery, focus on structural reforms is essential to lift trend growth”.

Meanwhile, looking at the implications of the GDP result for the monetary policy outlook, analysts at ING added: “We retain our forecast of an additional 50bp of rate cuts over the rest of the year, taking the repo rate to 4.90%, the lowest in a decade and just shy of the 4.75% record low reached during the 2009 global financial crisis.”

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