IIP numbers indicating economic growth could be below 5% for Q2 of FY20

The Index of Industrial Production (IIP) for the September 2019 quarter shrank by 0.4% as against a 3% expansion in the earlier quarter. The IIP declined 4.3% in September after registering a decline of 1.4% in August 2019. The IIP numbers hint towards a deeper economic slowdown.

The slowdown is pervasive across the core infrastructure sectors and manufacturing sectors. The IIP data released indicates eight infrastructure sectors declining by 5.2% in September, the lowest in 14 years. In the manufacturing industry, 17 out of 23 industries contracted during September. 

The GDP growth had hit a six-year low OF 5% in Q1 of FY 2019-20 (FY20). For the Q2 of FY20, the government would announce the GDP data on 29 November. The Japanese brokerage, Nomura, has projected lower Q2 GDP growth at 4.2%. The brokerage has also cut the full-year GDP forecast to 4.9% for FY20 as against 5.7% estimated earlier.

The State Bank of India (SBI), in its Ecowrap report released last week, stated that out of 26 growth indicators, only five were showing an acceleration in September. These indicate that the slowdown in the economy will take a longer time to recover. On a mapping of the leading indicators showing acceleration, the GDP growth is likely to be below 5%.

Also Read: How GDP Growth Could Be Recovered with Sectoral Solutions

The government has, in the last three months, announced several measures to counter the effects of the economic slowdown: 

1. Relief measures and rate cuts in Goods and Service Tax law
2. Corporate tax rate cut under income tax law
3. Rs 70,000 crore upfront capital infusion into public sector banks
4. Setting up of Rs 25,000 alternative investment fund for the real estate sector

The above measures should revive economic activity and boost consumption.

Mr Sachchidanand Shukla, the chief economist at Mahindra Group, says that the government has tried to address various sector-specific issues. Most of the measures have addressed the supply-side concerns but not on the demand side.

The Reserve Bank of India (RBI) has, however, cut rates addressing liquidity concerns and making available low cost credit. According to Mr Shukla, the Q3 of FY20 may see a slight recovery in economic growth and a better Q4 of FY20. The recovery in Q4 would likely draw support from RBI’s rate cuts, government spending and a lower base effect. 

Mr Arun Maira, a former member of the planning commission of India, states that India needs to create employment and livelihood so that income levels increase and help resolve the weakness in the economy, apart from boosting investor sentiment.

He states “We need a broader policy for improving incomes and livelihood. Short-term measures will not help sustainably recover the economy. We need an industrial policy that focuses on the bottom of the economy, that is, small enterprises in various sectors, which will create more employment and income for people. From this, we can derive the solutions for other facets of the economy”.

For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in