Slowdown has intensified half-way through this fiscal

• We’re cutting our GDP growth call for fiscal 2020 to 5.1% from 6.3%
  
• In the second half this fiscal, we expect growth to recover mildly to 5.5% from 4.8% in the first half, with support from monetary policy, agriculture, a mild pick-up in government spending, and a weak-base effect.
  
• Monetary policy is expected to remain growth supportive in the near term, we expect RBI to cut repo rate by 25 basis points (bps) in its December policy
  

At 4.5%, GDP growth in the second quarter (Q2) of this fiscal is the lowest since the fourth quarter (Q4) of fiscal 2013, and a full 50 bps below Q1. This is in line with our expectations, and GDP growth in the first half of fiscal 2020 tots up to 4.8%.

Key short-term indicators such as industrial production, merchandise exports, bank credit, tax collections, freight movement, electricity production, and credit, had all pointed to weakening growth momentum (chart 1).

On the demand side, a dip in fixed investment and weak private consumption growth were the drags. Government consumption supported growth in first half, but capex spending on infrastructure - roads and highways, shipping, power and affordable housing was slower till August. However, from September, there has been some pick-up that, if sustained, should have mildly positive spillovers.

Private consumption growth, benefiting from a weak base, printed higher in Q2 but its growth rate nearly halved on-year and versus first half of last fiscal as consumer sentiment stayed muted.

Lower external trade (exports–imports) gap also helped growth.

On the supply side, weakness in manufacturing is worrisome with gross value added (GVA) by the sector contracting in Q2. The construction sector, too, posted weak numbers, while overall industry GVA was stagnant. Within services, the trade, hotels, transport and communications segment was the weakest. Here too, government spending saved the blushes.

A major worry is the sharp fall in nominal growth to 6.1% in Q2 – the lowest in the new GDP series. We expect nominal GDP this fiscal to average 8.9% as against the budget estimate of 12%. This will impact tax collection and fiscal ratios.