The GDP and the GVA recorded a surprisingly sharp slowdown in the pace of growth in Q1 FY2020 to 5.0% and 4.9%, respectively, from 5.8% and 5.7%, respectively in Q4 FY2019. The main culprit was the manufacturing sector, which saw a collapse in growth to 0.6% in Q1 FY20 from the low 3.1% in Q4 FY19, rating agency ICRA said.
The contraction in volumes in the auto sector, the YoY decline in the value of merchandise exports, as well as a slowdown in growth in other consumer sectors contributed to the subdued manufacturing GVA growth in Q1 FY2020.
Accordingly, while the headline GVA growth slowed to 4.9% in Q1 FY2020 from 5.7% in Q4 FY2019, the expansion of GVA ex-manufacturing recorded a narrower dip to 5.9% from 6.3%, respectively, the agency said.
Government spending was the key driver of GDP growth in Q1 FY2020. The outlook for the same appears somewhat mixed. The pace of Central Government spending is expected to pick up in the post-Budget months. Moreover, additional spending may be incurred following the recent measures announced to arrest the slowdown in economic growth. However, a back-ended reduction or deferral in expenditure may have to be undertaken in Q4 FY2020, to prevent a fiscal slippage, particularly if tax revenue collections do not revive, ICRA said in the report.
The low growth of private consumption expenditure in Q1 FY2020 is not unexpected, given the mounting evidence of weak urban and rural sentiment. The unfavourable temporal and spatial spread of the monsoon rains may affect kharif yields and further dampen rural sentiment in H2 CY2019. However, the rapid replenishment of reservoirs bodes well for rabi sowing and rural sentiment in Q4 FY2020, the report said.
The cumulative repo rate cuts of 110 bps and improved transmission of monetary easing would boost sentiment to some extent going forward. Nevertheless, consumer sentiment and demand will remain contingent on the broader outlook for agricultural and economic growth, as well as availability of financing through the NBFCs, it said.
Regardless of the monetary easing and the measures announced so far by the Government to support the economy, some of the constraints to economic growth, including the moderate capacity utilisation levels, cost of land acquisition, and weak outlook for farm incomes, are likely to persist. We continue to expect private investment to remain muted, particularly, given the availability of brownfield assets through the National Company Law Tribunal (NCLT). Exports too are unlikely to revive considerably, given the global economic slowdown, the agency said.
Although the pace of expansion is expected to rise in the subsequent quarters from the multi-year low recorded in Q1 FY2020, the GVA and GDP growth are expected to print at sub-6.5% in the current fiscal, it said.