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GDP Growth


Posted on 27-Mar-2020 Comments  0

GDP Growth

Q4 could be big shocker for India in terms of GDP growth

After 3 quarters of weak GDP growth in FY20, Indian economy may have to brace itself for the worst fourth quarter in terms of GDP growth. Most experts believe that the GDP figure in the fourth quarter ending March 2020 could be a big shocker.

Back to the Hindu rate

The concept of Hindu rate of growth was first propounded by Prof. Raj Krishna in 1978 referring to the near stagnation between 1950 and 1980. The GDP grew at just 3.5% and per capita income at just 1.5% annually, keeping millions in poverty. Economists are now predicting that after nearly 3 decades of a much higher rate of growth, Indian economy could revert to the Hindu rate of growth once again in FY20 as the fourth quarter could be a washout.

Estimates of growth vary but the story is almost the same. CRISIL has pegged the GDP growth for FY20 at just about 3.5%. Since the first 3 quarters of the year have seen growth rates of 5%, 4.5% and 4.7% respectively, it actually translates into negative (-0.2%) growth in the fourth quarter. Moody’s has also been talking about a similar stagnation in the fourth quarter. Moody’s projects 2.5% growth in GDP for calendar year 2020, which could also translate into negative growth in March quarter and flat to negative rate of growth in the June quarter. The message is clear; it is back to Hindu rate of growth in 2020.

Blame it on COVID-19

It is not just India but the entire globe that is likely to see a growth slowdown. In fact, IMF is now projecting a global contraction in growth of up to (-0.3%) in the calendar year 2020. That would clearly mean huge losses in terms of bankruptcies, job losses plus income stagnation. But growth matters a lot more to India; despite the pretext of COVID-19 being available. India needs growth to match up to the growing might and influence of China. If China growth manages to pull back and India stagnates, it is bad enough. Secondly, equity valuations in India and FPI flows are largely a function of robust GDP growth quarter after quarter.

Don’t wait for the Q4 shocker

It would be naïve to believe that India would be able to do anything better than negative growth in Q4. With a virtual lockdown across India, factories shut and malls and shopping centers empty, clearly there will be de-growth. While the lockdown is for 21 days, it could well extend for 3 months. India has to be prepared for negative GDP growth in the March and June quarters. The question is what can be done to mitigate the impact. Clearly, India has to give up its fiscal deficit obsession and opt for a counter-cyclical spending approach. Beyond rate cuts, India needs a flurry of tax cuts and incentives right away. Growth will then follow! 

Also read Monetary Policy here!


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