Slowdown signals: on Q2 growth estimates

Mains Paper 1: Economy
Prelims level: Economic growth
Mains level: Economic growth and development

Context

•  The growth estimates for the July-September quarter from the Central Statistics Office show that the economy’s expansion predictably slowed.
•  GDP growth weakened to 7.1%, from the robust 8.2% in April-June, as rising oil prices combined with a weakening rupee to dampen demand.

Important highlights of the Q2 growth estimates

•  Gross value added (GVA) data show five of the eight sectors reflecting the slowdown from the first quarter, with only utility services, public administration, defence and other services, and trade, hotel, transport, communication and broadcasting services bucking the trend.
•  GVA growth in agriculture, forestry and fishing eased to 3.8%, from 5.3% three months earlier, as foodgrain output in the kharif season inched up a mere 0.6% (production had expanded by 1.7% in the previous year).
•  Given the distress in the farm sector, below-normal monsoon rains and a shortfall of over 8% in rabi sowing till November 30.
•  The outlook for rural demand remains challenging at least for the next couple of quarters.
•  This demand weakness in the hinterland is also evident in the consumption spending data, with growth in private final consumption expenditure slowing to 7%, compared to 8.6% in the first quarter.
•  Manufacturing, though posting a 7.4% expansion, also poses cause for concern as the momentum almost halved from the June quarter’s 13.5% and slipped back nearer to the year-earlier level of 7.1%.
•  Index of Industrial Production data reveal that growth in manufacturing output remained becalmed at 4.6% through August-September, and when seen alongside the weakness in car and two-wheeler sales, suggest an acceleration may be some time away.

Important indicators highlighted by the RBI

•  Gross fixed capital formation (GFCF), a key metric for investment demand, expanded by a robust 12.5%, building on the first quarter’s 10% increase, and constituted 32.3% of GDP.
•  An RBI research paper posits that improvement in investment activity is being driven by cyclical factors and may last up to 2022-23.
•  The investment rate as measured by the GFCF is estimated to increase to 33% of GDP.
•  The same RBI paper, however, points to risks to the investment outlook and flags the gross fiscal deficit as a key pressure point, given that borrowing by the government invariably crowds out investment demand.

Way forward

•  The latest expenditure and receipts figures released by the Controller-General of Accounts are not reassuring.
•  The fiscal deficit crossed the budget estimate for the full year in just the first seven months.
•  It raising the chances that the Centre would miss its target of limiting the deficit to 3.3% of GDP.
•  With multiple uncertainties looming on the global trade and growth horizon and elections approaching.
•  India’s economic managers will need to be at their best to keep the momentum from sliding.

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General Studies Pre. Cum Mains Study Materials

Prelims Questions:

Q.1) With reference to money markets, consider the following statements:
1. Call money refers to borrowing/lending of funds on overnight basis.
2. Notice Money refers to borrowing/lending of funds for period exceeding 14 days.

Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Answer: A

Mains Questions:
Q.1) Why the growth estimates for the second quarter show the challenge of shoring up rural demand?