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    ET Explains: Why everyone is obsessing over Q2 GDP numbers

    Synopsis

    All latest numbers paint a dismal picture of the economy and dash any hopes of a revival anytime soon.

    ET Online
    With a pall of gloom spread wideover the economy and most key indicators in the red for a while, latest estimates for the second-quarter GDP have compounded the worries for the government.

    Both Nomura and the SBI have pegged Q2 GDP growth at 4.2 per cent, a sharp deceleration from the 5 per cent reported in the first quarter of the current fiscal. The numbers paint a dismal picture of the economy and dash any hopes of a revival anytime soon. In fact, some reports have predicted that the economic revival may not come before the next fiscal.

    Two important indicators released by the Central Statistics Office, the Core Sector and the IIP, only reinforce the worst fears of the government. Both the core sector and the index of industrial production have contracted consecutively for both August and September. The September numbers have a more alarming tone as the fall was sharper than experts had estimated.

    The Index of Industrial Production — or factory output — contracted by 4.3 per cent, the worst in seven years. A more granular view of the index will reveal the real cause of worry which could spill over to GDP numbers due on November 29.

    The massive slump seen in the industrial output was on account of the manufacturing growth nosediving for the month of September. Manufacturing, which forms 77.6 per cent of the industrial production basket, declined by 3.9 per cent — deep enough to send shock waves through policy circles as reviving manufacturing growth had been one of the topmost agendas of Modi government.

    In fact, the slump witnessed in the first quarter GDP growth had manufacturing GVA collapsing 0.6 per cent, which means it barely saw any growth. It is quite possible that the manufacturing GVA may witness a de-growth in the second quarter, thereby pulling the overall economic growth down below the 5 per cent mark.

    'Triple Balance Sheet Problem'
    In its report, Nomura has pointed out that the economy is suffering from a 'triple balance sheet problem' which has constrained credit growth.

    The persistent problem in India's shadow banking sector and the bad debts on banks' books — along with the highly leveraged corporate sector — pose a risk to hopes of an investment pick-up. According to the Nomura report, these are significant growth headwinds and could delay the pace of recovery.

    The Manufacturing curse
    With manufacturing collapsing, the fallout could be captured in the coming GDP numbers. A closer look at the manufacturing scenario within the factory output shows that for the month of September not only did the durables show a de-growth but also non-durables witnessed contraction.

    This is nothing short of alarming. While durables' fate is understandable given the state of auto, consumers refusing to spend even on basic necessities like FMCG goods in the non-durables is poignant.

    Shrinking Private Investment
    Another important marker of economic activity — capital goods sector — was the hardest hit. It witnessed the steepest fall at (-)20.7 per cent for the month of September showing that the private business has no appetite for investment at a time when consumption demand has all but collapsed.

    Lacklustre consumption outlook
    The gorilla in the room is the slackening consumption which has fed the pessimism in the economy. Corporates will only invest when they expect demand to pick up. With sectors like auto and non-durables decelerating, the demand scenario looks bleak. A crisis in the NBFC sector further crimped the animal spirits of the economy.

    Private consumption forms the largest chunk of the GDP and a slowdown in demand will clearly show up in the second quarter GDP.

    More fiscal measures needed
    SBI, in a note, said that the recovery could be more supported by fiscal measures rather than just relying on more rate cuts. It goes on to say that more rate cuts could be counter-productive. It adds that in the current economic downturn, it is the 'future expectations' which will drive investment rather than the cost of funds.

    Almost all major agencies have cut India's growth forecast for the current fiscal. The recent measures announced by the government including the corporate tax cut along with rate reductions by the RBI and better transmission have kindled hopes for revival in the second half. But right now, the state of the economy can only be called dismal.
    (Catch all the Business News, Breaking News Events and Latest News Updates on The Economic Times.)

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    23 Comments on this Story

    Shaleen Nath Tripathi290 days ago
    INDIA''s real GDP is increasing 1.3% ever month, 3.9% every quarter and 16% every year... But, the Govt is averaging real GDP from every quarter to arrive at annual real GDP, suppose real GDP from four quarters 7, 6, 5, 4 therefore according to Govt the annual GDP growth is 7 6 5 4/4 = 7.5, which is wrong... Suppose, a man earns 5, 000 every month then to get his yearly income we need to add salary of ever month and not his average salary... Therefore, if we have data of 12 months or 4 quarters we need to add and not average them... Similarly, if INDIA''s growth rate in four quarters are 6.6, 5.8, 5, 4.5 then the annual GDP growth rate would be 6.6 5.8 5 4.5 = 20% (app.)... real GDP would be nominal GDP -inflation would be equal to 16%....
    Satish chandran310 days ago
    These people (present govt) got 1 more trump card on their back. They (BJP) will will definately take credit for Mandir issur even during next election. And win next general election also. Oh God, please teach them proper lesson. All midlle class people suffering without having jobs. BJP dont have guts to accept that unemployment problem.... Selfish politicians. Only God save this country ......
    Santosh Iyer310 days ago
    let it go on for 5 yrs, people deserve foolish govt..... SAYING IS TRUE, ANDHER NAGRI TOH CHAUPAT RAJA
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