The government of India is expected to publish the GDP growth rate estimates for Q4, FY 19-20 tomorrow. The revised estimates for the overall FY 2019-20 growth which was released in Jan, 2020 showed a 5% growth for the financial year. The Q3 growth stood at 4.7%. The world is going through a severe pandemic situation. The country has been under a lock down since March 25. So officially only 7 days of the 4th quarter went into lockdown. But the impact of global pandemic was visible in other countries since January. What is the impact of all these on Indian Economy. Let us examine how has been the trends in major economic indicators.
IIP and Core Sector Growth
The first two months of the quarter witnessed a positive growth in IIP after months. Moreover the IIP growth of February was higher than that in the same month last year. But March numbers were historically low. The IIP numbers of March stood at -16%. Because of this the overall IIP numbers sttod at -5% for the quarter. Similar pattern was witnessed for the core sector growth. While January and February numbers showed positive growths, in March the growth rate of core sectors stood around -6%. But still due to the positive growth in the previous two months, the overall quarter growth rate was positive for the first time after two months.
Sectoral Credit Growth
The sectoral credit growth on various commercial sector is a reflection of the private investment growth or gross capital formation of the economy. The Indian economy had witnessed a negative growth in gross capital formation in Q3. The trend in Q4 continues to show a dismal picture with the only silver lining coming from services sector.
In terms of sectoral credit growth as reported by Reserve Bank of India, it is seen that almost all the sectors have witnessed a lower credit growth in Q4, 2019-20 apart from the services sector which showed some increase in credit growth quarter on quarter. However it remained much lower than the previous year numbers. This sign of increase in the services sector credit growth is encouraging as this is the highest contributing sector in terms of GDP growth. However the growth rate of creidt in all other sectors declined with the most severe been the drop in credit growth in the industrial sector. It is to be noted here that if one compares the sectoral growth rate with the same quarter last year, then there is a severe drop in the sectoral growth rates in all sectors including the services sector.
Lack of demand has been a problem in the Indian economy. The private consumption numbers has shown steady decline quarter on quarter. Personal credit growth is driven by the demand. If we look at the monthly trends it is seen that the personal credit growth showed a increasing trend for the first two months of Q4. But March witnessed a significant decline driving the overall personal credit growth down from the last quarter and significantly less than the same quarter, previous year.
What can be the possible GDP growth for Q4
After showing some encouraging trend in the first two months of the quarter, there was a dismal performance in the third month leading to a overall drop in performance of the economic indicators both in the demand and supply side. One needs to keep in mind that lockdown in the entire country happened for only 7 days in March. What can then explain such a dismal performance of all the economic indicators in March which drove the overall quarter numbers down. One primary reason is the global spread of the pandemic. The manufacturing sector in India is very much dependent on the raw materials coming from mainly China. With the Chinese economy under lockdown the supply chain was acutely impacted and hence we see a severe drop specifically in IIP growth, a mojor contribution of which is from the manufacturing sector. The first two months of quarter 4 showed some encouraging trends. But the situation reversed in March.
There has been no consensus in terms of the forecast by several organisations. While Care ratings puts the growth at 3.6%, CRISIL on the other hand forcasts the growth to be 0.5%.
IPD finds that among all the indicators, IIP , growth rate in Personal Credit and Core sector growth has very high correlation with the GDP growth rate. This is followed by the credit growth rate of service sector. While IIP and growth rate in personal credit showed a decline from last quarter with the drop in IIP being severe as discussed above, the core sector growth and the credit growth in services sector has increased as compared to the previous quarter. Let us wait for tomorrow for the Q4 growth estimates.