The Indian economy recorded its slowest growth in 26 quarters knocking in fears of a recession. While the Government denied this, the dipping growth rate continues to be the focus of global financial institutions. Foreign investment inflows increased compared to last year providing some hope and showing continuing confidence of overseas investors.

Growth Slowest in 26 quarters.

The Indian economy grew at its slowest pace in 26 quarters or six-and-a-half years in the July-September period of the current fiscal year, dragged down by contraction in the crucial manufacturing sector, piling pressure on the government to unleash fresh measures to revive growth and lift sentiment.

Data released by the National Statistical Office (NSO) recently showed gross domestic product (GDP) grew by 4.5% in the September quarter, slower than 5% in the previous quarter and the lowest since the 4.3% expansion in the January-March quarter of 2012-13.

The manufacturing sector contracted 1% in the September quarter, the first decline in nine quarters, highlighting the lack of demand in the economy. This is in line with the contraction in factory output and core sector numbers.

Growth Slow But No Recession.

The Indian Union Finance Minister, Nirmala Sitharaman recently said the Indian economy may be facing a slowdown but there’s no danger of a recession taking hold. The government will make policy changes as and when required.

“Every step being taken is in the interest of the country,” the minister said in her reply to a discussion on the economic situation in the Rajya Sabha, upper house of Parliament recently.

“Looking at the economy in discerning view, you see that growth may have come down but it is not recession yet; it won’t be recession ever.” A recession is typically defined as two successive quarters of negative growth. 

OECD Growth Projection for FY 2021.

The Organisation for Economic Co-operation and Development (OECD) recently released its OECD Economic Outlook, November 2019, wherein for India it stated that Economic growth is projected to recover to just under 6½ per cent in FY 2021 as election-related uncertainties fade and monetary and fiscal policies have become accommodative.

The new income-support scheme for farmers and a good monsoon are supporting private consumption. The cut in corporate income tax will support corporate investment. Inflation and the current account deficit will remain moderate given the relatively large spare capacity in the economy and low oil prices. Job creation remains a challenge.

Growth has slowed from a rapid pace. Stress in non-banking financial companies, coupled with changes in insurance regulations, has affected car sales, while volatility in fuel prices has weighed on consumer confidence. Construction has been hurt, as non-banking financial companies contribute a large share to its financing, weighing on job creation, income and consumption. Industrial production and related imports have weakened.

Exports have suffered from the slowdown in foreign demand. However, they have benefitted from improvements in the Goods and Services Tax (GST) administration, enabling exporters to get faster tax refunds, while efforts to improve trade infrastructure, logistics and processes are starting to pay off. Overall, India has succeeded in seizing some of the market shares lost by other countries and exports have proved relatively resilient.

Moody’s forecasts further slide.

Moody’s Investors Service recently slashed India’s economic growth forecast to 5.6 per cent for 2019, saying government measures do not address the widespread weakness in consumption demand. “We have revised down our growth forecast for India. We now forecast slower real GDP growth of 5.6 per cent in 2019, from 7.4 per cent in 2018,” it said.

“India’s economic slowdown is lasting longer than previously expected.” Moody’s had in October 2019 slashed India’s economic growth forecast for 2019-20 fiscal to 5.8 per cent from an earlier estimate of 6.2 per cent, which was reported by Asia Law Portal. In another related report, Moody’s expects the Centre’s fiscal deficit to touch 3.7 per cent of the GDP. For all States put together, it is estimated to be three per cent.

The Centre has targeted to keep the deficit at 3.3 per cent for the current fiscal (2019-20), but it has already reached 92.6 per cent of the Budget estimate in first six months of the current fiscal.

“Persistent spending pressures and slower economic growth will result in continued fiscal deficits,” the agency said in its report while adding that by fiscal year-end March 2020, it is projected that government deficits will be about 3.7 per cent GDP for the Centre (slightly higher than the 3.4 per cent posted in fiscal 2019) and around 3 per cent for States, adding up to a general government deficit of about 6.7 per cent.

Foreign Investment Inflows Increase.

Even as the Indian economy sees a slowdown, the inflow of foreign investments has remained upbeat, with April-November 2019 witnessing net inflows of $10.7 billion as against outflows of $14.6 billion in the corresponding period of last year.

In the ongoing fiscal year, all the months except July-August 2019 saw net inflows of FPIs. After the government proposed to impose a levy on FPIs in July budget, an outflow of foreign funds was seen.

However, the rollback of the levy along with another slew of measures announced by the government (reported by Asia Law Portal in September 2019) not only stalled the outflows but also led to a rise in inflows.

Review of FTAs with ASEAN and Japan.

India has sought review of its existing free trade agreements (FTAs) with ASEAN and Japan, Parliament of India was informed recently. Union Commerce and Industry Minister Piyush Goyal said that eight rounds of negotiations have been held with South Korea for upgrading the existing comprehensive FTA.

Further, the minister said the FTA with ASEAN was executed around 10 years ago and “our study shows that we have not been able to get as much benefit out of the FTA”.

Posted by Sourish Mohan Mitra

Sourish Mohan Mitra, India-qualified lawyer from Symbiosis Law School, Pune and currently working as an in-house counsel in Delhi, India; views expressed are personal; he can be reached at; Twitter: @sourish247

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