Q3 GDP shows a small bounce, but it’s too early to celebrate

The GDP advance estimates for the Dec-19 quarter came in slightly higher at 4.7% compared to 4.5% in the second quarter. The NSO has also upgraded the full year GDP closer to 5%. But is it too early to celebrate?

Boost from agriculture

The underlying theme of the GDP for Q3 was that agriculture had shown a sharp bounce. Full year agricultural GDP is likely to grow at 3.7%, well above the agri comfort zone. Also, the boost has come from a solid Rabi crop which benefited from unseasonal rains during September. While it negatively hit the Kharif output, the overflowing reservoirs ensured that the Rabi output was 9% higher. That made all the difference to the third quarter GDP. Nominal growth in agriculture in the third quarter was closer to 13.7%, best in recent times.

Manufacturing still lags

Manufacturing growth for the third quarter is sharply lower than the third quarter last year. Capacity utilization of the manufacturing sector has fallen to 67%. The weak consumption demand across the urban and rural areas are forcing many companies to shut down production to allow supply and demand to match. While agriculture has been robust in Q3 and services at par, it is the manufacturing sector that still lags. Unless that picks up, jobs will not pick up and hence consumption will falter.

Nominal growth the worry

While the bounce in real GDP growth is well and good, the bigger worry is on the nominal growth front. For FY2019-20, the nominal GDP is estimated to grow at 7.5%. That is way below the 11% nominal GDP growth that India needs to sustain to give a tough fight to China. It may be recollected that China maintained 12-13% nominal rates of growth for close to 30 years, which kind of explains the Chinese Miracle. India did manage to grow at nominal rates of over 11% for most of the last decade. However, post 2011, growth has faltered. That is what should really consume the attention of the finance ministry and the policy makers.

Is 5% full year growth feasible?

The NSO estimates have pegged full year GDP growth at around 5%. Since, Indian GDP has grown at 5%, 4.5% and 4.7% in the first 3 quarters; the growth assumed in the fourth quarter is closer to 5.8%. That is what looks ambitious for 3 reasons. Firstly, the full impact of the Coronavirus on growth has not been factored in. Secondly, the agricultural boost in Q3 will not exist in the fourth quarter. Lastly, India is already running at 128% of revised full year fiscal deficit in the first 10 months. That limits any pump priming by the government in this fiscal year. Hence full year growth of 5% does look difficult. It will take a miracle to scale 5.8% growth in Q4!