GDP numbers indicate the economy might be running out of steam

Growth in Gross Domestic Product (GDP) for the third quarter ended December 2018 slowed to a six quarter low of 6.6% for Financial Year 2018-19, figures released by the Central Statistics Office (CSO) on Thursday showed. Chief culprit for this disappointing figure was subdued expansion in agriculture, manufacturing and government expenditure. Investment activity, however, continued to grow at a healthy pace.

As a result of Thursday’s figures, the forecast for the full year’s GDP growth was revised downward from 7.2% to 7%, making it the slowest in the Narendra Modi led government era and indicates the economy is losing steam.

Economists had expected the GDP growth for the quarter gone by to be 6.8%; in comparison, a growth of 6.6% confirmed the wide spread worry that the economy is losing momentum and may be in need of policy support. The lower than expected figures now provide room for the RBI to cut interest rates further in its next committee meeting in order to give a boost to the economy.

Two important parameters give us an insight into the story behind the numbers. First off is the private final consumption expenditure which denotes demand in the economy, it slowed to 8.4% from nearly 10% in the preceding quarter. This is mainly due to distress in the rural sector because of collapse in prices of several agricultural produce. With farmers earning less, they have less to spend. The second important parameter is government expenditure which slowed considerably due to the fact that the government has been consciously spending less to meet its fiscal deficit target which is already 121.5% of its target for the whole year. With investment being the only bright spot in the economy, it is not surprising that the GDP figures were subdued for the third quarter.