India’s deepening slowdown faces fresh risks from coronavirus

By Anirban Nag,
India’s economy slowed to a more than six-year low in the final three months of last year, and it now faces a fresh threat from the coronavirus outbreak.

Data on Friday showed growth decelerated to 4.7% in the three months through December from a year ago, the third straight quarter of decline and matching the median forecast in a Bloomberg survey of economists. That was before the virus began spreading early this year, disrupting global supply chains as China shut factories and restricted the movement of people to contain the epidemic.

The slowdown was from a revised 5.1% growth witnessed in the previous three months and a far cry from the 8.1% expansion seen in the quarter to March 2018. The soft numbers came on the back of flagging investments and subdued consumption in the October to December quarter. That backed a growing view that a recovery will be uneven, with a slew of high-frequency indicators showing consumption -- which accounts for 60% of gross domestic product -- is still weak.

The government retained its estimate of 5% GDP growth for the fiscal year through March, an 11-year low.

“Growth decelerated further in the last quarter of 2019 confirming our view that a bottom may not yet be in place,” said Priyanka Kishore, Singapore- based head of India and Southeast Asia Economics at Oxford Economics Ltd. “While there are some green shoots, patchy hard data points toward a fragile recovery, prone to downside risks.”

Key points from the October-December GDP data:
Agriculture output expanded 3.5% versus 3.1% in the previous quarter Mining grew 3.2% versus 0.2% in the July-September quarter Manufacturing declined 0.2% against a 0.4% fall earlier Electricity output fell 0.7% compared with a 3.9% growth

The coronavirus adds a new layer of complication. The World Bank sees global economic growth in the first half of 2020 likely falling short of the 2.5% pace it forecast for the full year amid supply disruptions of everything from automobile components to pharmaceutical ingredients.

India imports more than one-fifth of its total non-oil, non-gold goods from China, and production halts there pose downside risk to domestic manufacturing, economists said.

“Temporary price increases are likely to be accompanied by production delays if the pain spills over into the April-June quarter,” said Radhika Rao, an economist at DBS Group Holdings Ltd. in Singapore.

Rate Cuts

Even before the virus began spreading, surveys showed consumer spending was in the doldrums while business sentiment was frail with the economy still grappling with the aftermath of a shadow banking crisis that has crippled credit growth. Factory output contracted in two of the three months in the fourth quarter of 2019, data show.​

Former central bank governor Raghuram Rajan said politics is also holding back India’s economic potential. New Delhi has been gripped by sectarian violence this week, with dozens of people killed, as protests against a new citizenship law continue to polarize society.

“Unfortunately the current government, post a massive election win, has focused more on fulfilling its political and social agenda rather than paying attention to economics,” Rajan said in an interview on Bloomberg Television on Friday.

The enduring weakness in some sectors of the economy, along with the threat from the coronavirus have persuaded the Reserve Bank of India to keep the door open for more policy easing -- as inflation rose to 7.6% in January -- after cutting interest rates by 135 basis points last year. The virus may “impact tourist arrivals and global trade,” the RBI said at its most recent policy meeting in February.

The continued slowdown suggests the central bank’s rate-setting panel may well undertake another rate cut, Aditi Nayar, principal economist at ICRA Ltd., said, adding that it depends on headline inflation easing considerably toward the 4% mark.

Finance Minister Nirmala Sitharaman has said the government is ready to respond with measures to counter the effect the virus may have on domestic industry.

On Feb. 1, she unveiled a budget with modest steps to stimulate consumer demand in the form of changes to personal income tax rules. That, together with the lower corporate tax rates announced last year, are likely to have a lagged effect on growth and demand.