India's economy slows further in Q2

India's economic growth fell further to 4.5% in the July-September period from 5% in January-March dragged down by an almost stalled manufacturing growth, weak private investment and weaker consumption.

But the government spends grew at a handsome 15%, contributing majorly to the headline gross domestic product (GDP) number, which otherwise would have looked much weaker.

With the current decline, India also lost the world's fastest-growing economy tag to China, whose July-September GDP growth came at 6%.

A steep decline in eight key infrastructure sectors, including electricity, steel, cement, crude oil, and coal for two consecutive months, pointed to a slower recovery even in the upcoming quarter of October-December 2019-20. Contraction in the core sector implies industries no longer demand inputs as production has been muted.

The nominal GDP growth, which does not strip out inflation, came at 6.1% in the July-September quarter, the lowest since 2003. The nominal GDP grew at 8% in the first quarter.

With the economic growth falling to this extent, the Reserve Bank of India, is expected to one more key interest rate in its December 5 monetary policy, overlooking the 4.6% consumer inflation number in October, which is higher than its target range.

But the Chief Economic Advisor to the government, K Subramanian and Secretary, Economic Affairs Atanu Chakraborty said the fundamentals of the economy was still strong and that the growth could pick up in December quarter.

The data, however, did not reflect on strong fundamentals. The manufacturing sector, which contributes over 17% to GDP, contracted at 1% in the quarter under review from a 0.6% growth in April-June period. The Modi government aims at increasing manufacturing sector's contribution to GDP at 25% by 2022.

The gross fixed capital formation, a barometer of investment in the economy, contracted 0.9% from a 11.8% growth in the same period a year ago.

“The economy is not out of the woods yet. The overall story is not very good. Goal of $5 trillion economy seems to be slipping by at least one year,” former finance secretary S C Garg, who took voluntary retirement after being shifted to power ministry from the finance post the Union Budget in July, said.

According to Sameer Narang, a Bank of Baroda economist, state government's spendings and defence expenditure helped the GDP stay at 4.5%.