India’s gross domestic product (GDP) growth for October-December 2019 was 4.71%, the lowest since the quarter ended 31 March 2013, when it was 4.3%, according to government data published on Friday. Mint takes a detailed look at this downward trend.

What is driving GDP growth downwards?

GDP comprises private consumption expenditure, government expenditure, investment and net exports (exports minus imports). Of these constituents, government expenditure, which makes up around 10% of GDP, grew the fastest at 11.8% in the third quarter. If this is left out of GDP, what remains is the non-government GDP or the private part of the economy. Non-government GDP growth in the quarter was 3.95%, 76 basis points lower than overall GDP growth. One basis point is one hundredth of a percentage. So, 90% of the economy is growing much slower than the overall economy. This is the problem.

View Full Image In the December 2017 quarter, non-government GDP grew very fast at 8.47%. Since then, it has fallen constantly and has more than halved to 3.95%

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Why has non-govt GDP growth slowed?

There is a clear trend here. In the December 2017 quarter, non-government GDP grew very fast at 8.47%. Since then, it has fallen constantly and has more than halved to 3.95%. One reason for this lies in the contraction of investment over the last two quarters. In the September and December quarters, overall investment in the Indian economy shrank by 4.14% and 5.16%, respectively. Private consumption expenditure growth during the last two quarters has slowed to 5.63% and 5.86%, respectively. With investment contracting, it is not surprising that private consumption has slowed down.

How are investment and consumption linked?

Investment creates jobs. Jobs provide income, which, in turn, encourages consumption. With investment contracting, enough jobs are not being created for the nearly million Indian youth entering the workforce every month. Hence, it is not surprising that consumption growth has slowed down dramatically this year.

How will GDP growth fare in March quarter?

The full impact of the coronavirus outbreak on the Indian economy will be felt during this period. This will impact the manufacturing part of the economy, which has anyway shrunk by 0.43% and 0.25%, respectively, in the last two quarters. Besides, the tax collection of the central government has shrunk by 2.1% between April 2019 and January 2020. This limits the ability of the government to spend its way out of trouble, something that it has managed to do to some extent until now.

But what about the talk of green shoots?

There is a lot of talk among economists about the economy having bottomed out. This means that economic growth won’t fall any further. This has led to further talk about there being green shoots that suggest an economic revival. However, with the economy likely to grow at a rate slower than 5% in the current quarter, any talk of green shoots is just talk. A substantial recovery cannot happen unless investment in the economy picks up.

Vivek Kaul is a Mumbai-based economist.

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