A dip in fixed investment and weak private consumption growth are the main drags on the demand side.
Illustration: Uttam Ghosh/Rediff.com
The slowdown is deeper than anticipated and will be prolonged, ratings agency Crisil warned on Monday slashing its growth estimate sharply to a low 5.1 per cent from 6.3 per cent earlier.
The agency attributed the sharp revision to various high-frequency indicators showing a softness and partly blamed the same to reforms like GST, real estate regulation, and the bankruptcy code which are still a "drag" on the economy which is yet to adjust to the changes unveiled years before.
The Crisil's estimate is among the lowest, but still above Japanese brokerage Nomura's 4.7 per cent forecast.
The Reserve Bank, which is scheduled to review of the monetary policy on Thursday, had in the October review lowered its forecast to 6.1 per cent--down a full 90 bps from its August forecast.
Given the gathering storm, the monetary authority is widely expected to slash its rates further--after five successive rate cuts to the tune of 135 bps, bring down the policy rates to a nine-year low of 5.45 per cent.
Official data released on Friday showed the September quarter GDP hitting a 26-quarter low of 4.5 per cent, the first half growth at a low 4.75 per cent.
"The economy is going through a deeper-than-anticipated slowdown, as weakness in the real sector and stress in the financial sector feed into each other," the Crisil report said.
"Key short-term indicators like industrial production, merchandise exports, bank credit off-take, tax mop-ups, freight movement, and electricity production, all point to a weakening growth momentum," the report underlined.
However, it expects a "mild" pick-up in growth in the second half.
"Growth in the second half will go up to 5.5 per cent, up from 4.75 per cent in the first half," it said.
The note said a dip in fixed investment and weak private consumption growth are the main drags on the demand side, and that it is government consumption that has supported growth in the first half, but capex spending on infrastructure like highways, shipping, power and affordable housing was slower till August.
Private consumption growth, benefiting from a weak base, printed higher in Q2 but the pace of growth nearly halved year-on-year and also against the first half of last fiscal as consumer sentiment stayed muted, it said.
On the supply side, weakness in manufacturing is worrisome with gross value-added by the sector contracting in Q2, it said, adding there was weakness in construction, trade, hotels, transport and communications as well.
The weakness in financial sector is "aggravating" the demand-led slowdown, the note said, warning a clean-up of the financial sector can further stretch the slowdown.
Reacting to government announcement to fast track spending to push growth, it said non-tax revenue generation through divestments and asset monetisation can help keep the fiscal deficit (which has already crossed 102 per cent as of October) under check is important now.
"Downturn is sharper and can be prolonged. That's because the financial system, which plumbs the economy, is clogged.
“While demand for credit is weak, its supply is also constrained. Risk aversion has meant caution on lending," it concluded.