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19 Jan 2020


The first estimate puts the GVA and GDP expansion at 4.9% and 5%, respectively for FY 20. While the growth has been lower than previous estimates, our calculations suggests that growth is not too far off the potential output. For FY20, we arrive at a potential output growth of 5.16%, a number that is just 16 bps higher than the reported actual output growth. Clearly, it can be inferred that despite a record slowdown in manufacturing and construction activities, the output gap is minor.

As pointed by the RBI earlier, the output gap had closed in the previous financial, with capacity utilizations levels consistently over 75%. However, as domestic demand faltered further in the current financial year, utilization levels declined to sub 70% levels and inventory overhangs forced manufacturers to prolong production cuts. The transition to Bharat Stage VI also disoriented the automotive OEMs and ancillaries (a significant contributor to manufacturing) as engine production lines had to be retooled and engineers trained to newer technology. The discontinuation of diesel power trains among prominent players such as Maruti Suzuki was another important factor, as major volumes came from these products. This condition is well reflected in the Core numbers and subsequently, the IIP.

When looking at the sectors by economic activity, apart from the aforementioned usual suspects, manufacturing (2%) and construction activity (3.2%) – the performance has not been completely disappointing. Boosted by healthy rainfall boosted reservoirs, agricultural output is expected to grow at 2.8%, almost similar to that achieved in the previous year. Financial, Real Estate and Professional Services sector also managed to expand at a respectable 6.4%, as compared to 7.4% attained last year. We reckon this performance is driven by strong credit offtake in much of H1 FY20 along with strong inflows of FDI Equity/ FIIs on the back of DM monetary easing. Mining & Quarrying, growing at 1.3%, still managing to meet the average recorded by the previous two years. National electrification programs and continued investments in renewables helped the Electricity, Gas, Water Supply & other Utility Services sector maintain 5.9%, about 1 percentage point lower than FY19. Ongoing capital expenditure under the civil projects such as those embedded within the Smart City program has helped the section’s gas, water supply and utilities components sustain their trajectory. Meanwhile, the Trade, Hotels, Transport, Communication and Services related to Broadcasting, came at 5.9%, again just a percentage point lower than the previous year. This section was majorly helped by a somewhat consistent demand for passenger services pertaining to both civil aviation and railways. Hospitality may have gained from the recent hikes in room rates, a gain that should be reflected in revenue and ultimately GST collections.

Government expenditure (Government Final Consumption Expenditure) perhaps remained the strongest variable in the aggregate demand function, expected to expand by 10.5% in FY20 as compared to 9.2% last year. From the economic activity point of view, the Public Administration, Defense and other Services GVA expanded by 9.1%, 50 bps over the previous year’s expansion. Speaking from the point of view of aggregate demand, domestic consumption as reflected by Private Final Consumption Expenditure (PFCE), expanded by a rather average 5.8%, a full 230 bps lower than the previous year’s. Brisk sales of consumer durables such as cars and electronics towards the end of Q3 through heavy discounts maintained the somewhat respectable number. High inventories and production cuts however arrested the expansion of the Gross Fixed Capital Formation (GFCF) however; the metric is expected to grow by just 1% in the current fiscal. Relentless Government expenditure managed to maintain a status quo of sorts but fresh capex was far from normal, especially in the light of last year’s expansion of 10%. Given a limited fiscal space, we reckon that a focus on infrastructure investments and liquidity infusion in public banks to shore up their LCR are two of the best bets to get the economy back on track at the moment.

First Advance Estimates of GVA at Basic Prices by Economic Activity

(At 2011-12 Prices) (₹ crore)