Only three days into 2020, New Year cheer for markets fizzled out when tensions escalated between the U.S. and Iran over the killing of an Iranian commander.

A week into the New Year, it doesn’t look good for the Indian economy, too, as per the macroeconomic print in the First Advance Estimates of National Income for FY20 released by the National Statistical Office (NSO) on Tuesday.

The NSO reckons real GDP growth for FY20 at 5.0% as compared to 6.8% in FY19. The NSO under the Ministry of Statistics and Programme Implementation is the entity formed by merging the National Sample Survey Office and the Central Statistics Office.

Mumbai-based Nikhil Gupta, chief economist at Motilal Oswal Financial Services (MOFS), highlights that the advance GDP estimate is the same as that of the Reserve Bank of India (RBI), but higher than MOFS’ forecast of 4.6%.

According to Dr. V.K. Vijaykumar, chief investment strategist at Geojit Financial Services, the FY20 GDP growth estimate is on expected lines. “The 5% print will put strain on the fisc forcing the government to cut down on expenditure in Q4 (FY20),” he says. “This will further delay the recovery in growth,” he adds, as he expects the growth recovery expected from Q1FY21 to be weak and slow.

The figures may be revised down further. As per State Bank of India’s (SBI) group chief economic adviser Soumya Kanti Ghosh, the latest NSO estimate has a shelf-life of only two months and is only used as an input for budget arithmetic. The first revised estimates for FY17, FY18, and FY19 are expected on January 31. And based on that, Ghosh believes that GDP and GVA (gross value added) for FY20 would be revised further downwards in the second advance estimate for FY20 on February 28 and May 29. “We are now revising our GDP projection for FY20 to 4.6% based on current available trends,” says Ghosh. “It is likely that the 40 basis points’ downward revision could be spilt over February and May 2020 in equal proportion.”

According to the NSO, private final consumption expenditure (PFCE) at current prices is estimated at ₹123.07 lakh crore in FY20 as against ₹112.90 lakh crore in FY19. At constant (FY12) prices, PFCE is estimated at ₹84.81 lakh crore in FY20 as against ₹80.17 lakh crore in FY19. In terms of GDP, the rates of PFCE at current and constant (FY12) prices during FY20 are estimated at 60.2% and 57.4%, respectively, as against the corresponding rates of 59.4% and 56.9%, respectively in FY19.

On the other hand, government final consumption expenditure (GFCE) at current prices is estimated at ₹24.34 lakh crore in FY20 as against ₹21.35 lakh crore in FY19. At constant (FY12) prices, GFCE is estimated at ₹16.65 lakh crore in FY20 as against ₹15.06 lakh crore in FY19. In terms of GDP, GFCE at current and constant (FY12) prices during FY20 are estimated at 11.9% and 11.3%, respectively, as against the corresponding rates of 11.2% and 10.7%, respectively in FY19.

The NSO release also points out that gross fixed capital formation (GFCF) at current prices is estimated at ₹57.42 lakh crore in FY20 as against ₹55.70 lakh crore in FY19. At constant (FY12) prices, GFCF is estimated at ₹45.93 lakh crore in FY20 as against ₹45.48 lakh crore in FY19. In terms of GDP, GFCF at current and constant (FY12) prices during FY20 are estimated at 28.1% and 31.1%, respectively, as against the corresponding rates of 29.3% and 32.3%, respectively, in FY19.

“Interestingly, CSO (NSO) expects personal consumption growth to pick up from 4.1% in H1FY20 to 7.3% in H2FY20, which certainly seems optimistic to us,” says MOFS’ Gupta. “Surprisingly CSO also expects government consumption to continue to grow strongly at 8.5% in H2FY20, which seems challenging considering massive receipt shortfall,” Gupta adds.

According to Aditi Nayar, principal economist at rating agency ICRA, the pickup displayed by various lead indicators in November-December 2019 is encouraging, and portends a modest improvement in economic growth in H2FY20. “However, the momentum of spending by the central government dipped in October-November 2019, and we are apprehensive that revenue concerns may necessitate an expenditure squeeze by the central and state governments in the on-going quarter, which has emerged as a key risk to the pace of economic growth,” says Nayar. “For FY20 as a whole, we expect GVA and GDP growth to print at 5.1% and 5.3%, respectively, modestly higher than the advance estimates of 4.9% and 5.0%,”she adds.

SBI’s Ghosh is of the view that the key to a quick recovery is consumption. The NSO estimates reveal an impending consumption recovery but Ghosh believes the quadruple balance sheet problem (banks, corporates, shadow banks and households) is creating space for deleveraging that will delay a pickup in consumption and investment. And, now, Ghosh believes that the RBI projection of a 5.9%-6.3% GDP for FY21 could be on the higher side. “We could be now staring at a sub-6% growth for two successive years,”Ghosh warns.

Beyond the immediate problems, Ghosh is of the view that the government’s $5 trillion economy ambition for FY25 would now have a tedious path, too. To achieve $5 trillion target by FY25, the FY20 GDP should have been around $3.2 trillion (or around ₹225 lakh crore). However, the NSO has projected FY20 GDP to be around ₹204 lakh crore. “This leads to a gap of around ₹20 lakh crore,” says Ghosh. “We believe that FY25 nominal GDP will be in the range of $4.5 trillion-$4.7 trillion (not the $5 trillion as expected) at the current rate,”Ghosh adds.

RBI’s Monetary Policy Committee (MPC) decided to continue with the accommodative stance as long as it is necessary to revive growth while ensuring that inflation remains within target. In 2019, while consumer price inflation (CPI) had increased from 3.3% in August and 4% in September to 4.62% in October and 5.54% in November. At its December 3-6 review meeting, the MPC had revised upwards its CPI projection to 5.1%-4.7% for H2FY20 and 4.0%-3.8% for H1FY21.

All eyes would now be on the MPC review meeting on February 6. Based on the view the government takes on the slowing economy in the Union Budget on February 1, the RBI may have to intervene with rate action this time round. A surprise “no rate cut” is highly unlikely.

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