MOSL: ECOSCOPE-States offset weak consumption spending by center in 2QFY18-Capital spending, however, declined at record pace

​ECOSCOPE: States offset weak consumption spending by center in 2QFY18; Capital spending, however, declined at record pace

• Based on data for 16 states, we find that consumption spending (revenue spending less interest payments) grew 14.6% YoY in 2QFY18. However, capital spending declined at a record pace of 23.4% YoY, falling for the second consecutive quarter. Total spending grew 8% YoY, faster than 5% YoY in 1QFY18, but slower than ~15% YoY in 2QFY17.
  
• With tax receipts growing 11.7% YoY in 2QFY18, slower than in 1QFY18 but better than in 2QFY17, fiscal deficit of 16 states reached 37% of budget estimates (BE) in the first half of FY18, lower than 44% in the corresponding period in FY17, but higher (or worse) than in the previous years.
  
• Combined analysis of the center and 16 states (=general government) reveals that total fiscal spending grew only 2% YoY in 2QFY18, marking the slowest growth in more than five years. Within total spending, core revenue spending grew ~8% YoY in 2QFY18 primarily due to states, while capital spending declined (15.7% YoY) for the first time since 2015.
  
• As is evident from the analysis of states’ budgets, weaker fiscal spending in FY18 implies lower contribution to economic activity in comparison to FY17. With deficit of the general government reaching ~69% of BE in 1HFY18 – the highest in at least the past seven years, its ability to contribute faster in 2HFY18 will be constrained. Fiscal policy, as we had noted in April 2017, has indeed reached its limits.