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MOSL: FUEL OR ENGINES (Economy)- GDP growth to remain sub-7% in FY19-Faster growth in consumption to offset weakness in other components

FUEL OR ENGINES (Economy): GDP growth to remain sub-7% in FY19; Faster growth in consumption to offset weakness in other components

 

India’s real GDP is forecast* to grow 7.3-7.4% in FY19, up from 6.7% in FY18. In its monetary policy this week, while the Reserve Bank of India (RBI) highlighted higher crude oil prices as an upside risk to inflation, it maintained the real GDP growth forecast at 7.4% for FY19. Our recent study of the 2018-19 budgets of 20 major states reveals that real fiscal spending (excluding interest payments) is budgeted to grow 6.6% in FY19 – the slowest pace in four years. Further, a sharp revival in private investments in FY18 – grew 9.8% versus ~4% in FY17 – is attributable to ‘valuables’ and ‘household investments’. With the base effect fading, household investments are unlikely to grow as fast and valuables are also likely to decline. Consequently, private investments are expected to also grow slowly at 8.3% in FY19. Higher crude oil prices will also drive current account deficit at ~2.5% of GDP, which will continue to act as a drag. It implies that the burden of pushing GDP growth higher lies with private consumption. If real GDP has to post 7.4% growth, real PCE must grow 8.5% in FY19, as against 6.6% in FY18. Overall, while we expect private consumption to grow faster (at 7.5%) and drag from the external sector to be lower in FY19, slower growth in fiscal spending and private investments is likely to keep real GDP growth at sub-7% for the second consecutive year in FY19. Further, crude oil poses a downside risk to even 7% GDP growth in FY19.