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MOSL: FUEL OR ENGINES (ECONOMY)-Role of fiscal spending in India’s GDP growth

FUEL OR ENGINES (ECONOMY): Role of fiscal spending in India’s GDP growth; 2HFY19 growth could ease sharply to 6.5%

 

India’s 2QFY19 real GDP growth of 7.1% YoY came in lower than expected, impacting market sentiment. It is, however, important to note that government/fiscal spending (consumption + investment) grew at 12.3% YoY – the fastest pace in five quarters, contributing as much as 2 percentage points (pp) to real GDP growth in 2QFY19. The contribution of fiscal spending increased from 0.4pp in FY18 to 1.7pp in 1HFY19, accounting for more than the entire rise in real GDP growth from 6.7% to 7.6% in the corresponding period. Lower-than-budgeted tax receipts, however, are set to worsen the situation in 2HFY19. Assuming that the center relaxes its deficit target from budgeted estimate (BE) of 3.3% of GDP to 3.5% in FY19 and also spends the unutilized compensation cess amounting to INR400b, total spending (excluding interest payments) growth could ease from 13.6% in 1HFY19 to 9.4% in 2HFY19. Such slowdown would be primarily because of a shortfall – according to our base case scenario – of ~INR1,030b in the government’s total receipts in FY19. The shortfall could be lower by just INR153b (implying 22.1% spending growth in 2HFY19) in the best case and as high as INR1.8t in the worst case (implying a decline of 2.1% in spending in 2HFY19). Overall, it is highly unlikely for the center to continue supporting economic activity in 2HFY19 as much as in 1HFY19. Thus, we expect real GDP growth to ease from 7.6% in 1H to ~6.5% in 2HFY19, implying full-year FY19 growth of ~7% with potential downside risks.