Nirmal Bang comments upon India’s “Q2FY19 GDP Growth which Slowed down to 7.1%”.

GDP growth for Q2FY19 stood at 7.1% YoY down from 8.2% in the previous quarter despite a relatively low base of 6.3% in 2 Q2FY18. This was significantly below our estimate of 7.6% and the consensus estimate of 7.5% Industrial growth was below our expectation as manufacturing grew 7.4% YoY against our estimate of 8.5% YoY, while the mining sector declined 2.4% YoY. On the services side, the downside surprise largely came from government spending reflected by the public administration and defense services growing at 10.9% YoY, slower than we had anticipated. Agricultural growth at 3.8% YoY was also a tad below our estimate. Private consumption grew 7.0% YoY, down from 8.6% in the previous quarter, and just a tad higher than 6.8% a year ago.

On a positive note, CapEx spending remains supportive with gross fixed capital formation rising 12.5% YoY, up from 10% in the previous quarter and 6.1% a year ago*** The CapEx spending in our view is largely government supported, and is likely to slow in the months ahead as cutbacks in capital expenditure are implemented in a bid to meet the fiscal deficit target. Data released separately showed that the fiscal deficit for April – October stood at 103.9% of the budget, compared to 96.1% a year ago. The shortfall is on account of lower tax and divestment revenue.

Divestments have witnessed a pickup in November, yet indirect taxes may not receive the expected boost as growth slows Ahead of elections, revenue spending is likely to witness a pickup to support growth while CapEx spending slows. With the revenue shortfall and slowing growth warranting higher revenue expenditure, we see increasing risks of fiscal slippage in FY19.

With Q2FY18 GDP growth coming in below our forecast we have cut FY19 GDP growth to 7.1%. With growth slowing and inflation below the RBI’s 4% target, an extended pause is likely in FY19, with a move towards more accommodative policy by mid FY20 as the Fed also eases its rate hiking cycle. Our FY20 growth forecast also stands at 7.1%, a tad lower than our earlier estimate of 7.2%.