FISCAL DEFICIT WORRISOME, GDP SAYS, “DON’T WORRY!”

By Ruma Dubey

There were two big macro data which came in today. One was the fiscal deficit and the other was Q2FY18 GDP. Fiscal deficit came in during market hours and it left a telling effect on the index.

The Sensex plunged over 450 points today as the fiscal deficit raised its ugly head. The fiscal deficit – which is the difference between what the Govt earns and what it spends, for the seven month period between April to October, came in at 96% of entire FY18 target.

The Govt earned Rs.7,67327 crore and its total expenditure was Rs. 12,92,648 crore. Thus it spent 68% more than what it earned. The difference, Rs.5.25 lakh crore is the deficit. For the entire year, it had budgeted a deficit of Rs.5.47 lakh crore and this is what we mean when we say that it is already 96% of the entire FY18 target. Till September, it was at 91.3% or at Rs.4.99 lakh core. Based on the fact that we have 5 more months to go, it looks like the Govt might overshoot the fiscal deficit target for current year, unless revenue collection, especially from indirect taxes goes up in these months. We have already seen data for Oct where Govt collected the lowest monthly revenue yet from GST, as businesses used input credits to offset their liability.

The fiscal deficit is always expressed as a percentage of the GDP. For FY18, Govt has set itself a target of bringing the fiscal deficit to 3.2% of the GDP and for FY17, it was at 3.5%.  

Break-up of revenue (Rs.7,67327 crore):

Tax Revenues (Net to Centre), Rs. 95,151 crore

Non-Tax Revenues and Rs.38,559 crore

Recovery of Loans Rs. 8,394 crore

Disinvestment of PSUs Rs. 30,165 crore

Break-up of expenditure (Rs. 12,92,648 crore):

Revenue Account Rs.11,29,853 crore 

 Capital Account Rs.1,62,795 crore 

The Govt now has no alternative but to increase its revenue collection and maybe speed up the divestment process. Remember, on the expenditure front, there is still the bank recapitalization to contend with though most of it is through bonds. Then there is spend on Bharatmala too.

The bottomline on fiscal deficit – as of now, it seems like there will be a slippage but if it is coming at the cost of growth, it is fully worth it!

And the second big story – Q2FY18 GDP.

This was a very crucial number as it would show whether or not GST had stabilized as it had come into effect from 1^st July. In Q1, the GDP grew slowest in last 13 quarters because of major liquidation of inventory ahead of GST. But during the past three months, the IIP numbers have not been too bad and the corporate performance has also been much better. Automobile sales have been picking up and we do see companies announcing receipt of new orders. So things are indeed on the move as far as manufacturing is concerned though agriculture remains a worry as the output of kharif has been low.

The numbers as expected did not disappoint. GDP came in at 6.3% v/s 5.7% (QoQ) while GVA (which is GDP – tax) came in at 6.1% v/s 5.6% (QoQ).

And manufacturing did do well, coming in at 7% v/s 1.2% (QoQ) and 7.7% (YoY). Agriculture does show the pressure at 1.7% v/s 2.3% (QoQ).

This means that we now have a very tall task ahead in second half of FY18. Apart from keeping a tight leash on expenditure and increasing revenue, it means that there is really not much room left for fiscal stimulus for growth. It also means that GDP for entire year, based on this data, will not be more than 6.5%.The onus really lay entirely on India Inc to increase investment spend and hope that demand also shows sign of picking up. What we need now is more of demand increase and less of spend.

What we are also seeing in these numbers is that non-agri and non-public sector have shown a pickup in growth and this, to a large is an indication that the economy is stabilizing, leaving behind the demon of demonetization and GST.

So what happens to the markets tomorrow? The overhang of these two major numbers will remain as these are precisely the concerns which S&P had mentioned while maintaining the status quo on ratings. But the fact that the growth has bounced back will keep the cheer going. We will now look, like always towards RBI to reduce rates. And if that does not happen, the elections results on 18^th December will set the mood.