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Economy Watch - August 2019

Monitoring India’s macro-fiscal performance

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Growth: real GDP growth decelerated to a five-year low of 6.8% in FY19

A. Growth: GDP growth fell to a 20-quarter low of 5.8% in 4QFY19

  • Real GDP growth decelerated to a 20-quarter low of 5.8% in 4QFY19 from 6.6% in 3QFY19, its fourth consecutive fall since 4QFY18 (Chart 1). Slowdown in the growth of private consumption and investment demand coupled with a negative contribution from net exports led to the slowdown of growth.
  • As per the provisional estimates of National Accounts Statistics (released on 31 May 2019), real GDP growth fell to a five-year low of 6.8% in FY19 from 7.2% in FY18.
  • Reflective of a slowdown in consumption demand, growth in PFCE fell to a five-quarter low of 7.2% in 4QFY19 from 8.1% in 3QFY19.
  • Growth in investment demand, measured by gross fixed capital formation (GFCF), fell to a 14- quarter low of by 3.6% in 4QFY19 after remaining in double digits in the preceding five quarters since Home 3QFY18.
  • Contribution of net exports has remained negative for 10 successive quarters. In 4QFY19, the negative contribution of net exports increased to (-) 0.9%.
  • On the output side, GVA growth slowed to a 20-quarter low of 5.7% in 4QFY19 due to deceleration in the manufacturing, construction and trade, hotels, transport and communication sectors.
  • Growth in manufacturing GVA weakened to a seven-quarter low of 3.1% in 4QFY19 as compared to 6.4% in 3QFY19 (Table 1).
  • Growth in the output of construction sector at 7.1% in 4QFY19 was the lowest in six-quarters while that in trade, hotels, transport and communication sector was at a 17-quarter low of 6.0%.
  • From a recent peak of 6.5% in 4QFY18, growth in agricultural and allied activities has fallen in successive quarters. In 4QFY19, it contracted by (-) 0.1%, for the first time in 12 quarters as compared to a growth of 2.8% in 3QFY19.
  • The sectors which showed relatively higher growth during 4QFY19 include financial, real estate and professional services (9.5%) and public administration and defense services (10.7%).

Chart 1: GDP growth (y-o-y, %)

Source: MoSPI, GoI

B. IIP Growth: improved to a six-month high of 3.4% in April 2019

  • IIP growth improved to a six-month high of 3.4% (y-o-y) in April 2019 from 0.4% (revised) in March 2019 led by a broad-based recovery across all sub sectors (Chart 2).
  • Manufacturing sector output (accounting for 77.6% of overall IIP) grew by 2.8% (y-o-y) in April 2019, its fastest in six-months, relative to 0.4% (revised) in March 2019. Both electricity and mining sectors posted a higher growth of 6.0% and 5.1%, respectively in April 2019 (Table A1 in Data appendix).
  • Growth in the output of the capital goods industry, an indicator of investment activity, turned positive for the first time in four months. It increased by 2.5% (y-o-y) in April 2019 as compared to a contraction of (-) 8.4% in March 2019. Growth in the output of consumer durables recovered to 2.4% in April 2019 from (-) 3.1% in March 2019 while that of non-durables increased to a four-month high of 5.2% in April 2019 from 1.0% in March 2019.
  • Growth in the output of eight core infrastructure industries fell to 2.6% (y-o-y) in April 2019 from 4.9% (revised) in March 2019. This was largely on account of deceleration in the output growth of sub-industries including steel (1.5%), coal (2.8%) and cement (0.8%) and a sharp contraction in the output of crude oil ((-) 6.9%) in April 2019.

Chart 2: IIP growth and PMI

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Source: Office of the Economic Adviser, Ministry of Commerce and Industry, and IHS Markit.

IIP growth increased to a six-month high of 3.4% in April 2019 led by a broad-based improvement across all sub sectors. However, a recovery would only be reflected in a sustained increase in IIP.

C. PMI: signaled a slight pickup in manufacturing but a further slowdown in services in May 2019

  • Headline manufacturing PMI (seasonally adjusted (sa)) increased to 52.7 in May 2019 from 51.8 in April 2019, which was an eight-month low (Chart 2). The improvement was led by expansion in new export orders, output and total sales in consumer goods relative to intermediate and capital goods.
  • PMI services fell for the third consecutive month to a 12-month low of 50.2 in May 2019 from 52 in April 2019.
  • The composite PMI Output Index (sa) remained unchanged at 51.7 in May 2019 relative to April 2019 as the slight pickup in manufacturing was offset by a slower expansion in services.

In May 2019, manufacturing PMI improved slightly to 52.7 but services PMI fell to 50.2, its slowest pace of expansion in 12 months. As a result, the composite PMI Output Index remained unchanged at 51.7 during the month.

Inflation: CPI inflation remained stable at a low rate of 3.0% in May 2019

CPI inflation remained subdued at 3.0% (y-o-y) in May 2019, the same level observed in April 2019, (Chart 3). However, core CPI inflation slowed further to a 23-month low of 4.0%.

    Core CPI inflation1 moderated for the third consecutive month to a 23-month low of 4.0% in May 2019 from 4.4% in April 2019.
  • Inflation in transportation and communication services eased for the seventh successive month to a 33-month low of 1.6% in May 2019 from 2.5% in April 2019, partly due to base effect. The fall was driven by an increase in the pace of contraction in petrol prices to (-) 5.9% from (-) 3.0% over the same period.
  • Consumer food prices grew marginally by 1.8% in May 2019 as compared to 1.1% in April 2019. It had earlier turned positive at 0.3% in March 2019 after contracting for nine successive months. The increase was driven by a pick up in vegetable prices, which rose to 5.5% in May 2019 from 2.9% in April 2019.
  • Fuel and light-based inflation declined marginally to 2.5% in May 2019 from a four-month high of 2.6% in April 2019.
  • Housing-based inflation decelerated for the 11th successive month to a six-year low of 3.1% in May 2019 from 3.4% in April 2019, mainly due to base effect.

Chart 3: Inflation (y-o-y, %)

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Source: MoSPI, Office of the Economic Adviser, Government of India (GoI)

In May 2019, core CPI inflation eased to a 23-month low of 4.0% and core WPI inflation eased to a 29- month low of 1.2% from their respective levels of 4.4% and 1.9% in April 2019.

WPI inflation eased to a 22-month low of 2.5% in May 2019 from 3.1% in April 2019 (Chart 2) driven by a fall in inflation in fuel and power, vegetables and manufactured basic metals.

  • The pace of contraction in crude price increased to (-) 7.8% in May 2019 from (-) 2.5% in April 2019. This was also reflected in the easing of fuel and power-based inflation to a 31-month low of 1.0% in May 2019 from 3.8% in April 2019. The fall was driven by moderation in inflation in mineral oils which include petrol,diesel, naphtha and furnace oil, to 3.0% in May 2019 from 5.8% in April 2019.
  • Inflation in vegetables although continued to remain elevated at 33.2% in May 2019, was lower as compared to 40.6% in April 2019. However, consumer food price index based inflation increased marginally to 5.1% from 4.9% over the same period due to an increase in inflation in manufactured food products.
  • Inflation in manufactured products moderated to a 31-month low of 1.3% in May 2019 from 1.7% in April 2019 due to a contraction of (-) 2.2% in the prices of manufactured basic metals.
  • WPI core inflation eased further to a 29-month low of 1.2% in May 2019 from 1.9% in April 2019.

1Core CPI inflation is measured in different ways by different organizations/agencies. Here, it has been calculated by excluding food, and fuel and light from the overall index.

Fiscal performance: center met the fiscal deficit target of 3.4% of GDP in FY19

A. Tax and non-tax revenues

  • As per the Comptroller General of Accounts (CGA), growth in gross central taxes in FY19 fell to 8.4% as compared to 11.8% in FY18 and 17.9% in FY17 (Chart 4).
  • Gross taxes stood at 92.5% of the FY19 revised target. The percentage shortfall in gross taxes relative to the FY19 revised estimate was 7.5%.
  • Growth in direct tax revenues was 14.9% in FY19, lower than 18.6% in FY18. Direct taxes stood at 93.8% of the FY19 revised estimate. The shortfall in direct taxes was INR74,774 crores, which was largely due to an underperformance in personal income taxes.
  • Growth in corporate income taxes was 16.2% in FY19 as compared to 17.8% in FY18. Growth in personal income taxes was at 13.1% in FY19 as compared to 19.9% in FY18. The shortfall in personal income taxes relative to FY19 revised estimate was INR67,346 crores.
  • Growth in indirect taxes (comprising union excise duties, service tax, customs duty#, taxes of the UTs, CGST, UTGST, IGST* and GST compensation cess) was low at 1.6% in FY19 as compared to 5.9% in FY18 and 22.9% in FY17. The shortfall in indirect taxes relative to the FY19 revised estimate was INR93,198 crores.
  • The annual buoyancies of both direct and indirect taxes fell in FY19 relative to FY17 and FY18. Direct tax buoyancy in FY19 was at 1.1 as compared to 1.6 in FY18. Buoyancy of indirect taxes fell to 0.4 in FY19 as compared to 1.8 in FY17.
  • Given the underperformance of central taxes, the base numbers for the FY20 budget have shifted down. If the interim budget tax revenue targets are to be met, it might call for a significantly higher growth and buoyancy compared to recent years.

Chart 4: Growth in central tax revenues (% annual)

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Source: Monthly Accounts, Controller General of Accounts (CGA), Government of India
Note: Direct taxes include personal income tax and corporation tax, and indirect taxes include union excise duties, service tax, taxes of UTs (other taxes), customs duty, CGST, UTGST, IGST and GST compensation cess from July 2017 onwards; *IGST revenues are subject to final settlement; #Collections under customs for July 2017 also include INR21,377 crores on account of IGST on import/exports and compensation cess on imports/exports of INR609 crores for 2017-18.

IAs per the CGA, growth in center’s gross taxes fell to 8.4% in FY19 as compared to 11.8% in FY18. The annual buoyancies for direct and indirect taxes have fallen in FY19 relative to FY17 and FY18.

  • The center’s non-tax revenues grew by 27.9% in FY19. Non-tax revenues in FY19 stood at 100.4% of the annual revised target.
  • According to the Department of Disinvestment, the disinvestment proceeds up to 28 March 2019 stood at INR84,972.16 crores, indicating that the FY19 annual revised target at INR80,000 crores has been met. Going forward, the central government may prioritize privatization of loss-making central public-sector undertakings.

B. Expenditures: revenue and capital

  • Center’s total expenditure in FY19 grew by 7.9% as compared to 8.5% in FY18 (Chart 5). Both revenue as well as capital expenditures were squeezed in FY19, leading to a shortfall of INR1,45,813 crores in total expenditure relative to FY19 revised estimate.
  • Growth in revenue expenditure was 6.9% in FY19 as compared to 11.5% in FY18. Revenue expenditures were cut by an amount of INR1,32,149 crores. Of this, INR69,141 crores were on account of underpayment for major subsidies (food, fertilizer and petroleum). In April 2019, the first month of FY20, revenue expenditure stood at 9.2% of the FY20 interim budget estimate.
  • Center’s capital expenditure showed a growth of 14.9% in FY19 due to base effect as capital expenditures contracted by (-) 9.2% in FY18. Capital expenditure was squeezed by INR13,664 crores relative to FY19 revised estimate. In April 2019, capital expenditure stood at 9.1% of the FY20 interim budget estimate.

Chart 5: Growth in central government expenditure (% annual)

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Source (basic data): Monthly Accounts, Controller General of Accounts (CGA), Government of India

Center’s total expenditure grew by 7.9% in FY19 as compared to 8.5% in FY18. Total expenditure cut in FY19 relative to RE amounted to INR1,45,813 crores.

C. Fiscal imbalance

  • The central government achieved its fiscal deficit target of 3.4% of GDP, in line with the FY19 revised estimate (Chart 6). However, given the underperformance of taxes, substantial expenditure cuts, particularly with respect to revenue expenditure were undertaken to achieve the FY19 target. In April 2019, fiscal deficit stood at 22.3% of the FY20 interim budget estimate.
  • Center’s revenue deficit was at 2.3% of GDP, 0.1% point higher than the FY19 revised estimate. However, it was lower as compared to 2.6% of GDP in FY18. In April 2019, revenue deficit stood at 27.5% of the FY20 interim budget estimate.

Chart 6: Fiscal and revenue deficit as percentage of nominal GDP

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Source: Monthly Accounts, Controller General of Accounts (CGA), Government of India, MoSPI and CSO.

Center’s fiscal deficit in FY19 was 3.4% of GDP as envisaged in the revised estimate. However, substantial expenditure cuts were undertaken in order to achieve this target.

India in a comparative perspective: status and prospects

Gross national savings as % of GDP
Saving rate in AEs is expected to increase slightly while it is expected to fall in EMDEs during the forecast period.

  • Gross national savings as a percentage of GDP (saving rate) for EMDEs as a group has been consistently higher than that of AEs since 2000 until 2018. This trend is expected to continue during the forecast period.
  • However, savings rate in AEs is expected to marginally increase from 22.7% in 2018 to 23.1% by 2024, while in EMDEs, it is expected to fall from nearly 33% in 2018 to 31% by 2024.
  • Amongst selected major AEs, the highest saving rate is that of Japan followed by the Euro area and the US. In all three cases, saving rate is expected to broadly increase during the forecast period from their levels in 2018.
  • Amongst selected EMDEs, saving rate of China has been the highest. Broad trends during 2018 to 2024 indicate that saving rate is expected to increase in Brazil, fall in Russia and more sharply in China, and remain stable in a narrow range of 29% to 29.8% in India.

Table 2: Gross national savings (% of GDP)

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Source (basic data): World Economic Outlook, IMF, April 2019
Note: forecasted for 2019 and beyond;
data pertains to fiscal year. For example, data for 2019 pertains to the year FY20

Total investment as % of GDP
Although investment rate in EMDEs is forecasted to remain higher than that in AEs, it is expected to fall during the forecast period.

  • Investment as percentage of GDP (investment rate) shows similar trends as savings across selected major advanced and emerging market economies.
  • Investment rate in AEs as a group is expected to increase marginally from 21.9% in 2018 to 22.6% by 2024.
  • Investment rate in the US is projected to remain between 21% to 22% during the forecast period. In Japan, the investment rate is expected to increase from 24.4% in 2018 to 25.2% in 2024.
  • Among the EMDEs, investment in China is projected to decline from 44.2% in 2018 to 40% by 2024. Investment rates in China witnessed their peak levels during 2010 to 2013 with the average investment rate at 47.6% during this period.
  • In India, investment rate is expected to gradually increase from 31.6% in 2018 to 32.3% by 2024. This would still be much lower as compared to the high investment rates of close to 39% during 2011 and 2012.

Table 3: Total investment (% of GDP)

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Source (basic data): World Economic Outlook, IMF, April 2019
Note: forecasted for 2019 and beyond;
*data pertains to fiscal year. For example, data for 2019 pertains to the year FY20.
-ve indicates deficit and +ve indicates surplus

In focus: recent fiscal trends and FY20 Union Budget prospects

The context

The FY19 GDP growth fell to 6.8% from a peak of 8.2% in FY17. As shown in Chart 7, the quarterly growth profile indicates a sharper fall in the recent quarters. Real GDP growth in 4QFY19 fell to 5.8% from 8% in 1QFY19. The RBI, in its 6 June 2019 monetary policy review, has lowered its FY20 GDP growth projection to 7% from an earlier estimate of 7.2%. The recently released World Bank Global Economic Prospects2 has lowered the global growth forecast by 0.3% points to 2.6% for 2019, although India’s growth forecasts have been retained at 7.5% for the next three years. In order to reach and sustain the growth level of 7.5%, the domestic economy needs to be stimulated in the short run and the saving rate needs to be uplifted in the medium to long run.

Chart 7: Real GDP growth

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Source (basic data): MoSPI

The CPI inflation averaged 3.4% in FY19, which is well below the mean CPI inflation target at 4% as per the MPC. The RBI has estimated the CPI inflation at 3.3% for FY20. This below-target inflation level has facilitated, three consecutive repo rate reductions of 25 basis points each during 2019, although the transmission of the rate reductions has been only fractional. It is estimated that the transmission of the cumulated reduction of 50 basis points in the repo rate in February 2019 and April 2019 was only 21 basis points3. There may be a case for supplementing monetary stimulus by a fiscal stimulus but the options may be limited.

In order to consider the fiscal policy options, we have reviewed fiscal trends over the last 10 years, covering two five-year periods from FY10 to FY14 under the UPA regime and from FY15 to FY19 under the NDA regime. These periods are referred to as Period 1 and Period 2, respectively, in the subsequent analysis.

Revenue trends and prospects
In spite of major tax reforms including the implementation of GST, center’s gross tax revenue as percentage of GDP increased only by a margin of 0.6% points, averaging 10.8% in period 2 as compared to 10.2% in period 1. However, this increase did not translate into an increase in the center’s net tax revenue which fell by a margin of (-) 0.2% points (Table 4) of GDP during the same period. This may be attributed to the recommendations of the 14th Finance Commission, implemented in 2015-16, which increased the share of states in central taxes to 42% from 32%, that is, by a margin of 10% points. Center’s non-tax revenue also fell by a margin of (-) 0.3% points relative to GDP in period 2. Together center’s net revenue receipts fell by a margin of (-) 0.5% points. It is creditable therefore that, in spite of the fall in revenue receipts relative to GDP, the center was able to reduce, in successive years, its fiscal deficit level from 4.5% in FY14 to 3.4% in FY19, that is by a margin of (-) 1.1% points, comparing the last years of period 1 and period 2, respectively. This reduction was 1.7% point of GDP, if the annual averages of the two periods are compared. With a falling level of borrowing along with a lower level of revenue receipts, the burden of adjustment was borne by expenditures that had to compressed. This is discussed in detail in the next section.

Table 4: Center’s receipts (% of GDP)

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Source (basic data): Union budget documents, CGA and MoSPI; *basic data is sourced from CGA

Taxes constitute the major part of center’s revenue receipts. Personal income tax (PIT) and corporate income tax (CIT) are the main constituents of direct taxes while GST, non-GST domestic indirect taxes and customs are the main central indirect taxes. If we compare the period averages, the CIT revenue to GDP ratio was 3.3% in period 2, lower by a margin of (-) 0.4% points as compared to period 1 (Table 5). This could be attributed, among other reasons, to the rate reduction in the CIT rates which the government introduced in phases during FY17 to FY19. In the case of PIT, the period 2 average is marginally higher by 0.3% points of GDP compared to the period 1 average. In case of indirect taxes, period 2 average shows an increase of 0.7% points compared to that of period 1. However, most of this increase occurred in the pre-GST era when the revenue from union excise duties increased sharply to 2.5% of GDP in FY17 from 1.5% of GDP in FY15. This may be due to the lowering of global crude prices in these years enabling the central government to increase the specific component of excise duties on petroleum products. It may therefore be better to look at the change in tax GDP ratios by making a comparison of the last year of the two regimes. While comparing FY19 to FY14, we notice that revenues from indirect taxes increased by 0.5% points of GDP.

Table 5: Tax revenues (% of GDP)

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Source (basic data): Union Budget various years, CGA and MoSPI

In the case of disinvestment, there is a marginal increase of 0.10% points of GDP with the period 2 average being 0.34% of GDP compared to 0.24% of GDP in period 1 (Table 7).

Table 6: Trend in non-tax revenues

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Source (basic data): Union budget documents, CGA and MoSPI;

In the case of disinvestment, there is a marginal increase of 0.10% points of GDP with the period 2 average being 0.34% of GDP compared to 0.24% of GDP in period 1 (Table 7).

Table 7: Disinvestment performance: comparison over the recent periods

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Source (basic data): Union Budget various years, CGA and MoSPI

Expenditure trends and prospects
In the context of the fall in center’s net revenue receipts in period 2 compared to period 1, fiscal deficit was successfully brought down by reducing the revenue expenditure by a margin of (-) 2.1% of GDP in period 2 compared to period 1 on an average. The expenditure reduction in period 2 involved large reductions amounting to (-) 0.8 % points of GDP in social services and (-) 1.3% points in economic services4. A part of the reduction in economic services was due to the reduction in expenditure on subsidies, which were lower by a margin of (-) 0.7% points of GDP in period 2. Also, on the capital expenditure side, there was a marginal fall of (-) 0.1% points of GDP in period 2 compared to period 1. Together, this adds to a reduction of (-) 2.2% points of GDP in total expenditure while comparing the average of the two periods.

Table 8: Center’s expenditures as % of GDP

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Source (basic data): Union budget documents, CGA and MoSPI; *basic data is sourced from CGA;
Note: red colored cells have data as per FY19 RE and nominal GDP as used for FY19 RE. Period 2 average and % point difference are based on these numbers as CGA does not provide data on pensions and total subsidies.

As shown in Table 9, all major subsidies fell: petroleum subsidies by a margin of (-) 0.4% points, food subsidies by a margin of (-) 0.1% points and fertilizer subsidies by a margin of (-) 0.3% points (Table 9).

Table 9: Explicit subsidies

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Source (basic data): Union budget documents, CGA and MoSPI; *basic data is sourced from CGA;

In the case of food subsidies, some of the subsidies may have been shifted out of the budget, but may be financed through public sector entities such as Food Corporation of India. However, the fall in subsidies on petroleum and fertilizers are largely related to rationalization of these subsidies including direct benefittransfers (DBTs) and reduction in global crude prices. Further, the central government has been rolling over these subsidies to subsequent years5, which is a practice on which the Comptroller and Auditor General of India (CAG) has often commented in its reports6. Some instances are indicated below.
a. “Government has adopted off-budget means of financing the subsidy arrears, thereby deferring the paymentin the relevant financial year and in the process also incurring additional cost by way of interest payments”
b. “When the budget allocation of a financial year to Ministry of Consumer Affairs, Food and Public Distributionis not sufficient to clear all the dues of food subsidies bill raised by FCI, the dues of such subsidies are carried over to next financial year”

Fiscal imbalance: managing debt and deficit
A major achievement of the government during period 2 is the reduction of fiscal deficit by a margin of 1.1% points of GDP, comparing the last year of the two periods. Alongside, the revenue deficit to GDP ratio also fell by a margin of 1.5% points of GDP. In period 1 on average, revenue deficit amounted to 74% of fiscal deficit. This ratio has been brought down to 68% in period 2, thus reflecting an improvement in the quality of fiscal deficit.

Table 10: Deficit and Debt Indicators

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Union budget documents, CGA and MoSPI; *basic data is sourced from CGA;
# debt for FY19 has been derived by adding the annual fiscal deficit of FY19 as per the CGA to the outstanding liabilities at the end of FY18 as per Union budget actuals

Outstanding liabilities of the central government also fell. Comparing the last year of the two periods, these fell from a level of 50.47% of GDP in FY14 to 46.71% in FY19, witnessing a fall of 3.76% points of GDP (Table 10).

Budget prospects: scope for fiscal stimulus
A major policy decision that has to be taken in the preparation of the final full year budget of FY20 relates to the extent to which the economy can be fiscally stimulated. The interim budget had envisaged a fiscal deficit level relative to GDP of 3.4% for FY20. However, given the shortfall in the actual revenues for FY19 relative to the revised estimates as per the interim budget, and the likely increase in expenditures for FY20 so as to accommodate the government’s electoral promises, achieving a fiscal deficit of 3.4% of GDP would be a challenge. Additional stimulus is even more difficult without breaching the fiscal consolidation path. The government may be able to resort to some windfall gains if the Jalan committee recommends the release of excess reserves from the RBI, based on a review of RBI’s reserves to liabilities ratio as compared to the corresponding global norms. These funds would add to government’s non-tax revenues and would come in handy to contain the FY20 fiscal deficit while providing scope for some additional expenditure over and above the IBE. The support to India’s farmers through a cash subsidy would be entirely on revenue account. While themanifesto promises a much larger amount of infrastructure investment, the government may take only afraction of this amount on the capital account of the budget, leaving the rest to be financed by extra budget and off-budget resources in line with the practice followed in the recent budgets. In regard to center’s commitment for expenditures, relatively larger volumes are involved in funding infrastructure. This could support demandand thereby growth.

Table 11: Key budgetary indicators

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UUnion Budget various issues, CGA and MoSPI
*IBE – Interim Budget Estimates

In Table 11, FY19 budget actuals as per CGA are compared with the IBE and implied growth rates are estimated. Two numbers are clearly noticeable. The first one pertains to the center’s net tax revenues where a growth rate of 29.5% is implied with respect to the FY19 actuals. This is much higher than the annual growth rates observed in recent years. The second number pertains to revenue expenditure. Here, the implied growth in FY20 (IBE) is21.9% relative to 6.9% in FY19. This also is not in alignment with the revenue expenditure growth rates in recentyears. Consequently, both center’s net tax revenues and its revenue expenditure estimates for FY20 may haveto be revised downwards. Even while revising the revenue expenditure downwards, the commitments in relationto support to famers in the PM-Kisan Samman Nidhi and other post election commitments may have to beaccomodated. This may require downward adjustments in other components of revenue expenditure includingsubsidies which may be rolled over or shifted to some public sector entity like FCI. On the non-tax revenue side,the Jalan committee report may not be submitted to the government prior to the preparation of the budget. Anyadditional dividend that RBI may release on the basis of the recommendations of this committee wouldtherefore, not be available although some part of it may be incorporated in the upcoming budget in anticipation.Any scope for increasing the fiscal deficit above the level of 3.4% of GDP may be marginal.

2World Bank’s Global Economic Prospects was released on 4 June 2019

3Second Bi-Monthly Monetary Policy Statement for 2019-20 (released on 6 June 2019)

4 In computing period averages for revenue expenditure on social and economic services, revised estimate for FY19 has been used because CGA does not provide data for these heads.

5 CAG. (2015). Union government: accounts of the union government (p. 14). New Delhi: Government of India

6Report of the Comptroller and Auditor General of India on Compliance of the Fiscal Responsibility and Budget Management Act, 2003 for the year 2016-17.

Money and finance: RBI lowered the repo rate by another 25 basis points in June 2019

A. Monetary sector

Monetary policy
  • In its second bi-monthly monetary policy review (2019-20), held on 6 June 2019, the RBI lowered the policyrepo-rate by 25 basis points to 5.75%. A benign CPI inflation rate has provided the RBI the necessary space for stimulating domestic economy, with three consecutive repo rate reductions of 25 basis points each during this calendar year.
  • In RBI’s assessment, CPI inflation is expected to average 3.3% during FY20. The near-term trajectory of CPI inflation projections has been shaped by the following factors: (i) sharper than expected hike in vegetable prices coupled with a broad-based pick-up in prices of several food items, imparting an upward pressure on inflation; (ii) significant weakening of domestic and external demand leading to a decline in core CPI inflation, imparting downward bias; (iii) the impact of volatile crude prices which has remained muted owing to incomplete pass-through; and (iv) households’ inflation expectation which continued to moderate.

Chart 8: Growth in broad money and movements in repo rate

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Source: Database on Indian Economy, RBI.

The RBI lowered the repo rate by 25 basis points to 5.75% in June 2019, thelevel last seen in August 2010. These rate reductions were undertaken tostimulate the domestic economy.

Money stock

  • Growth in broad money stock (M3) fell to 9.6% (y-o-y) in April 2019 from 10.1% in March 2019 (Chart 8).Time deposits, accounting for nearly 76% of M3, grew by 8.7% in April 2019, its slowest pace in five-months, as compared to 9.2% in March 2019.
  • Growth in narrow money (M1) also moderated to a five-month low of 12.6% in April, from 13.3% (y-o-y) in March 2019. This was due to a fall in the growth of currency in circulation to 14.5% in April, an 18-month low, from 16.8% in March 2019.
Aggregate credit and deposits

From a recent peak of 15.3% in November 2019, growth in bank credit gradually fell to a four-month low of13.0% (y-o-y) in April 2019. It was at 13.3% in March 2019 (Chart 9).

Chart 9: Growth in credit and deposits

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Source: Database on Indian Economy, RBI.

  • Growth in non-food credit dipped to a seven-month low of 11.9% in April 2019 from 12.3% in March 2019 due to a sustained fall in the growth of credit to services sector.
  • Growth in credit to services sector was at a 13-month low of 16.7% in April 2019, falling from 17.8% in March 2019 while growth in credit to industries (accounting for 34% of non-food credit) and agriculturalsector grew by 6.9% and 7.9%, respectively, in both March 2019 and April 2019.
  • Housing sector credit, a key driver of retail sector credit, continued to post a strong growth of 18.6% in April2019, but was slightly lower than 19.0% in March 2019.
  • Growth in aggregate bank deposits fell to 9.7% in April 2019 from 10.0% in March 2019 due to a slowergrowth in time deposits of residents.

B. Financial sector

Interest rates
  • Banks have retained the interest rates offered on term deposits with a maturity of more than one year forthe sixth consecutive month at 6.9% (average) in May 2019.
  • Commercial banks retained the marginal cost of lending rate (MCLR) at 8.28% (average) in April 2019 andMay 2019. The transmission of policy rates to lending rates continues to be limited.
  • The average yield on 10-year government securities was lower at 7.33% in May 2019 as compared to 7.42%in April 2019. Bond yields were influenced by lower crude oil prices and increased prospects of anotherpolicy rate reduction in June 2019 as CPI inflation has been below the RBI’s mean inflation target rate of 4%.
FDI and FPI
  • As per the provisional data released by the RBI on 11 June 2019, the overall foreign investment inflows (FIIs)fell sharply to US$2.7 billion in April 2019 as compared to US$11.1 billion (revised) in March 2019 (Chart 10) due to portfolio investment outflows.

Chart 10: Net FDI and FPI inflows

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Source: Database on Indian Economy, RBI.

Net FDI inflows were higher at US$4.4billion in April 2019 as compared to US$2.4 billion in March 2019.

  • Net FDI inflows increased to US$4.4 billion in April 2019 from US$2.4 billion (revised) in March 2019. Gross FDI inflows were at US$7.0 billion in April 2019, marginally lower than US$7.1 billion (revised) in March2019.
  • Net FPIs turned negative, registering an outflow of US$1.6 billion in April 2019 as compared to an inflow ofUS$8.7 billion (revised) in March 2019.

Trade and CAB: growth in merchandise exports improved but remained low at 3.9% in May 2019

A. CAB: Current account deficit (CAD) fell to 2.5% of GDP in 3QFY19

  • CAD in 3QFY19 fell to 2.5% GDP from a 21-quarter high of 2.9% in 2QFY19 as net invisibles as a percentageof GDP rose to a three-year high of 4.9% (Table 12). This was due to net services exports climbing to a three-year high of 3.2% of GDP and net income transfers improving to (-) 0.9% of GDP in 3QFY19 from 3.0% and (-) 1.3% of GDP, respectively, in 2QFY19.
  • Goods and services deficit for 4QFY19 is estimated to have narrowed to 2.2% of GDP as compared to 4.2% in 3QFY19.

Table 12: Components of CAB in US$ billion

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Source: Database on Indian Economy, RBI.

Chart 11: CAD

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Source:Databaseon Indian Economy, RBI.

B. Merchandise trade and exchange rate

Growth in exports improved to 3.9% in May 2019 from 0.6% in April 2019. Growth in imports was at 4.3% in May 2019 as compared to 4.5% in April 2019.

  • Merchandise exports growth increased to 3.9% in May 2019 from 0.6% in April 2019 (Chart 12) due to the improvement in exports of engineering goods and gems and jewelry even as oil exports contracted.

Chart 12: Developments in merchandise trade

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Source: Ministry of Commerce and Industry, GoI

  • Growth in exports of engineering goods turned positive at 4.4% in May 2019 from a contraction of (-) 7.4% in April 2019. The pace of contraction in gems and jewelry exports decreased to (-) 7.4% from (-) 13.4% over the same period. Oil exports contracted by (-) 1.4% in May 2019 as compared to a growth of 30.7% in April 2019, partly due to base effect.
  • Growth in exports excluding oil, gold and jewelry turned positive at 7.4% in May 2019 from a contraction of (-) 1.3% in April 2019.
  • Imports growth eased to 4.3% in May 2019 from 4.5% in April 2019, mainly due to a) growth inimports of gold and precious/semi-precious stones slowing down to 13.2%, and b) a contraction of (-) 3.2% in electronic goods imports.
  • Growth in oil imports marginally fell to 8.2% in May 2019 from a five-month high of 9.3% in April 2019.
  • Merchandise trade deficit expanded to an eight-month high of US$15.4 billion in May 2019, marginally higherthan the US$15.3 billion deficit in April 2019. Goods and services trade deficit picked up to a five-month high of US$8.7 billion in April 2019 from US$4.3 billion in March 2019.
  • The Indian Rupee depreciated marginally to INR69.8 per US$ (average) in May 2019 from INR69.4 per US$ in April 2019.

Global growth: OECD projected a broad-based slowdown in global growth in 2019

A. Global growth outlook

  • The OECD (Economic Outlook, May 2019) projected global growth to fall to 3.2% in 2019 from 3.5% in 2018,attributable to a moderation in the growth of trade and investment. The world’s real trade growth is forecasted at 2.1% in 2019, the weakest rate since the global financial crisis. Global growth is expected to remain weak but may recover slightly to 3.4% by 2020.
  • Growth in the US is projected to moderate to 2.8% in 2019 and 2.3% in 2020 as support from fiscal easing fades. Although positive labor market outcomes and supportive financial conditions are likely to support consumption, higher tariffs may constrain the growth of business investment and exports.
  • In the Euro area, growth is expected to remain weak at 1.2% in 2019 and 1.4% in 2020. Policy uncertainty, weakexternal demand and low confidence are likely to weigh on investment and trade growth.
  • Growth in Japan is projected around 0.7% in 2019 and 2020. An increase in social spending and a temporaryboost to public investment are expected to cushion the immediate impact of the scheduled increase in the consumption tax rate in October 2019, but fiscal consolidation efforts are likely to resume in 2020.
  • Growth in China is expected to ease to 6.2% in 2019 and 6% in 2020. Import, investment and credit growth have slowed and trade tensions have led to increased uncertainty. Although, fiscal and monetary policies have been eased to arrest the slowdown, these measures may add to the challenges for deleveraging for corporate sector and aggravate risks to financial stability.
  • In India, growth is expected to improve to 7.2% in 2019 from a low of 6.8% in 2018 supported by an expected fiscal stimulus in the form of income support measures to rural farmers. Growth is projected at 7.4% in 2020.
The OECD projected the global growth to stabilize at low levels of 3.2% in 2019and 3.4% in 2020 due to a moderation in the growth of trade and investment and high policy uncertainty. The slowdown is expected to be broad-based with the growth moderating in almost all economies.

Chart 13: Global growth projections

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Source: OECD Economic Outlook, May 2019
*data pertains to fiscal year

Chart 14: Global crude and coal prices

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Source (basic data): World Bank, Pink Sheet, February 2019

Global energy prices: global crude price fell slightly to US$67/bbl. in May 2019
  • Average global crude price7 fell slightly to US$66.8/bbl. in May 2019 from US$68.6/bbl. in April 2019. Thiscould be due to higher output of the US during the month. Moreover, it is expected that oil demand may grow slower than previously anticipated due to heightened trade tensions.
  • Average global coal price8 declined to a 24-month low of US$75.6/mt. in May 2019 from US$79.6/bbl. in April 2019. The World Bank (Commodity Markets Outlook, April 2019) projected coal prices to partially recover from their current levels and average US$94/mt. in 2019.

7 Simple average of three spot prices, namely, Dated Brent, West Texas Intermediate and Dubai Fateh
8Simple average of Australian and South African coal prices

Index of Aggregate Demand (IAD): grew at a slower pace for the second successive month in April 2019

Indicative of a sustained weakness in demand conditions, growth in IAD moderated for the second successive month to 1.2% in April 2019

  • An IAD has been developed by EY to reflect the monthly combined demand conditions in the agriculture,manufacturing and services sectors. It considers the movements in PMI for manufacturing and services, both measured in non-seasonally adjusted terms, tracing the demand conditions in these sectors. Demand conditions in the agricultural sector have been captured by movements in monthly agricultural credit offtake.
  • The y-o-y growth in the index of aggregate demand fell to 1.2% in April 2019 as compared to 3.2% in March 2019 (Chart 15). Demand conditions in both manufacturing and services sector weakened further in April 2019 while that in agricultural sector remained stable.

Chart 15: Growth in IAD (y-o-y)

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Source (Basic data): IHS Markit PMI, RBI and EY estimates

Table 13: IAD

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**Values here indicate deviation from benchmark value of 50. A positive value indicates expansion in demand while a negative value impliescontraction in demand; PMI for Mfg. and Serv. are non-seasonally adjusted.
Source (Basic data): IHS Markit PMI, RBI and EY estimates.

Capturing macro-fiscal trends: data appendix

Table A1: Industrial growth indicators (annual, quarterly and monthly growth rates, y-o-y)

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Source: Office of the Economic Adviser - Ministry of Commerce and Industry and IHS Markit Economics

Table A2: Inflation indicators (annual, quarterly and monthly growth rates, y-o-y)

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Source: Office of the Economic Adviser, Ministry of Commerce and Industry and MoSPI

Table A3: Fiscal indicators (annual growth rates, cumulated monthly growth rates, y-o-y)

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Source: Monthly Accounts, Controller General of Accounts-Government of India, Union Budget documents
**Includes corporation tax and income tax **includes customs duty, excise duty, service tax, CGST, UTGST, IGST and GST compensation cess.# As a proportion of revised estimates FY20

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Source: Monthly Accounts, Controller General of Accounts-Government of India, Union Budget documents
Note: IGST revenues are subject to final settlement.

Table A4: Monetary and financial indicators (annual, quarterly and monthly growth rates, y-o-y)

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Source: Database on Indian Economy - RBI

Table A5: External trade and global growth

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Source: Database on Indian Economy - RBI, Pink Sheet - World Bank and IMF World Economic Outlook Update, October 2018; *Indicatesprojections as per October 2018 database, **Indicates projections as per January 2019 WEO update.

Table A6: Macroeconomic aggregates (annual and quarterly real growth rates, % change y-o-y)

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Source: National Accounts Statistics, MoSPI
* Growth numbers for FY19 (AE) are calculated over the provisional estimates for FY18 as per the first advance estimates of NAS released by MoSPI on 07 January 2019
# Growth numbers based on the revised estimates of NAS released by MoSPI on 31 January 2019

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Source: National Accounts Statistics, MoSPI
* Growth numbers for FY19 (AE) are calculated over the provisional estimates for FY18 as per the first advance estimates of NAS released byMoSPI on 07 Jan 2019
# Growth numbers based on the revised estimates of NAS released by MoSPI on 31 January 2019

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