Dhananjay writes…-India H1 net tax revenue at 40.1% of BE was seen to be the lowest since FY15. The growth has slowed to 7.5% yoy. The mop up in indirect tax collection have been much lower than expected at 1.9% yoy growth. Now with excise duty cut on petroleum products, we expect even a lower indirect tax collection – however the pace of expenditure strengthened to 13.5% yoy primarily due to stronger revenue expenditure at 13.8%. While capital expenditure slowed to 10%. -overall states expenditure also remained strong this year- with revenue growing at
14% and capital at 17%
Outlook: scope of fiscal slippage
With deficit reaching over 95% of BE and capital spending also being at 54% of BE, there is a limited room to curtail capital spending to meet the fiscal deficit target of 3.3% of GDP. With petroleum excise cut, higher revenue obligations especially from subsidies, expected lower tax collections on economic growth peaking out in Q1, rising cost are all likely to increase the pressure on fiscal deficit. Also the impending state and general elections might compel the governments to retain the reflationary path, notwithstanding the narrowing fiscal headroom. Earlier GoI announced lowers market borrowing for H2FY19 by Rs 700bn, which we believe will rebalanced by higher other
borrowings. With fiscal deficit likely to exceed the BE, we believe that the overall borrowing will be somewhat higher.
India G Sec yield has softened in recent days (10 year at 7.87%); this we believe is largely on the back of slower credit demand induced by the NBFC turmoil. we think this may be a temporary.
My two cents…. Market is underestimating the extent of Fiscal slippage and I had already written before that Household consumption is also slowing down simultaneously http://worldoutofwhack.com/2018/10/24/india-sales-managers-index-suggest-slowing-growth/ . Govt is caught in a catch 22 situation because slowing consumption in absence of capex will weigh down on revenue collection and there is not enough space left in Fiscal to do extra spending. Expect slowing growth with stubborn inflation