Vijay Kumar Gaba

Friday, January 10, 2020

Thoughts on FY20 GDP advance estimates - 2

As I indicated yesterday (see here), the advance estimates of FY20 GDP are at significant variance from the estimates used for the setting budget targets in July.

The union budget for FY20 presented in July 2019 has apparently estimated nominal GDP growth at 12.2% for the purposes of calculating deficit and revenue. A 40% lower nominal GDP growth could distort the entire fiscal maths of the government. For example, consider the following:

The union budget estimated the central fiscal deficit for FY20 to be Rs7.04trn or 3.3% of the GDP. This implies a nominal GDP of Rs213.26trn. As per the revised estimates, the nominal GDP for FY20 may be Rs204.42trn only.

As per the latest reports (see here) the actual fiscal deficit of the central government was already at Rs7.53trn (or 3.7% of the advance estimates of GDP) by the end of November 2019.

This implies any one or more of the following three scenarios materializing:

(i) The government tightens its belt during 4QFY20 by drastically cutting public consumption and investments. In this scenario, the GDP growth may slip a further down since in first 3qtrs only higher public expenditure has supported the growth. The government has in fact already provided some indications of cutting back on expenses. (see here)

(ii) The government may relax the fiscal deficit targets and settles for a higher fiscal deficit number. Given the poor GST collections, many states have already requested relaxation in the FRBM targets for FY20. In this case the pressure on bond yields shall remain high and the scope for further easing by RBI may get limited.

(iii) The government is forced to delay payments and refunds thereby further pressurizing the working capital cycle of the businesses.

The full impact of the corporate tax rate cuts announced in August is not known and needs to be adjusted in the revenue assumptions of the budget. Besides, slower growth means poor corporate profitability.

The government had budgeted Rs7.66trn of corporate tax collections which is equivalent to 3.6% of nominal GDP estimated in the budget making. If we assume a pro rata fall, the corporate tax collection (without accounting for the tax rate cut impact) may not be more than Rs7.34trn.

Accounting for corporate tax cut impact, the actual situation may be worse.

The manufacturing and construction sectors have witnessed the worst slowdown. Given that Automobile and Cement are major contributors to the GST collections, the chances are that GST collection shall fall materially short of the budget estimates.

This essentially means much lower transfer of resources to state governments and local bodies as compared to the previous estimates. This shall strain the finances of state government and also the debt rating (...and cost of debt) for the state governments and local bodies

Given the lower denominator, the statistics like Debt to GDP, Market Cap to GDP and Subsidies to GDP look much worse than previous estimates. The target to bring subsidies to 1.3% of GDP by FY21 may also be missed.

Thursday, January 9, 2020

Thoughts on FY20 GDP advance estimates

The Ministry of Statistics and Programme Implementation, Government of India released first advance estimates for the national income for the financial year 2019-20 on Tuesday.

The following are some of the key highlights of the estimates released by the national statistics office:

Real GDP Growth at 4.98% for FY20

As per the estimates, the GDP (at 2011-12 prices) is likely to record a growth of 4.98% during the financial year 2019-20. The real GDP for FY20 is expected to be Rs147.79trn compared to Rs140.78trn.

This is a steep fall from the 6.8% growth recorded in FY19. This in fact would be the slowest rate of GDP growth since 2003 growth rate of 3.84%.

The Gross Value Addition (GVA) during this period is expected to have grown by 4.9%.

...primarily supported by sharp jump in public expenditure

‘Electricity, Gas, Water Supply and Other Utility Services’ (5.4%), ‘Trade, Hotels, Transport, Communication and Services related to Broadcasting’ (5.9%), 'Financial, Real Estate and Professional Services’ (6.4%) and ‘Public Administration, Defence and Other Services’ (9.1%) are the sectors that may perform better than the overall growth rate.

Union Government Expenditure Net of Interest Payments grew by 17.8% during April-November, 2019-20. It is clearly evident that public expenditure (perhaps at the expense of fiscal prudence) has supported the growth, otherwise the real growth could have been much lower.

‘Agriculture, Forestry and Fishing’ (2.8%), ‘Mining and Quarrying’ (1.5%), ‘Manufacturing’ (2%) and ‘Construction’ (3.2%) have performed poorly.

...Manufacturing and Construction growth collapsed

Manufacturing growth has collapsed in FY20 to 2% from 6.9% in FY19. Construction sector growth has fallen to 3.2% from 8.7% recorded last year, despite huge increase in public sector spending.
The Railway freight (Net Tonne Kilometer) has contracted by (-)4.1% during April-November 2019 period. The Passenger traffic also recorded negative growth of (-)0.9%.

Nominal GDP growth even worse, US$5trn by 2024 remains a distant dream

The GDP at current prices is likely to grow at 7.5% during FY20 to Rs202.42trn (US$2.81trn). Assuming no change in the current USD-INR exchange rate of 72, Indian economy would need to grow at 15.5% CAGR for next 4years to become a US$5trn economy.

FY20, per capita income growth at 6.8% vs 10% in FY19

The Per Capita Net National Income during 2019-20 is estimated to be ₹1,35,050 showing a rise of 6.8% as compared to ₹1,26,406 during 2018-19 with the growth rate of 10.0%.

Share of consumption rise, investment contracts

Private consumption expenditure at current prices is expected to rise to 60.2% of GDP from 59.4% in FY19.
Government consumption expenditure at current prices is expected to rise to 11.9% from 11.2% in FY19.
The investment share in GDP is likely to contract to 28.1% from 29.3% in FY19.

Foreign trade contracts

The share of exports in GDP may contract to 18.4% of GDP in FY20 against 19.7% in FY19.
The share of imports in GDP may contract to 21.2% of GDP in FY20 against 23.2% in FY19.

The advance estimates of GDP are in line with my expectations, and may see little more revision on the downside. It is pertinent to note that RBI in its latest Policy statement in December had also revised its GDP growth forecast for FY20 to 5% from 6.1% assessed in in October policy meet.

These estimates are however at significant variance from the estimates used for the setting budget targets in July. The union budget for FY20 presented in July 2019 has apparently estimated nominal GDP growth at 12.2% for the purposes of calculating deficit and revenue. A 40% lower nominal GDP growth could distort the entire fiscal maths of the government.