India: Economic growth tumbles in Q4 FY 2018; annual fiscal deficit hits 3.4% of GDP
In the fourth quarter of fiscal year 2018—which ended in March 2019—GDP grew 5.8% in annual terms, down from the 6.6% expansion recorded in the third quarter, below market analysts’ expectations of 6.3% and marking the slowest expansion since Q1 FY 2013. As a result, the economy expanded 6.8% in FY 2018, down from the 7.2% increase in FY 2017 and representing the lowest annual growth reading since FY 2013.
Private consumption, which represents just over half of GDP, increased 7.3% in Q4 FY 2018, down from 8.1% in Q3. The slowdown in part stemmed from tight financial conditions, which were exacerbated by operating difficulties in the non-banking financial services sector. Government consumption rose a stellar 13.1% in Q4, up from 6.5% in Q4, marking the fastest public spending increase since Q1 FY 2017. On the investment side, fixed investment rose 3.6% in Q4, down from 11.7% and representing the slowest increase since Q2 FY 2015. The sharp moderation in investment growth was partly due to political uncertainty in the run-up to general elections.
Exports of goods and services increased 10.6% in Q4, down from 16.7% in Q3. Imports, meanwhile, rose 13.3% in Q4, down from 14.5%. All told, the external sector detracted 0.7 percentage points from economic growth in Q4, more than the 0.1 percentage-point subtraction in Q3.
Commenting on the slowdown and how the administration of Prime Minister Modi, who was re-elected in the April–May general elections, may respond, analysts at Nomura said:
“We believe the new government will prioritize growth and rural reflation over fiscal prudence, but not sufficiently to counter the growth slowdown. A combination of weak global demand, a struggling monetary policy transmission mechanism and tighter financial conditions owing to the shadow banking crisis suggests growth risks are skewed to the downside.”
The government’s fiscal deficit came in at 3.4% of GDP in FY 2018, which was just on target. With this in mind, ING analysts said: “We expect weak public finances to continue to weigh on investor sentiment this year. Even as the government aims to maintain the deficit at 3.4% of GDP in FY2019-20, the risk of another overshoot remains high as the Modi administration will likely be spending the rest of the year in fulfilling its election promises. Look out for Modi’s newly appointed finance minister, Nirmala Sitharaman, unveiling the final budget in about a month [on 5 July].”
ING analysts also noted that, “the external uncertainty of U.S. President Trump expanding his battlefield of the trade war to India has gone up sharply” as “Trump has just proclaimed India to be out of the developing countries enjoying trade benefits under the generalized system of preference (GSP)”.