Can Government Support To Growth Continue In FY19?

Government spending continued to support the Indian economy in 2017-18, leaving economists questioning whether growth will weaken in the current year if the government’s finances force it to cut back large expenditures.

National income data released on Thursday showed that economy grew at 7.7 percent in the fourth quarter and 6.7 percent for the full year 2017-18. Economists noted that India benefited from significant support from government spending.

For instance, the expenditure side data showed that government consumption expenditure rose by nearly 17 percent in the fourth quarter. In the corresponding quarter of last year, government spending had grown by 23 percent. For the full year, government consumption expenditure rose 10.9 percent compared to 12.2 percent last year.

“...all the heavy lifting was done by the public sector,” wrote Sajjid Chinoy, chief India economist at JPMorgan in a note on Friday.

In terms of sectors, segments like public administration, which is a proxy for government spending, have remained strong. In the fourth quarter, this segment saw growth of 13.3 percent compared to 16 percent in the same quarter last year. For the full fiscal year, growth in this segment stood at 10 percent - the same as last year.

Private consumption expenditure grew 6.6 percent in FY18 compared to 7.3 percent last year. The year was marked by an upswing in investment, as measured by gross fixed capital formation. This segment saw growth of 9.6 percent during the financial year compared to 4.7 percent last year.

However, even that pick up in investments may be supported by government spending across sectors like construction, said Pronab Sen, former chief statistician of India.

With government support remaining crucial to growth, economists question whether the recovery will sustain in FY19. The government’s finances may be stretched this year if it cuts excise duties on petroleum products due to rising retail prices. It may also need to provide more for subsidies on products like kerosene and LPG.

In addition, there is still uncertainty over whether GST collections have picked up to the extent needed.

Credit Suisse shared that view and noted that government expenditure as a percentage of GDP is now the highest in nearly five years. Despite positive commentary from firms, private consumption growth is moderate, the brokerage house said. It added that with agricultural growth still struggling (due to weak prices), consumption may not strengthen meaningfully.