A crane stands between steel construction beams on a commercial and residential construction site. (Photographer: Simon Dawson/Bloomberg)

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.

The upswing was strongly supported by low base with the government spending and agriculture doing better than expected although momentum in private sector gross value added (GVA ex agri and public administration) was weak.
Kapil Gupta, Edelweiss Financial Services

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.

Construction has been driven essentially by public infrastructure spending. If that’s the case then you may have a situation where the strong growth in fixed capital formation is essentially a public investments driven figure. That’s necessarily not very sustainable.
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.

The question is whether this scorching pace of government expenditure can sustain if GST tax collections do not pick up, given the Center’s fiscal consolidation targets for 2018-19 and the fact that state-deficits have widened meaningfully in recent years and, at some point, will need to stabilise.   
Sajjid Chinoy, Chief India Economist, JPMorgan

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.

We continue to believe the best in growth is behind us—slowing government expenditure growth (state + centre, FY19 budget estimates), ongoing  weakness in farm prices, a reversal in the trend of lending rates and a drain on income from higher oil are headwinds.
Neelkanth Mishra, Credit Suisse
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