Following the government's decision to exercise fiscal restraint and stick with the budgeted borrowing plan for 2H17, the central bank also left rates on hold last week. With short-term stimulus measures looking less likely, more policy fine-tuning is likely to continue to provide short-term relief to consumers and businesses. Towards this, fuel excise duties were trimmed last week. This measure will support consumers but entail fiscal costs (~ 0.1% of GDP). Up next, targeting smaller businesses and exporters, the government relaxed a handful of GST restrictions.
Key changes included:
a) lowering of rates on 27 items and 12 services,
b) raising the threshold for the composition scheme to INR 10mn,
c) Taxpayers of upto INR 15mn turnover will be allowed to file returns every quarter instead of monthly, lowering compliance costs,
d) a host of measures for exporters to ease working capital issues, including quicker refunds, introduction of an e-walled payment facility, amongst others. More such instances of policy fine-tuning is likely in the coming weeks. Incoming high-frequency data are, meanwhile, likely to improve.
Aug industrial production due this week is poised to extend gains from Jul's 1.2%. As GST-driven distortions fade, expectations are for festive-driven demand, good monsoon, remonetisation and higher disposable incomes due to wage/ allowances to provide support to the production outlook. FY18 production is nonetheless likely to be around 2%, slower than last year's 4.6%.
More such pockets of improvement are likely in high-frequency data prints, including core industries index, PMIs and auto sales. This should see growth average 6-7% in 2HFY18 after marking a trough in the Jun17 quarter. While this still implies that full-year growth will be at a three-year low, the urgency to adopt pump-priming measures is lower. Longer-out, the onus is on the government to support growth, once the impact of GST uncertainty rolls off. More emphasis will be on recovery of non-performing assets and rebuilding banks' balance sheets. Further rate cuts seem unlikely, with the budget to modestly miss its FY18 targets owing to a revenue shortfall. A less rigid deficit target will also reduce the extent to which spending needs to compressed in 2H FY18.