3 obvious trends in India's fiscal numbers

Will there be recovery soon?

According to Nomura, a number of activity, survey and fiscal data have been released in the last week. They highlighted three key trends:

Core inflation is likely to moderate: The output price index of India‟s manufacturing PMI fell sharply to a near two-year low of 52.9 in October from 56.8 in September.

Since this is a good lead indicator of WPI core inflation (manufactured ex-food), it suggests that core inflation should moderate from November (data out mid-December).

No clear growth recovery in sight: The manufacturing and services headline PMI numbers were stable in October, but their output components fell further. There is no strong correlation between the quarterly PMIs and quarterly GDP, but the longer-term trends are similar.

As such, demand remains subdued and supply-side bottlenecks, especially power shortages, remains a constraint.

Government belt-tightening is on: Government spending rose by a paltry 1.4% y-o-y in September compared to 20% in the April-August period.

Spending likely remained under control in October (as suggested by rising government cash balances, based on our estimates). This is unsurprising as tax revenues are likely to be much lower than budget estimates and the only levers available to the government are its asset sales and to contain its spending.

Our FY13 (year ending March 2013) fiscal deficit estimate is 5.8% of GDP against the government‟s revised target of 5.3%. If this crash diet continues, the fiscal deficit could be marginally lower than our estimates, but we still do not see it falling below 5.5% of GDP.