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The unexpected downshift in Q1FY20 GD P growth to 5% (our expectation: 5.5 %) was due to a severe slowdown in private consumption. This, along with weak lead indicators for Q2, led us to revise FY20 growth estimate to 6.1% from 6.7%. Nominal GDP growth at 8.0% for Q1FY20 is the slowest since FY10. This, we believe, emanates from: 1) the significant slowdown in private consumption (6.2% yoy vs. 10% in Q4FY19) which is reflected in the decline in auto sales and consumer durables production; 2) uncertainty regarding election and budget; 3) tightness in systemic-level credit; and 4) meaningful decline in corporate earnings and sales growth. Government consumption growth of 12.1% yoy in Q1FY20 is likely to be revised downward as it is not in line with the central government’s revenue spending (CGA) growth of 1.7% yoy.
In our view, Q1 GDP is significantly lower than the RBI’s trajectory, making room for at least another 50bps cut - as the policy decision is now anchored toward narrowing the output gap. Based on this, we expect 10-year G-Sec yields to rally further from the current level of 6.5%. However, we believe that GDP in H2FY20 will be higher on: 1) lower base; 2) eventual pick-up in government consumption spending to ~15% yoy; 3) improvement in credit growth to 13%; and 4) multiplier impact of higher government spending on private consumption growth.
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