Daily Macro: India: Big Shortfall in Tax Collections, but Fiscal Deficit Likely to Be Contained and more

In this briefing:

1. India: Big Shortfall in Tax Collections, but Fiscal Deficit Likely to Be Contained
2. FLASH: UK PMI Builds on Inventories in Dec-18
3. Are US Stocks A Buy Yet?

1. India: Big Shortfall in Tax Collections, but Fiscal Deficit Likely to Be Contained

Tax revenues in India are running sharply lower than budget estimate. At current run rate, tax revenues would miss the budget estimate by almost US$19bn or 0.7% of GDP. This short-fall is almost entirely due to weaker GST revenues. Direct tax revenues are running broadly inline with the estimate suggesting the economy is doing fine. This short-fall however will not result in a material widening of the fiscal deficit. The government has been remarkably conservative in spending so far with expenditure growth running well below budget estimate. Non-tax revenues are also running ahead of full year estimate. This coupled with higher small savings collections will mean that Government borrowings will be lower than budget estimate even if the fiscal deficit is modestly higher and that will be a relief to the bond market. However, the quality of deficit is worsening with the government resorting to even more questionable routes (the PFC-REC transaction is a case in point) to achieve its disinvestment target. Additionally, it has started to resort to off-balance sheet financing with the loan to the ailing Air India from the NSSF. The numerical focus on fiscal deficit is resulting in wrong precedents being set and government finances becoming more opaque.

2. FLASH: UK PMI Builds on Inventories in Dec-18

• The UK’s manufacturing PMI increased by 0.6-points to 54.2 in Dec-18, contrary to Consensus expectations of a decline towards the weaker euro area readings.
• Inventory accumulation was mostly responsible for the headline strength. Car manufacturing weakness may offset this in Q4, though, and energy looks set to weigh on overall industrial production.

3. Are US Stocks A Buy Yet?

• 5%-like rallies on Wall Street are signs of a bear market not a bull market
• Bull markets require strong liquidity and low risk appetite, neither yet apply
• Risk appetite readings at minus 12.6 are still above the minus 40 criterion for an upturn
• Recent large fall in risk appetite consistent with upcoming economic recession