- India's Q1 real GDP growth was strong at 7.8% year-on-year
- Nominal GDP growth at 10.3% fell below government fiscal assumptions
- Non-defence government capex may decline 10% in the rest of FY27
India's economic outlook remains broadly comfortable, but weaker-than-expected nominal GDP growth could squeeze the government's fiscal headroom, according to Jefferies' equity strategy note by Mahesh Nandurkar. In its note, Jefferies said the June quarter showed resilient economic performance, supported by an uptick in capital expenditure. Real GDP growth came in at 7.8% year-on-year, reinforcing the strength of underlying activity.
The concern, however, is the gap between real and nominal growth. Nominal GDP growth was 10.3%, below the level assumed in the government's fiscal calculations. Jefferies said this creates some pressure on the fiscal headroom, particularly if nominal growth remains softer than expected.
Non-Defence Capex Could Face Pressure
Jefferies estimates that non-defence government capex could decline by around 10% during the remainder of FY27, even with revenue collections broadly tracking expectations.
The brokerage said the lower nominal GDP outlook could make it harder for the government to maintain its fiscal trajectory without adjustments elsewhere. Its analysis suggests that the government may need to offset the impact through measures including lower spending, with the implied pressure on the fiscal deficit target estimated at around Rs 560 billion.
India's fiscal deficit target for FY27 stands at 4.3% of GDP, making nominal GDP growth particularly important for the government's fiscal arithmetic.
At the same time, Jefferies sees some support from tax collections. Tax collections for April-July FY27 were up 11% year-on-year. Personal income-tax collections have also remained strong, while corporate tax growth is expected to benefit from a favourable base.
FCNR Flows Offer Rupee Cushion
A key positive for the currency is the sharp rise in FCNR deposits, Jefferies said. The brokerage expects large FCNR inflows to provide support to the rupee if a crude price spike pushes up India's import bill and widens current-account concerns.
Jefferies noted that the June quarter current-account deficit was only $4 billion, or 0.5% of GDP, despite elevated crude prices.
The brokerage expects FY27's current-account deficit to remain manageable under its baseline assumptions, while noting that FCNR inflows provide an important buffer if oil prices rise further.
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