Growth outlook. The start to FY18has been disappointing, as reflected in theApril-June’17GDP data. Real GDP growth (5.7% yoy) surprised sharply to thedownside in April-June, led mainly by de-stocking ahead of the implementation ofGST from 1July. While we acknowledge that the April-June GDP data slowdownwas largely due to GST related destocking, which should normalize from thepresent quarter, the current data warrants a revision to the annual growthforecasts, in our view. Based on the latest GDP data, we are therefore revisingdown our growth estimates for 2017and 2018to 6.5% and 7.5% respectively(from 7.0% and 7.8% earlier). For FY18and FY19, we have revised down our GDPgrowth estimate to 7.0% and 7.5% respectively (from 7.5% and 7.8% earlier).    Fiscal update.    The fiscal data for April-July'17indicates that revenue collectionis slightly above trend, but expenditure has been front-loaded even moreaggressively than the previous year, leading to a sharper jump in budget deficitrelative to trend. The recent news that RBI will pay lesser dividend to theGovernment of India (INR307bn vs. budget estimate of about INR650bn) and thefact that fiscal deficit has already touched 92.4% of the budget estimate in April-July’17period has led some market participants to worry whether the centralgovernment's FY18fiscal deficit target of 3.2% of GDP is at risk of being breachedto the upside, but we think the authorities have many levers at their disposalto offset this potential revenue slippage and meet the fiscal deficit target. Ourbaseline view is that the government will likely compress expenditure, if required,to meet the fiscal deficit target, but that decision will be taken only if the othersources of revenue fail to offset the likely shortage in non-tax revenues owing toRBI's lesser than anticipated dividend payout.

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