The pressure to further expand the farmer welfare programme ahead of the 2019 national elections is high for PM Modi. A possible announcement of a nationwide direct farmer support scheme is quite likely, or possibly even earlier. A Telangana-style scheme could cost ~ Rs1.2trn, further complicating fiscal maths, as it could be a recurring liability. The RBI’s possible large dividend might help just one time.
The GST-led tax revenue shortfall of 75-80bps of GDP is not reflected in the reduced government expenditure for FY19 due to off-balance-sheet funding, which is not a sustainable solution and will create its own problems later and distort the reported fiscal deficit
We expect the ‘real’ government expenditure growth to slow down. The impact on capex will be even greater if the farmer support scheme is implemented. ITC should see some relief rally, as the budget is unlikely to tinker with tobacco taxation.
Bank of America Merrill Lynch
We expect the Center to target a fiscal deficit
of 3.5% of GDP in FY20, after ending FY19 at 3.7%, 40bp higher than target. This should be funded by running down the Center's surplus with the RBI
without additional issuance. While a pre-election Budget should ideally not propose new direct taxes, the finance minister should take steps to alleviate stress in rural India (metaphorically Bharat) via subvention or direct income transfer and for small industries via subvention.
The interim budget would provide an opportunity for the government to outline its medium-term economic priorities, specifically with regards to improving farm/rural incomes. We pencil in GFD/GDP of 3.2% in FY2020E after 3.5% for FY2019E. Outside of the farm sector, we expect a focus on micro, small and medium enterprises (MSMEs) and the middle class. We do not expect any big tax changes in the interim budget (if any, they will be announced in the final budget to be presented in June/July).
The interim budget for FY20 is likely to forecast a fiscal deficit
of 3.3% of GDP whilst the actual fiscal deficit is likely to be 3.5% of GDP for FY20. Announcement of sops for farmers, SMEs, women and income taxpayers are likely to be the key features of the budget speech. Whilst these will be announced with much fanfare, the hidden features of the Budget are likely to include the absence of above-the-line allocations for banks' recapitalisation (given the expectation of windfall gains from the RBI) and the coming withdrawal of Government support to the economy in FY20 vs FY19. We urge investors to SELL overvalued consumption stocks (FMCG and auto) and non-bank finance companies (NBFCs).
Slippages that were expected at the time of the budget announcement have come true ‐ GST, disinvestment, telecom auction, LTCG
tax. FY20 (IB) will likely be populist and inferior in quality. Bond yields will likely range around 7.3‐7.7 per cent, until a final budget is announced by the new government. Overall, we see the interim budget being marginally positive for consumption.
Motilal Oswal Securities
We believe that the (farm) relief package could be a mix of reallocation and new spending, considering there is a serious constraint in terms of financial resources with the central government to increase spending, especially if it doesn’t want to unsettle the bond market. Higher rural spending and a relief package for farmers appear on priority, while a significant reduction in direct taxes ‐ corporate or personal income tax ‐ looks unlikely.