We expect the budget to: (a) focus on credible fiscal numbers and gradual consolidation, (b) continue to favour investment-driven growth with redistributive spending likely to remain in line with nominal GDP growth, (c) provide strong intent to raise additional resources through strategic divestment and asset monetization, and (d) provide a credible medium-term fiscal consolidation plan and improve the health of the public sector balance sheet.
Factors that will likely have maximum impact on the markets
include the government spending plan on infrastructure and farmers, a credible fiscal deficit target, and re-alignment of direct taxes (including long-term capital gains tax for all classes of investors) and scale of privatisation.
We expect the Union Budget to reveal fiscal deficit slipping ~0.4 per cent of GDP off-target to 3.7 per cent in FY20. Amid a challenging growth environment, the government will find itself having to choose between correcting this slip in FY21, or on the other hand, using fiscal activism to support growth, but at the cost of other macro risks.
Our baseline remains one where the government will reiterate its commitment to medium-term fiscal consolidation. We attach a 45 per cent probability to our baseline of ‘fast track’ consolidation (FY21 fiscal deficit target at 3.3-3.4 per cent of GDP); 40 per cent to a ‘slow track’ consolidation scenario (3.5-3.6 per cent of GDP); and a lower 15 per cent probability to fiscal activism (3.7-4 per cent of GDP).
We expect the Budget to prioritise investment over short-term consumption demand, announce measures for boosting housing demand and attract more long-term risk capital. Overall, we expect the Budget to be largely neutral for both growth and inflation.
The government has tried to turn the economy around but it remains sluggish. Not surprisingly, the markets
are eyeing the Union Budget for magical measures to bury the gloom, especially as the Reserve Bank of India (RBI) has paused on rates because headline inflation is high, even if core CPI is softening and core WPI is negative.
A cut in personal income taxes will achieve little, though, and the government was actually evaluating an increase in GST rates to plug revenue shortfalls. Indeed, the fiscal accounts are in disarray with the central government deficit set to miss the 3.34 per cent of GDP target by ~100bps with the adjusted deficit another ~100bps higher at 5.3 per cent.
Even so, a fiscal stimulus is possible. Expanding employment guarantees and direct transfers are easy announcements to make but the NDA has been keener to lift investments that it hopes will also lift employment. Infrastructure, in particular, may be an area of emphasis – at least in the Budget Speech.
The market is likely to look for two key changes: a) to personal income taxes. There are expectations of some relief for tax payers with incomes below a certain cut-off; and b) to taxes for companies / investors. Some reports suggest the government may remove/reduce long term capital gains tax and that recently imposed on stock buybacks. These are modest measures, but broader tax cuts are unlikely given a lack of revenue (and due to the recent large corporate tax cuts).
Increasingly, these measures are becoming part of market expectations though. Their announcement may lead to small positive move in the market, but may not result in any significant de-coupling of India from emerging markets
(EM). The real message, in our view, will be in reducing some of the current sense of economic despair, which could have have real economic impact.
No major surprise announcement expected and markets could remain range-bound. The space to give further relief to lower income sections (less than Rs 10 lakh / annum) is marginal, with effective tax rate at an annual income level of Rs 10 lakh being at 11 per cent before deductions, and minor tweaks at the lower end remain our base case expectation. On the other hand, with reports of lower household savings, it is likely that measures to boost savings into productive investments may be given priority.
The focus could remain on areas that have the potential to generate employment, improve long-term efficiency of the economy and support consumption. Hence, we expect continued focus on infrastructure and rural development in the upcoming budget. The government may also try to improve the quality of expenditure by boosting capex.
Motilal Oswal Securities
Two major expectations from the Budget include investment push by relaxing the fiscal deficit targets and personal consumption boost by cutting personal income taxes. The former can be attained with strict conditionality and only after the true economic and fiscal narrative is placed before the country, while the latter must be avoided despite the very strong urge because it discourages savings as the real problem lies in subdued personal income growth.