Market expects the Budget to focus on fiscal prudence, raising revenue

Union Budget
Credible fiscal numbers and gradual consolidation, rising revenue via strategic divestment and asset monetisation are some of the measures that the markets expect from the Budget for financial year 2020-21 (FY21) scheduled to be announced on February 1 amid a weakening economy.

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Over the past few quarters, gross domestic product (GDP) growth has slowed to a 26-quarter low of 4.5 per cent in quarter ended September 2019, with risks to the economy stemming from both domestic (risk aversion in the financial sector and corporate sectors and weak private capex cycle) and external fronts (uncertainty caused by US-China trade tensions). On its part, the Reserve Bank of India (RBI) has cut the key lending rate / repo rate by 135 basis point (bps) in 2019 to a 10-year low of 5.15 per cent to prop-up growth.

Combined with a likely miss of Rs 850 billion on divestment, the total net collection for the government will likely be behind by Rs 2.8 trillion (1.4 per cent of GDP), wrote analysts at at Bank of America Merrill Lynch (BofAML) in a recent report. In addition, the central government has payables of around Rs 3 trillion for food, fertiliser and fuel subsidies, and may have to pay states around Rs 600 billion for a GST (goods and services tax) shortfall. These, according to BOfA, should be corrected in the FY21 budget by limiting expenditure growth to below revenue growth.

"We expect the Budget to contain some pro-market/economy measures. Tax cuts (lower income categories, long-term capital gains), real estate incentives and credit support for small businesses are potential candidates," wrote Sanjay Mookim, India Equity Strategist at BofAML in a recent report.

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Though the impact of Budget on the market has been on the wane since the past few years, aruge analysts at Morgan Stanley, factors according to them that will likely have maximum impact 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 and scale of privatisation.

"We expect the budget to focus on credible fiscal numbers and gradual consolidation, continue to favour investment-driven growth with redistributive spending likely to remain in line with nominal GDP growth, provide strong intent to raise additional resources through strategic divestment and asset monetisation and also provide a credible medium-term fiscal consolidation plan and improve the health of the public sector balance sheet," wrote Ridham Desai, head of India research and India equity strategist at Morgan Stanley in a co-authored report with Sheela Rathi, Upasana Chachra and Nikita Jain.

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Morgan Stanley expects the central government’s fiscal deficit to gradually narrow to 3.5 per cent of GDP in F2021 (3.7 per cent estimated for FY20). As regards growth, India Ratings and Research (Ind-RA) sees a marginal uptick in GDP for FY21 at 5.5 per cent with risks to the downside.

"Ind-Ra expects the shortfall in the tax plus non-tax revenue to result in the fiscal deficit slipping to 3.6 per cent of GDP (budgeted 3.3 per cent) in FY20, even after accounting for the surplus transferred by the RBI. A continuance of low GDP growth even in FY21 means subdued tax revenue and limited room for stepping-up expenditure," their analyst said.

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