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The current market rally a month before the Budget proposals are announced on February 1 is the best in over a decade, with the S&P BSE Sensex and the Nifty50 indices gaining over six per cent so far in calendar year 2018 and crossing the 36,000- and 11,000-levels, respectively, for the first time ever on Tuesday.
Though most analysts do not expect the proposals to be hugely populist, brokerages would keep a close watch on how the government manages the fiscal situation a year before the country goes to polls scheduled in May 2019, and changes, if any, to the existing norms of long-term capital gains tax (LTCG) on equities.
While analysts peg the fiscal deficit for FY19 to be around 3.2 per cent, any change to the LTCG tax structure on equities could be a sentiment damper, analysts say. Increased allocation for infrastructure such as affordable housing, roads, railways, and ports is also possible.
Here is a quick compilation of what leading brokerages and research houses expect:
We expect the government to project the fiscal deficit at 3.2 per cent of the gross domestic product (GDP) in FY19 from 3.5 per cent of GDP in FY18. Markets will keenly watch for the expenditure tilt (we expect focus on agriculture, infrastructure, and housing), revenue projections (first-ever goods and services tax or GST projection, divestment strategy, tweaks in LTCG for equity investment) and finally commitment to adopt Fiscal Responsibility and Budget Management (FRBM) recommendations.
We expect further details on PSU bank recapitalisation and higher allocation to rural infrastructure (housing, roads, and electricity) but fiscal consolidation to continue. Direct tax relief is unlikely for corporate houses, although there could be tweak in the lower slab for personal taxes. Any changes to long-term capital gain exemption rules for equities (for example, three-year holding period) will be a sentiment negative.
Prime Minister Narendra Modi’s recent statements suggest that fears of outright populism — spurred by the fact that this is the government’s last full Budget ahead of the 2019 general election — may be exaggerated. Outside the Budget, we expect the government to focus on measures (including via trade policy) to prevent farm prices from falling further.
Themes that are likely to benefit from the pre-election Budget are consumption, affordable housing and infrastructure. Accordingly, we recommend Dabur, Mahindra & Mahindra, UltraTech Cement, Mahindra & Mahindra Financial Services, V-Mart Retail, India Cement and Sadbhav Engineering. Changes in indirect taxes and corporate tax cut are unlikely; some relaxation in income tax slabs/tax rate is expected so as to boost urban disposable incomes.
While space is limited for any surge in government spending, trend growth pace is expected to persist with focus on roads, metros, housing, irrigation, and defence. We do not see the government going overboard in making this Budget populist; but rural focus will continue. Overall, we see fewer negatives from this Budget.
We expect FY18 fiscal deficit to slip to 3.4 per cent from the budgeted 3.2 per cent, and FY19 at 3.2 per cent, higher than the FRBM’s recommended three per cent. Rising oil prices may also demand greater allocation of funds to cover for unavoidable excise cuts and a higher subsidy burden to cushion the economy.
Fiscal deficit projections are key. We do expect the government to focus on rural and capital expenditure spending to boost sentiment and revive growth further. However, given the hard-achieved gains on fiscal consolidation, flexibility to go overboard on spending is limited, in our view.
Apart from a push to increase non-tax revenue in the form of dividends to meet the deficit target, we expect a large disinvestment programme in FY19. Given that the government prodigiously met the target for this year, its resolve has been amply demonstrated, and hence we can expect a high figure for coming year as well.
We expect this Budget to utilise the fiscal space to enhance spending rather than reduce direct taxes. The FY19 Budget may increase the allocations for social infrastructure and social security spending, such as National Rural Employment Guarantee Scheme, food subsidy, insurance schemes and welfare pensions. Budgetary allocations for capital spending are likely to be supplemented by extra-budgetary sources of funds such as institutional finance and market borrowings of the central public sector enterprises (CPSEs).