Challenges for union budget 2019: Union budget 2019 will be presented on 1 Feb 2018 amidst several challenges such as rising crude oil prices, shortfall in revenue collections, upcoming elections (8 state elections + general elections in early 2019), and requirement for sustained government spending to revive GDP growth.
Fiscal consolidation to continue although the glide path is likely to be extended: Although India received a rating upgrade from Moody’s, most rating agencies have highlighted the risk of high government debt to GDP at 68% and high combined fiscal deficit (6.5% in FY17) as an impediment for India’s rating upgrade. In this context, we expect the government to not deviate from fiscal consolidation although the glide path is likely to be extended for FY18 and FY19 at 3.4% and 3.2% of GDP, respectively.
Factors helping fiscal consolidation: Recovery in nominal GDP growth (10.5% in FY19), declining trend of primary deficit due to improved tax buoyancy as tax compliance improves from GST and its spillover effect on direct taxes, and elevated stock markets (higher disinvestments) should allow fiscal deficit to reach 3.2% in FY19. Risks to fiscal deficit – Sharp increase in oil prices and its impact on aggregate demand, primary deficit, inflation and interest rate.
FY18 fiscal slippage largely due to shortfall in revenue: Shortfall from GST collections, telecom spectrum and RBI dividend for FY18 will be made up to some extent by higher disinvestment receipts, additional dividends from RBI and expenditure cut. Extra market borrowings guidance for FY18 is marginal at Rs 200 billion.
Bigger challenges to divert attention from introduction of LTCG in budget 2019: Although DMs have LTCG in some form or the other, the picture for EMs is mixed with almost full exemptions (China, Thailand, and Singapore) and partial exemptions with progressive taxation in Brazil. Although we believe LTCG in some form will be introduced eventually, given that the government is grappling with larger issues like revival of growth, job creation, rural stress etc., it is unlikely that a measure which dampens investor sentiment will be implemented in budget 2019.
Equity market volatility is the lowest in last 10 pre-budget periods: Market volatility in the pre-budget period is the lowest as compared to the past 10 budgets indicating that unless the budget springs up a huge surprise in terms of a surge in fiscal deficit estimate or a regressive measure such as a retrospective LTCG regime, market volatility will remain subdued post budget.
Gross borrowing program for FY19 at Rs 6 trillion: We expect FY19 fiscal deficit to be Rs 5.9 trillion and given the redemption of government bonds worth Rs 2.1 trillion in FY19 and estimated borrowings from external financing and small savings instruments at Rs 2 trillion, the gross market borrowing will be Rs 6 trillion (Rs 3.9 trillion net borrowing) for FY19.
FY19 budget to focus on boosting overall growth, job creation and alleviating rural stress with an eye on upcoming elections: We expect government to focus on measures targeted at: (a) improved allocation towards productive capital expenditure and infrastructure development including affordable housing; (b) protecting and enhancing farmer’s income; (c) improving agricultural productivity; (d) wider access to finance for marginal farmers at low interest rates; (e) social sector including health and education; (f) rural non-farm income.