Brokerages expect govt to revive investment cycle

Reform focus, simpler tax regime among other Budget expectations

Kick-starting the investment cycle, focusing on reforms and simplifying the tax regime are some of the key Budget expectations of broking houses.

The 2015 Budget, to be presented on February 28, will be the Narendra Modi government's first full-year Budget. It comes at a time when the stock markets are hovering around their record levels.

"The macro backdrop to the Budget is very favourable," says Goldman Sachs in its Budget preview, Making Hay While the Sun Shines. "Unlike recent years, both inflation and the current account deficit are no longer major concerns…. Further, the sharp fall in global commodity prices, especially oil, is providing a big helping hand to the government's finances. In addition, capital inflows and the RBI (Reserve Bank of India) beginning a rate-cutting cycle have led to a lowering of borrowing costs for the government."

The US-based investment bank says a credible fiscal consolidation path, shift from subsidies to capital spending and specifics on the government's structural reform agenda are the broad major points that investors should watch for in the Budget.

Global crude oil prices are down by nearly 50 per cent from the June 2014 highs, and this is expected to help the government rein in the fiscal deficit and push ahead with growth.

HSBC Global Research says: "We estimate about half of the fall in oil prices has been allowed to transmit to lower retail prices and the remaining will manifest itself as higher tax revenue. We expect the government to use this bounty to increase capital spending in the coming financial year, which is a positive for growth."

Goldman Sachs says, "We expect the finance minister to announce a fiscal deficit target of 3.6 per cent of GDP for FY16, in line with the medium-term fiscal consolidation path. This is largely due to reduction in subsidies, as a result of lower commodity prices."

On taxation, broking houses want the government to provide a clear road map for the goods and services tax (GST), incentives for the manufacturing and infrastructure sectors, and improvement in tax administration.

Nitin Jain, president and head of global asset management and capital markets at Edelweiss, says the market will look at a few key moves. "India needs to simplify its tax regime and encourage a larger set of people to pay taxes. The market is expecting a clear map of tax reforms and some concrete moves on implementation of GST. A big area would be the infrastructure sops for the private sector."

Economists expect the government to increase capital spends. "We expect capital spending to rise from an estimated 1.7 per cent of GDP in FY15 to two per cent of GDP in FY16. The space for greater spending would come from the reduction in subsidies and higher revenues," Goldman Sachs says.

EYE ON THE BUDGET

• Fiscal deficit target of 3.6% of GDP for FY16
• Boost to the investment cycle
• Road map for GST
• Incentives for manufacturing and infrastructure sectors
• Improvements in tax administration