Given the slowdown in the economy and the possibility of oil prices moving north over the next few months on the back of likely supply cuts by Organization of the Petroleum Exporting Countries (OPEC), market experts expect the upcoming Union Budget to focus on reviving growth and yet maintain fiscal prudence.
That apart, re-capitalisation of banks is also a key monitorable. The government, they say, is likely to continue with the off-budget route for carrying out infra-related spending.
“We believe that the government will focus on maintaining continuity in policy and spending on schemes allocated per the interim budget. As such, we maintain our fiscal deficit estimate at 3.5 per cent of GDP (3.4 per cent of GDP as per the interim budget), since the government has introduced the farmer income support scheme and also recently increased its scope,” wrote analysts at Morgan Stanley in a recent co-authored report led by Ridham Desai, their India equity strategist.
For the January – March quarter, the gross domestic product (GDP) came in at a dismal 5.8 per cent, sharply down from 6.6 per cent in the previous quarter, well below forecasts and the slowest in over four years.
Growth expectations have also been trimmed. DBS, for instance, now pegs India's FY20 GDP at 6.8 per cent on weakening exports, down from 7 per cent projected earlier. Fitch, too, has cut its expectation to 6.6 per cent for the current fiscal (6.8 per cent earlier).
“Beyond the fiscal numbers, markets will also be looking for other details – the credibility of tax revenue and growth assumptions, off-budget expenditure, quality of spending and themes that are likely to be championed by the recently re-elected government. The implication for the fiscal and monetary policy mix is clear in our view. While there is some space for monetary easing, there is no space for a higher fiscal borrowing,” said Pranjul Bhandari, chief economist for India at HBSC.
Markets, however, have seen a good run over the past few months. In the first half of calendar year 2019 (H1CY19), the S&P BSE Sensex and the Nifty50 have gained around 9 per cent each. The S&P BSE Mid-cap and the S&P BSE Small-cap indices have underperformed and have slipped around 4 per cent and 3 per cent, respectively during this period.
The performance of consumption-related sectors has also been dismal. The auto and fast moving consumer goods (FMCG) indices on the National Stock Exchange (NSE) have underperformed and lost nearly 15 per cent and 3.5 per cent, respectively in H1CY19.
As regards bank recapitalisation, U R Bhat, managing director at Dalton Capital says a small / token amount will not suffice. Public sector banks (PSBs) need funds to the tune to Rs 5 – 6 lakh-crore and the government must spell out a roadmap for this in the upcoming Budget, he says.
Anil Agarwal, India Financials analyst at Morgan Stanley echoes a similar view and says capital infusion of $10-14 billion will help to step-up lending by state-owned (SOE) banks. “We believe that this measure will be key to reinvigorating the financial sector, which has seen pockets of stress emerge, and address the cyclical slowdown in the economy,” Agarwal says.
While analysts at Phillip Capital and Edelweiss do not expect the government to offer tax rebates / concessions in the upcoming budget, but those at Edelweiss do expect the Budget focus on rural / social sector.
“We think the focus now could shift to rural / social sector. Income support scheme is already underway and ramp-up in affordable housing may also be needed to give a fillip to the beleaguered real estate sector,” said Aditya Narain, head of research, institutional equities at Edelweiss.