Union Budget 2018: 3 key issues markets are likely to watch out for

After a stellar rally, the markets have shifted focus to Union Budget 2018 in anticipation of fiscal consolidation and government reforms

The markets will keenly watch government moves on achieving the fiscal deficit target, in light of rising government expenditure and falling GST collections. 

Mumbai: After a stellar rally, the markets have shifted focus to Union Budget 2018 in anticipation for fiscal consolidation and government reforms. As this is the last full budget of the present government, analysts said it will be important to see whether the government will seek to consolidate fiscal deficit while boosting growth by encouraging public capex or will go for populist measures.

The Union Budget 2018 will be presented by finance minister Arun Jaitley on 1 February. Here are three key issues that the markets will be watching out in this year’s budget:

Fiscal slippage

Given significant upside risks to the centre’s fiscal plan, JM Financial Institutional Securities Ltd expects the government to defer the fiscal consolidation process and revise the FY18 gross fiscal deficit to 3.5% versus 3.2% as per FY18 Budget estimates. “For FY19, the government is likely to set a gross fiscal deficit target at 3.2% of gross domestic product,” JM Financial said in a note on 13 December.

Nirmal Bang Equities Pvt. Ltd pegs the fiscal deficit at 3.54% of the GDP in FY18. It said fiscal slippage can be attributed to the fact that non-tax revenues have fallen short on account of lower dividend from the Reserve Bank of India as well as less-than-expected telecom spectrum revenues, while goods and services tax (GST) collections cloud the outlook on tax revenues.

“On the other hand, the advancement of the Budget to 1 February 2017, resulted in front loading of expenditure, while there has been no significant attempt to curb expenditure in subsequent months,” Nirmal Bang said in a report on 1 January.

Government’s move to bridge revenue shortfall

According to Kotak Securities Ltd, the government will need to look at various ways of mitigating the revenue shortfall and it may consider levying an additional surcharge on income tax in the high income bracket. “On equity capital gains, a threat of extending the holding period to three years for ‘long-term’ benefits also looms. In addition to this, the government has the option of pushing ahead with more divestments of PSUs,” the research firm said.

Focus on rural spending

As the Gujarat election results highlighted that the overall performance of the Bharatiya Janata Party (BJP) was better in urban than in rural regions, there are concerns that farmer distress due to low prices of agricultural produce is likely to weigh on electoral outcomes in the 2019 Lok Sabha elections.

Most analysts said it is likely that the government will further enhance its focus on spending towards agriculture and rural themes. “One can expect more spending on rural infrastructure (roads, power and jobs) and higher procurement prices for crops,” said Kotak Securities Ltd.

Nirmal Bang expects higher allocation to Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) and other rural development schemes. “Rural road development and irrigation projects are likely to receive a big boost. Higher minimum support prices (MSPs) for agricultural crops are also on the cards,” it said.

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