Research Digest | January 30, 2019
Forthcoming budget will be more of a vote on account though it surely would be loaded with policy intents to get the voter attention for the forthcoming general election. Otherwise too with GST, the budget now is not about changes in indirect tax rates that prefers one industry over others. Key questions from the market perspective are:
What social policy measures would be announced and its impact on the fiscal arithmetic, what would be market borrowings by the government going ahead and will there be changes in direct tax to increase consumption?
With GST collection remaining way behind the target in fiscal 19, there are not much of rooms for the government for social profligacy. But looking at election ahead some incentive to rural sector looks imminent. The current government is on record for not going in for a general farm loan waivers as that would cost mammoth 2.5 % of the
GDP. But some variant of direct cash transfer to farmers is expected. Telangana style (Rythu Bandhu) farmer incentives that provide Rs 4000/acre/seasons to farmers as the direct transfer has been widely attributed as the scheme that helped current Telangana government reelection would have higher fiscal deficit implication. So
Odisha model (Kalia- Rs 5000/season to small & marginal farmers) is more likely as a similar variant has been implemented by the BJP government in Jharkhand. Also, the government could split the cost with the participating states to further dampen the impact on fiscal deficit. A step like this could have only 0.2-0.3%
impact on the fiscal balance.
With falling inflation and struggling IIP, an interest rate cut is usually expected but since December last year bond yield has continuously firmed up in India as the higher fiscal deficit, in turn, financed by large market borrowing is being feared. With fiscal deficit around Rs 6.7 lakh crores, net market borrowing would be about 2.2% of the GDP.
But this is not alarming as we have had higher net market borrowing in prior years.
There are also expectations that some changes would be brought in the direct tax rate to invigorate consumption and that would be populist too. However, not only GST but to some degree even other sources of government revenue like the direct tax as well as others like disinvestment and telecom auction have remained
below the budget estimate. So scopes are limited but something directed towards struggling MSME could be a fair expectation.