HDFC Securities: Pre Budget Expectations 2017-18

HDFC Sec | Jan. 14, 2015, midnight

Highlights:


- The Union Budget for FY18 to be presented on February 1, 2017 will be different in many ways. Apart from advancement of the date by a month (facilitating smoother execution of spending plans), the Budget will present consolidated funds for the Centre as well as Indian Railways and express expenditure as capital & revenue while doing away with the classification of plan & non-plan.


- Budget is a much hyped-up event each year with everyone from corporate chiefs to industry associations to economist and analysts sinking their teeth into it and deliver intelligible sound bites. We think that the Union Budget's influence on short-term market performance is declining – but expectations (measured by pre-budget performance) are still important in determining what the market does after the budget.


- The Budgeted fiscal deficit for FY17 (3.5% of GDP) will be easily met due to steep increase in excise revenues (8MFY16 excise revenue is up 46%) on account of higher excise duties on diesel and gasoline, which will more than offset likely lower non-tax revenues owing to lower spectrum auction revenues and lower divestment amount compared to the budget target of Rs.565 bn.


- The FY18 Budget is to be introduced at a time when there is high variability in expected revenues and expenditure due to the difficulty in assessing the government’s exact response to demonetization through lower tax rates and higher spending. Further the impact of GST on revenues of the Govt (given the uncertainty in its introduction date and its final form) may also create issues in revenue projections and its interpretation. Further there is uncertainty about additional revenues from IDS II (PMGKY 2016) and possible tax collections from unaccounted income coming under the personal income tax net, possible weakness in excise duty and corporate tax collections as a fallout of notes ban, and ‘special’ dividend (if any) from RBI on account of any cancellation of liabilities from the notes ban exercise.


- Assuming no additional revenue measures, tax collections may normalise in the 12-14% YoY range versus 17-18% growth in past 2 years. Thus, targeting a 3% FD for FY18 would leave no space for spending boost. We however think that the FM will adhere to the 3% target set in the FRBM Act awaiting the report of NK Singh committee on the issue.


- The challenges for the budget this year are more formidable than they were in the previous year. There is no substitute to investment led growth as opposed to consumption led. A more prudent approach will be to select two-three high potential sectors for fiscal stimulus, agriculture being the most promising followed by SME.


- With the crucial state election in Uttar Pradesh in February-March and derailment of growth momentum post-demonetisation, there are concerns that the government may be tempted to provide some populist measures. However, we think it will continue down the fiscal consolidation path and deliver a prudent and popular, (and not a populist) budget.


 

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