Will it be a Big-Bang Budget?

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Will it be a big bang budget? 

The expectations are always huge around this time of the year as all sections of society await some good news in budget. This time is no different as the expectations are sky-high from the government as growth continues to falter and employment generation continues to remain low. However, it is to be noted that the government has already taken several steps in the last six months that are yet to reflect on growth. Further, the government faces a tough task of maintaining its fiscal deficit target given the slowdown. Therefore, this time the government has extremely limited resources if they plan to adhere to fiscal consolidation trajectory.

Speed up Disinvestment and Incentivize white economy

This government has done a tremendous job in keeping fiscal deficit under check over the last five years. However, it would be a difficult task to adhere to this year as tax collections have been below par and economic growth is low. Further, the government has only managed to achieve 17% of its disinvestment target with little over two months to go for the end of the financial year. Therefore, speeding up disinvestment should be number one on the government’s to-do list. Secondly, the government has been going hard on issues like black money as evident by the reforms and measures implemented in the past.

We believe that these measures should continue in order to get more people under the tax bracket and ensuring better tax compliance. However, here lies our dilemma as we believe that these government’s measures (to eradicate black money) have somewhat contributed to the slowdown of India’s growth story. Nonetheless, we expect these measures to continue but the government needs to work on a plan to incentivize the white economy.

Increased spending rather than reduce tax rates

Coming to growth measures, the expectations are high for a personal income tax especially after the government reduced the corporate tax. However, only 1.5 cr of Indians pays income tax and that is pretty small portion of our population. Therefore, instead of any major personal income tax cuts announcement (slight tinkering would be acceptable), the government should focus on increasing spending by expanding the fiscal deficit limit on other employment generating sectors like Infrastructure, Roads, Ports and Railways.

Further, rural demand has taken a big hit in the current slowdown; therefore increased allocation to rural income schemes would aid economic recovery. The increased spending in social sectors would have an adverse impact on fiscal deficit and could lead to higher interest rates thereby impacting investment. Read more about Why fiscal discipline is important? However, reviving the economy is the need of the hour and the government should acknowledge the slippage in the current fiscal and commit to adhering to fiscal deficit in the coming fiscal. From the stock market point of view, we believe the markets would take it in its stride if the fiscal deficit target is missed by 30-35bps but would be enthused if the government plans to adhere to the trajectory of fiscal consolidation.

To conclude, we expect the budget should target a wide audience and should not be looked to woo a certain section of society (stock market investors, Income taxpayers etc.).

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