The government did a fine balancing act in its budget for 2018-19. Despite revision of fiscal deficit targets upwards, the borrowing numbers look benign and this will appease bond markets that have been hit hard by weak sentiments. 10 year GSec yields are likely to stabilize around 7.5% levels and would take direction from RBI policy on the 6th and 7th of February 2018.
The government has shown a spend of over 20% on infrastructure and has kept down total expenditure growth to 10.1% year on year. The government has also shown higher spends for Rural infrastructure, which is expected to grow rural incomes in the next few years. Non productive expenditures such as subsidies have grown by 15%. Defense expenditure has grown by 6%.
On the revenue front, there were no major tax overhauls except the introduction of Long Term Capital Gains Tax, marginally at 10%. Corporate tax for companies with turnover of Rs 250 crores and lower has been brought down to 25%. GST is expected to pick up pace in fiscal 2018-19. Non tax revenue is expected to grow by 3.8%. Disinvestments are pegged at Rs 800 billion from Rs 1000 billion in 2017-18.
Direct tax revenues are expected to grow at 14.4% and indirect tax revenues are expected to grow at 17.3%, with total tax revenues growing at 16.7%. The government has pegged the Tax to GDP ratio at 12.1% from 11.6% in fiscal 2017-18. The government is upbeat on the increase in number of tax payers in the country after demonetisation and GST implementation.
Overall, GDP growth is estimated at 7.5% in fiscal 2018-19 and nominal GDP growth at 11.5% with GDP deflator at 4%.
Given that the budget has largely stayed to expectations with positive surprise on the borrowing front, Sensex and Nifty will stay positive given global growth expectations and improved domestic corporate earnings expectations. INR will benefit from the benign macros projected in the budget.
Government Borrowing
The government has assumed a fiscal deficit of 3.3% of GDP against a nominal GDP growth of 11.5%. Fiscal deficit is projected at Rs 6.24 trillion s growth of 4.9% against fiscal 2017-18 numbers. Borrowing through bonds and tbills is pegged at Rs 4.07 trillion, with bond borrowing at Rs 4.62 trillion after switches. Gross borrowing is at Rs 6.05 trillion. Borrowing is expected to fund 65.2% of deficit with rest of deficit being funded by small savings, state provident receipts and receipts under reserve fund, deposits and advances. The government has room to play around the borrowing at a later stange depending on the state of non market borrowing flows.