The Union Budget 2017-18 presented by the FM to the parliament today on the 1st of February 2017 is a pragmatic budget though the question of how the government will achieve lower fiscal deficit target remains.
The fact that the budget did not tweak long term and short term capital gains on equity is a positive for equities while for bonds the target of fiscal deficit of 3.2% of GDP and net borrowing post buyback at Rs 3502 billion against Rs 3658 billion last fiscal year is highly positive. Last year the government budgeted for a net borrowing of Rs 4418 billion but with bond repurchase and reduction in borrowing , the net borrowing was lower. Government borrowing funding the fiscal deficit has fallen from 83% in 2015-16 to 64% in 2017-18. The government is also investing all the proceeds of the NSSF (National Small Savings Fund), which is helping the government to lower market borrowings. Securities issued against small savings was budget at Rs 221 billion for 2016-17 but with higher inflows the revised estimates was Rs 903 billion and budget estimate for 2017-18 is Rs 1001 billion.
Gross borrowing for fiscal 2017-18 is at Rs 5800 billion from Rs 5820 billion seen last year, a marginal decrease. Overall government borrowing will not pose an issue for the market as expected given that absolute numbers are down.
The government expects higher revenues from increase in tax to GDP ratio on demonetisation and has not really increased taxes. It has lowered tax rate to 25% for small and medium scale enterprises with turnover of less tha Rs 50 crores and cut rate for individuals in the Rs 2.5 lakhs to Rs 5 lakhs category from 10% to 5%. GST implementation would also lead to higher revenues.
Total expenditure is expected to increase by 6.6% while tax receipts are expected to increase by 6.5%. Gross fiscal deficit is higher by 2.3% and at 3.2% of GDP, nominal GDP growth is expected at 12% against 11.90% (CSO estimates and 11.25% Economic Survey Estimates) seen in 2016-17. Government has budgeted for 60% increase in revenues from disinvestment.
Listing of IRCTC and IRFC can bring in huge revenues to the government as these railway arms are highly profitable and IRCTC is comparable to top internet sites in the world in terms of usage. Government also plans to list more PSU’s and expand its strategic sales through the ETF route.
Corporate tax rate cuts for large corporates was not effected but the market, which was expecting rate cuts took it in its stride.
The Sensex & Nifty are higher by over 1% post budget and the INR is marginally higher against the USD. However 10yr gsec yield is higher by 2bps despite lower net borrowing showing that the bond market would prefer to wait for Fed policy outcome today and its potential effect on RBI policy before taking a call on bond yields.
