The first coalition Union Budget

As we go in for the first union budget post the re-election of the BJP coalition government there is a lot of expectation surrounding the nature of the Budget commentary and the estimates regarding possible expenditure and the revenue targets for next year.

First, the good news. The interim budget was indicative of some trends that are showing buoyant revenue collections and expenditures in line with estimates. There is a broad consensus view that the fiscal deficit at 5.8% will be in line with budget estimates. Capital expenditures were budgeted to be increased by 11.1% and the same can be seen as a continuation in the full budget. The focus on increasing rural demand and consumption in general could be a thrust in this budget.

With expenditure clearly on capital formation and infrastructure, the impetus to consumption demand will have to come from incentives by way of tax law changes to stimulate spending. This could mean a tinkering with the GST rates or personal income tax slab rates or minimum standard deduction amounts. The tightrope that the Hon. Finance Minister has to walk is between – how much to give away by way of incentive and yet generate adequate tax revenue, and on the other hand generate discretionary spending to make it up by way of non-direct tax mop up.

How will the market react?

We have tried to identify some markers that could make the market react sharply:

1. Any deviation from the fiscal deficit target can influence the stock market and any number below 5% can be a major positive surprise

2. Sectoral impact: If government spends more on rural and infrastructure spending, consumer discretionary and industrial stocks will likely fare better. While PSU industrials, defence and railway stocks have done very well, another round of appreciation can be expected if more allocation is made in the remaining fiscal. However this will be more sentimental and could revert back in a few days

3. The stock market could be surprised by the lack of major tax cuts or redistribution spends owing to which specific sectoral incentives and spending will be crucial.

There of course is the longer term reality that budgets over time have no significant lasting impacts on the Indian stock markets with the exception of the historic 1991 budget that unleashed major reforms and transformed the markets in a fundamental way. Compared to that this budget is likely to be more conventional and incremental in nature. However do not discount the possibility of a nasty surprise leading to a sharp dip. In any case it will be one to look into the fine print for a clear understanding of the measure of confidence the government has in passing incremental reforms by way of laws and its ability to balance its books.