The union government is facing serious budget challenges due to an almost certain fiscal slippage and other market pressures.
Rising crude oil prices and uncertainty over GST collection are also major risks.
What are the contours of the problem?
2018-19 Budget will be presented against the backdrop of uncertainty over tax collections post implementation of the GST.
The government will have to garnering higher revenue collections amid challenges faced by mid and small corporates due to the new tax regime.
Meanwhile, the slowdown caused by demonetisation and rising crude and commodity prices have already worsened the macroeconomic scenario.
While markets have already factored in the slight slippage in fiscal health in FY18, but too much slippage will spook the market — both equity and debt.
Hence, the government’s ability to strike a good balance between populism and fiscal prudence will be highly critical preserving market confidence.
How does the Fiscal Deficit fornt look?
The markets will be keenly watching fiscal deficit projections and whether the long-term fiscal consolidation is adhered to.
Notably, the government is also expected to breach its intial fiscal deficit estimate of 3.2% and close at around 3.4% for this year.
This slippage will effectively push the plans to meet the 3% fiscal target by another year (to 2020), in a 3rd such “1 year” extension.
Given the pressure for fiscal consolidation, flexibility to go overboard on spending is limited despite the poor job creation scenario.
Also, any slippage on fiscal deficit would have ripple effects on government’s borrowing programme, inflation, bond yields, interest rates, etc.
Finance Minister will therefore face the unique dilemma of balancing growth and inflation amid rising crude oil prices and bond yield.
What are the expectations?
Except minor changes for the medium scale industries, the corporate tax structure is not expected to change much.
Major change to indirect taxes is also unlikely as the GST council is planning to stabilise rates after the initial rationalisations.
Moreover, market is not expecting a highly populist Budget although some focus on infrastructure, social sector and rural economy is expected.
Consumer sector (especially rural), retail, building materials and infrastructure companies is expected to benefit the most from the budget.
