As expected, the last Budget (before the next general elections) presented by FM Mr. Arun Jaitley focusses on key themes, namely Rural (Agriculture and allied activities), Health, Social Causes, Education and Infra, with the aim of providing ease for citizens living in India.
As far as growth is concerned, nominal GDP is expected to grow at 11.54 percent in FY19. A buoyant global trade environment and a stable (not appreciating) Rupee are key requirements. A good monsoon in 2018 will also help
Bond markets have reacted adversely on February 1, as 10-year yields rose 18 bps to 7.61 percent. Gross borrowings are likely to remain broadly unchanged in FY19.
However, in an environment of rising inflation, mounting fears of a rate rise across the globe, the borrowings’ announcement (for next year) and a higher fiscal deficit number are likely to be viewed as negatives.
While headline expenditure growth prima facie looks credible with a budgeted 10 percent YoY growth in FY19, the fine print suggests that there could be overruns as the year progresses in certain categories like oil subsidies and in rural and urban development in a pre-election year.
For FY19, revenues are expected to rise 16.6 percent, led by 14.4 percent rise in direct tax collections (mainly personal tax), and indirect tax collections by 19.2 percent (GST revenues are expected to rise once matching of invoices and e-Way bills come into force).
Achieving the assumed growth in the economy is crucial for reaching indirect tax estimates, while expenditure will have to be kept within the forecast in the pre-election year.
The Budget could have an Impact on inflation due to higher MSPs and import duties being raised on a number of items for daily use (including edible oil) and increase in cess from 3 percent to 10 percent.
Unless the supply side shapes up in time and we have a good monsoon, we could see inflation rising in Q2 FY19. Interest rates could remain high, given the 3.3 percent fiscal deficit reducing the lure for equities and impacting corporate profitability.
LTCG of 10 percent could keep away fresh investors and new funds that were being diverted from other avenues. Rising interest rates domestically and tax on LTCG could result in a minor reversal of this trend.
The rural focus could lead to alleviation of rural distress, while urban populace may be a little disappointed at the overall outcome from the Budget due to meagre income tax relief offset by higher cess, import duties and surcharge, and higher taxes on capital gains and mutual fund distribution.
Inflation and growth remain the two macro variables, going forward. If we have inflation under control, and growth resurrecting, then we could have another good year ahead, although a repeat of 2017 may not be possible.
In a scenario where global yields are rising, crude prices threaten to take inflation up further, all the government can do is to send a signal that it will keep its purse strings tight.
The Union Budget could be less relevant after a few weeks, as the focus would again shift to global events, macroeconomics and earnings (which is the missing piece in the valuation game currently).
The current valuations are not cheap, and a lot depends on whether corporate earnings will revive enough to justify or expand these valuations.
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