NDA-II s' (National Democratic Alliance) first independent budget is bounded by greater tax devolution to states, higher capital outlay, and somewhat more liberal view on attainment on fiscal rectitude.
The overall spending growth of 5.7% and 26% expansion in capital spending give an impression of both quantitative and qualitative improvement in fiscal management, said Dhananjay Sinha, Head, Institutional Research, Emkay Global Financial Services.
The higher than expected fiscal deficit/GDP at 3.9% is in line with our expectation. But fact the Rs 5.6 trillion fiscal deficit comes on the back of lower spending growth of 5.7% vs our expectation of 10%, is somewhat worrying. The 3% target for fiscal deficit/GDP is now shifted to FY18 from FY17 earlier, implying lesser fiscal constriction than envisaged earlier, Sinha added.
The Net tax collection for government of India will grow by a modest 1.3%, largely due to higher 36% devolution to state government from the gross tax collection, which is budgeted to grow 15.8% in FY16.
"Given the underperformance on the tax collection front over the past 2 years, the assumed decline in commodity prices (oil subsidy cut by 50%) and decline in tax elasticity to 0.8, we believe there is some element of optimism on tax collection target," Sinha opined.
He further said, "The combined target for mobilization through non-tax revenues and disinvestments at Rs 3 trillion or 33% of non-tax revenue is in line with our expectations. However, the Rs 695 billion disinvestment targets will uphill task."
"In our view, higher devolution to state government make the overall fiscal expenditure pattern difficult to monitor. But is it quite likely that revenue expenditure of states will rise."
"Overall, the budget seems to be strongly in favor of infrastructure sector, specifically roads. However, curtailment in revenue spending and increase in effective indirect tax rates can impinge upon the growth impulses in the near term."
There is also a significant thrust to stimulate financial savings through various tax incentives and schemes. Objective of employment generation is expected to be addressed by encouraging FDI and tax incentives. Intention to reduce corporate tax rate and proposal to form an independent body to enhance governance PSU bank and institution of the Monetary Policy Committee are other positive. Lack of reforms with respect to Fertilizer sector, specifically increase in urea prices and a modest allocation for bank recapitalisation are two major disappointments
"Overall, the budget does little to stimulate corporate earnings in the immediate terms and hence, following the announcement the benchmark market multiples can still look stretched. We continue to focus on themes that are aligned to the select investment themes, specially road sector and larger players in construction space. Specialized Infra and micro finance companies are seen getting some impetus."
"In the banking sector the private banks will continue to be the winning theme; PSU banks will lag given the modest recapitalization support from the budget. Lower revenue spending will continue to impinge upon consumption themes, specially rural. We continue to like urban consumption themes."
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