According to Nomura, the union budget is unlikely to be affected by the outcome of the Delhi elections and the BJP government is likely to stick to fiscal discipline
Finance Minister Arun Jaitley would present the Narendra Modi government's second Budget on 28th February. Nomura said it expect the Budget to kick start public investment in infrastructure and incentives for Prime Minister Modi’s medium-term initiatives such as Make in India and Digital India are likely to be the highlights. Increased public spending on infrastructure and lower subsidies will likely be seen (by markets) as a better quality of fiscal consolidation, it said.
"In our view," Nomura said, "the union budget is unlikely to be affected by the outcome of the Delhi elections and the Bharatiya Janata Party (BJP) government is likely to stick to fiscal discipline.”
Here are key expectations of Nomura from the Union Budget...
• The government to stick to fiscal discipline: to meet fiscal deficit target of 4.1% of GDP in FY15 and target 3.6% in FY16. Accordingly, we expect net market borrowings to rise slightly to Rs4.8 lakh crore in FY16 from Rs4.5 lakh crore in FY15, and gross borrowing to rise to Rs6.5 lakh crore from Rs6 lakh crore (due to higher redemptions).
• Public investment in infrastructure to be the key focus with capital expenditure to rise from 1.8% of GDP to 2.5% of GDP. The financing of higher public investment may be done by pruning subsidies, increased asset sales and through other off-balance sheet channels.
• Quality of fiscal consolidation should be better as subsidies fall due to lower oil prices (from 2% to 1.4% of GDP) and capital outlay on infrastructure increases.
• The budget is expected to provide an incentive for Prime Minister Modi’s flagship programs such as renewable energy, clean India mission, make in India, digital India and the smart city initiative.
• To boost fiscal federalism, expect an increase in the centre’s transfer to states (in line with 14th finance commission recommendations), greater flexibility for states in spending money transferred under the centrally sponsored schemes and compensation to states for GST implementation.
• For capital markets, expect the government to formally mandate the Reserve Bank of India (RBI) to target CPI inflation within a band of 4% +/-2% over the medium term, announce the setting up of a bank holding company, postpone GAAR and extend the withholding tax of 5% on interest paid on rupee securities.
• Other than the Budget, the focus is also on the railway budget (26th February), Economic Survey (27 February) and the progress made on legislative reforms during the Budget session (23rd February to 8th May) with pending approval of various ordinances on land acquisition, coal mining, non-coal mining, insurance FDI and the GST constitutional amendment bill.
Nomura says it remain constructive on India bonds. "Given the higher gross supply for FY16, we expect bonds to develop some supply concession in March ahead of the beginning of bond supply in April. However, we believe supply considerations have no more than a tactical relevance at this stage. We suggest investors stick with a bullish bias in bonds, heading into the budget and beyond," it added.
FX strategy: Nomura says it remain short US dollar/Rupee given positive expectations on the budget, the strengthening economic cycle, progress in government asset sales, terms-of-trade benefits from low commodity prices, gradual rate cuts, less vulnerability of India to the global backdrop of US Fed policy normalisation, and our view of a step back in the RBI’s aggressive FX intervention.