Given the government's commitment to fiscal consolidation, Nomura believes that the RBI will perceive the budget as a positive event and may go for a 25bp repo rate cut in April with a greater chance of an inter-meeting cut
In the union budget presented on Monday, the Indian government chose macro stability over growth, delivering a positive surprise by sticking to its fiscal consolidation roadmap, says Nomura in a report.
"Overall, the budget is a positive surprise, relative to our expectations. The commitment to adhere to the stated fiscal deficit targets suggests that the government has chosen to prioritise macro stability over growth. Given the government's commitment to fiscal consolidation, we believe that the Reserve Bank of India (RBI) will perceive the budget as a positive event. Hence, we continue to expect a 25 basis points (bps) repo rate cut in April with a greater chance of an inter-meeting cut," the report said.
According to Nomura, much of the funding is coming via asset sales like disinvestment, strategic stake sales, and telecom spectrum where market conditions and balance sheet capacity (telecom) will play a key role, but lower tax assumptions suggest that the overall revenue collections are achievable. However, it said, expenditure on account of the seventh pay commission seems to have been under-budgeted, which could lead to higher spending later.
Here are Nomura's key takeaways from the Budget:
- Credibility of the fiscal arithmetic: We think the fiscal assumptions are optimistic on asset sales, but conservative on tax projections. Disinvestments and strategic sales are pegged at Rs565 billion (versus Rs253 billion in FY16), while revenue from the telecom spectrum (under the communication category, which includes past arrears and fresh auction receipts) has been budgeted at Rs990 billion (versus Rs574 billion in FY16). We view these as optimistic. However, gross tax revenues have been budgeted to rise only 11.7% in FY17 versus 17.2% in FY16, which could be higher. On nominal GDP, the budget has assumed 11% growth in FY17 versus 8.6% in FY16, which we think is reasonable. In our view, the revenue target is achievable, on an overall basis, with some overshoot on taxes and some undershoot on non-tax revenues and asset sales.
- Accounting for pay commission and OROP: The total outlay on account of the pay commission and the "one rank one pension" scheme is estimated at Rs1.1 trillion. At first glance, the budget seems to have under-budgeted for this, which suggests a staggered implementation of the pay commission's recommendations or greater outlay at a later stage.
- Quality of spend suffers: The quality of spending has deteriorated given the higher wages and pensions bill and elevated subsidies. Revenue expenditure (running expenses of the government) is budgeted to rise 11.8%, up from 5.5% growth in FY16, while capital expenditure growth is budgeted to slow to 3.9% y-o-y from 20.9% in FY16, which suggests less budgetary support for capital expenditure and greater reliance on off-budgetary sources.
- Key expenditure announcements: There were no major steps to rationalise subsidies in the near term, except a plan to move to direct cash transfer to curtail leakages. Subsidies remain elevated at Rs2.5 trillion in FY17 (1.7% of GDP), compared with Rs2.6 trillion in FY16 (1.9% of GDP). The budget also announced no increase in public sector bank recapitalisation, which has been left unchanged at Rs250 billion in FY17, lower than expected (Nomura: Rs350 billion).
- Gross borrowings: Gross market borrowings are slated to rise to Rs6.0 trillion in FY17 from Rs5.85 trillion in FY16, while net market borrowings are pegged at Rs4.25 trillion, up from Rs4.0 trillion in FY16, lower than expected.
- Key focus areas: On the reform side, key focus areas were
(1) agriculture (irrigation, e-platform for unifying wholesale markets, crop insurance);
(2) rural infrastructure and employment (rural roads, R-URBAN clusters, rural electrification, subsidised cooking gas to households below the poverty line, higher allocation for rural employment scheme);
(3) health (Rs1 lakh health cover per family);
(4) education and skill creation (Higher Education Financing Agency);
(5) infrastructure (higher allocation to roads, modernisation of ports and airports); and
(6) financial sector reforms (bankruptcy bill, RBI Act amendment to set up a monetary policy committee, amendments to the SEBI Act to introduce new products in commodity markets). - Key tax changes:
(1) new tax amnesty scheme to improve tax compliance (45% tax on declaring undisclosed income);
(2) lowering the corporate tax rate from 30% currently to 29% for small companies and 25% for new manufacturing companies;
(3) GAAR implementation from 1 April 2017;
(4) long-term capital gains on unlisted companies reduced to two years; and
(5) infra cess on car sales.
