FM likely to peg fiscal deficit target at 3.7% again

FM likely to peg fiscal deficit target at 3.7% again: Yes Securities

By Amar Ambani

We foresee the government reporting the fiscal deficit at 3.7% for the current financial year, essentially through large expenditure cuts in the last three fiscal months, including cuts in defence spends, roll-over of certain payments, as also by directing select public owned enterprises to raise their own resources. We expect expenditure cuts in the range of 15-20% in the remainder of the year. Yet, the total FY20 expenditure will rise by 10.5% yoy, vis-à-vis budget estimates of 13.4%, which is reasonable. We estimate tax revenues to remain flat yoy, factoring in a corporate tax cut, a ~50% miss in disinvestment target and the one-time bounty from RBI. With no likely material traction on the revenue front, reduced spend seems the only viable option to get to the 3.7% target. We believe 3.7% number will come as a relief amid the burgeoning market fear of 4% deficit.

For FY21 also, we believe the Finance Minister will likely peg fiscal deficit target at 3.7% again. Funding the budget will essentially hinge on ramp up in GST collections. We also expect the FM to pursue significant divestment target of Rs130,000 crore. We sense the possibility of likely settlements in several long pending litigations to raise resources.

We don’t anticipate material demand-side measures in the budget, which is staring at zero growth in tax revenue this year. Consequently, we expect the government to remain status quo on popular market demands around LTCG, STCG, STT, DTT or the Super-rich tax introduced in the last budget. Even on the personal income tax front, a complete overhaul seems unlikely. However, we do foresee some relief for personal income in lower tax slabs, with minimal impact on the exchequer. Material demand side measures could come through during the course of the year, once government sees traction in revenue collection. The biggest relief may come in the form of extending limits on section 80C benefits, with eligible deduction raised to Rs2.0-2.5 lakhs from Rs1.5 lakhs. 

Measures in recent times and the Prime Minister’s ongoing meeting with corporates have heightened expectations from the budget. Our view is that not all measures will necessarily flow through the budget speech. In the past during the Modi era, we’ve seen major announcements made during the course of the year apart from the budget. The FM may use this opportunity to refer to some of them but formalise later.

(Author is Senior President and Research Head at Institutional Equities, YES Securities)

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