Stock markets are back to the pre-demonetisation levels with a big rally in January on expectations that Finance Minister Arun Jaitley in Budget 2017 could announce tax sops for individuals and corporates. The stock market also expects Mr Jaitley to announce measures to support the demonetisation-hit economy in the form of higher infra and rural spending. If the Budget disappoints, Nifty could fall back to 8,000 levels, or even below that, warn analysts. Some economists see this year’s Budget as the most challenging one for Mr Jaitley.
Fiscal deficit: To support higher government spending, economists expect Mr Jaitley to plan a fiscal deficit of 3.3-3.4 per cent of gross domestic product (GDP) for 2017-18 which is higher than the 3 per cent pledged earlier but lower than 3.5 per cent that the government has budgeted for the current year to the end of March. Global financial services major Morgan Stanley, for example, expects the central government to target a fiscal deficit of 3.3 per cent of GDP in FY2018 as compared to 3.5 per cent of GDP in FY2017. But higher fiscal deficit would not be to the liking of rating agencies.
Rating agencies: Rating agency Standard & Poor’s has urged Finance Minister Arun Jaitley to stick to the fiscal consolidation path in Budget 2017. Otherwise, the chances of a ratings upgrade could be in jeopardy, it said. Despite the government’s pitch for an upgrade, S&P refrained from doing so last year, citing the country’s high debt levels. It affirmed India’s rating at “BBB-minus” with a “stable” outlook, putting Asia’s No.3 economy at the bottom rung of investment grade.
Economic recovery: Though the currency in circulation has largely normalised, the impact from demonetisation is likely to linger over the next 2-3 months, hence delaying the domestic demand recovery, says Morgan Stanley. This will make revenue projections a tough task, say economists. The International Monetary Fund has trimmed India’s growth outlook for the fiscal year beginning in April to 7.2 per cent from 7.6 per cent previously, citing the blow to the cash-reliant economy. A delay in the launch of a new national sales tax has also added to the uncertainty.
GST hiccups: If GST is rolled out from July 2017, it would be another uncertainty for coprorates, says Jyotivardhan Jaipuria, CEO of Veda Investment Managers. In early part of the fiscal 2017-18, starting from April 2017, there could be a lot of volatility in corporate earnings due to the GST rollout, he adds. “I don’t think the corporates fully are ready for GST. Demonetisation and GST could impact earnings in the first half of the fiscal,” he said.
Oil price: Thanks to lower global oil prices, the government’s excise duty collection for 2016-17 is likely to surpass its Budget targets. According to the economic research department of SBI, excise duty collection in this fiscal could jump to Rs 3.59 lakh crore as compared to the Budget estimates of Rs 3.18 crore due to oil bounty or excise duty on petroleum products. But with global oil prices on a rising trend, Mr Jaitley may not be so lucky in 2017-18. While FY17 was the year of indirect tax buoyancy, this may not continue into FY18 (especially as oil prices begin to rise), says Pranjul Bhandari, chief India economist at HSBC Securities.
RBI rate cuts: Pressure from rising oil prices, 7th Pay Commission hikes, and the early impact of GST are likely to stoke inflation in FY18, says HSBC economist Pranjul Bhandari. About 70 per cent of the 7th Pay Commission recommendations ( pay and pension) have already been accounted for in the FY17 budget, says HSBC, adding that the remaining item, the housing allowance, is likely to get implemented in FY18.This could reduce the space for significant rate cuts by the Reserve Bank next year.
Social sector spending: Given upcoming state elections and impact of demonetisation, some analysts have expressed concern that the government may could turn towards less productive forms of spending (like subsidies). However, Morgan Stanley expects the government to stick to a fiscal policy stance that will remain supportive of promoting productive spending. “The government policies over the last 2.5 years have shown policymakers’ commitment to promoting productivity-enhancing reforms,” it said.