FM may give fillip to rural investment

The countdown to the Union Budget 2018 – to be presented in Parliament on 1st February 2018 – has already begun. We believe the finance minister will have to do a tightrope walk – meet high expectations of growth stimulus in a pre-election year without disturbing the hard-achieved gains of fiscal consolidation – to get thumbs up for his Budget. Private investment, rural sector and fiscal balance may be prioritised in the 2018 Budget, in our view.

First, we expect the government to postpone the 3% deficit target by one year to 2019-20 for the third consecutive year and peg FY19 deficit at 3.2% of GDP (We had estimated FY18 fiscal deficit at 3.5% of GDP; however, the government released an issuance calendar on December 27, 2017 suggesting it will undertake additional borrowings. This makes it difficult to understand the government’s position on FY18 fiscal deficit. Thus, if FY18 deficit is revised higher to 3.5% of GDP, FY19 deficit – in extreme case – could also be pegged at 3.5% of GDP). This would imply gross market borrowings of about Rs 7 lakh crore and net borrowings of about Rs 4.9 lakh crore. 

Second, we expect the government to increase rural spending but also maintain decent growth in capital spending. Even Rs 50,000 crore allocation for MNREGA will be a huge and may help revive the rural sector. Simultaneously, we also expect the government to maintain estimated 10% growth in capex plan to support the weak investment cycle.

Finally, this is the year for the government to oblige on its commitment to cut corporate tax to 25%. Failure to do so will hurt sentiment. However, the recent fall in GST collections raises doubts over the government’s ability to let go of another stream of decent tax receipts. On personal tax front, we don’t expect any tax relief either in terms of raising slabs or cutting tax rates.

From the market’s viewpoint, we expect inclusion of a wider income range under the affordable housing schemes and further incentives for developers for the same, as well as incentives for long-term project financing by banks with a focus on roads and railways. We also expect more clarity over recapitalisation bonds for state-owned banks. On the infrastructure side, increased allocation for roads, railways, housing and urban development can be announced.

Rail capex is seen at Rs 1.46 lakh crore in FY19, while the road ministry is looking for 10-12% higher allocation. 

The writer is head of research, Motilal Oswal Institutional Equities