By Saurabh Mukherjea and Ritika Mankar
Fully in-line with our expectations, the Government opted for a ‘pro-poor’ budget for FY17. As opposed to the last two budgets presented by this Government which exhibited a clear focus on boosting public investment, the Budget for FY17 was explicitly focused on improving the situation in rural India and providing relief to the agricultural sector. Whilst the budget was characterized by no major self-goals or dramatic negatives, we rate this budget as one that is ‘neutral to negative’ owing to two sets of reasons namely:
Disappointment #1: Ambitious fiscal mathematics
Even as the Finance Minister in his budget speech said that “prudence lies in adhering to the fiscal targets”, the Government’s 3.5% of GDP fiscal target appears to be premised on unrealistic revenue assumptions.
Net tax revenue: The Union Budget builds-in net tax revenue growth of 11.2% YoY for FY17. We at Ambit find this assumption to be aggressive given that net tax revenue growth in FY16 was recorded only at 4.9% and given that we expect nominal GDP growth in FY17 to be recorded at 10% YoY (v/s 8.6% YoY in FY16 and Government’s estimate of 11% YoY for FY17).
From a sensitivity perspective, it is important to note that every 1% reduction in the assumed net tax revenue growth rate adds to the fiscal deficit by 10bps.
Non-tax revenue:Even if the Government was to be given the benefit of the doubt for the above assumption, the assumptions on the non-tax revenue front appear particularly aggressive. The Government expects proceeds from disinvestment plus telecom receipts to fetch Rs 1.6 trn in FY17 (vs Rs 0.8 trn in FY16). If this jump in proceeds does not materialize then we will be looking at a budget deficit overshoot. More specifically, we find the telecom receipts figure of Rs 1 trn to be very aggressive given the enfeebled state of balance sheets in that sector and given the broken balance sheets of PSU banks.
Disappointment #2: Expenditure tilted towards revex
One of the most positive aspects of the first two Union Budgets presented by the NDA was the fact that it was able to successfully limit revenue expenditure growth and boost capital expenditure growth. However, the third budget presented by the NDA Government appears to have reverted to the UPA-style of budget-making as the composition of expenditure shifted towards revenue expenditure in the Union Budget of FY17 (see exhibit below).
Exhibit 1: Union Budget FY17 marked a reversion to the UPA-style of budget-making
Monetary policy implications
In our note dated Feb 3,2016, we made the point that in view of the rising certainty of fiscal slippage in FY17 and the rising probability of the fiscal slippage being revex-based, we believe that the RBI likely to administer limited rate cuts to the tune of 50-75bps over FY17. Given that there is a high possibility that the Central Government’s fiscal deficit will exceed our initial expectation of 3.8% of GDP, we further prune our rate cut expectations to 25-50bps for FY17.
Saurabh Mukherjea is CEO – Institutional Equities at Ambit Capital. RitikaMankar is Senior Economist in the same team at Ambit Capital.
(The writer is CEO – Institutional Equities at Ambit Capital. Ritika Mankar is Senior Economist in the same team at Ambit Capital)