We expect the FY2016 union budget to reinforce the government’s commitment to fiscal consolidation and economic reforms. Low global crude prices and consequent savings will allow the government to pursue the twin objectives of fiscal consolidation and growth (capital expenditure). The budget session will be equally important given several pending legislations.
Government can marry the conflicting objectives of fiscal improvement and higher spending
We expect the government to project the FY2016 GFD-to-GDP ratio at 3.6% (central government only), meaningfully lower than 4.1% in FY2015. This improvement, despite assuming a sharp increase in plan expenditure (25%), is due to higher capital expenditure. Additional revenues from higher excise duty on diesel and gasoline and savings on fuel subsidies (due to lower crude prices) will allow the government greater flexibility.
Reiteration of commitment to reforms is equally important
The government is likely to use the budget to reiterate its economic and governance agenda in order to allay any concerns about a change in the government’s policies after the BJP’s defeat in the recent Delhi state elections. We expect the government to provide more details about its key economic initiatives, pursue economic reforms vigorously, and commit to taxation reforms (implementation of GST by April 1, 2016).
Budget session is as important as the budget
The budget session of the parliament (starting February 23, 2015) will be as important as the union budget. The government will attempt to pass four key bills to replace ordinances in the coal, insurance, land and mining areas and also the GST constitutional amendment bill, which is already in the lower house of the parliament. The budget session will provide greater clarity on the government’s ability and methodology to implement legislative reforms despite certain constraints (such as its minority position in the upper house of the parliament).
Not much to expect for sectors; focus will be on the macro
We expect the government to tinker around with tax (customs, income tax) rates in order to meet revenue or other economic objectives. However, we do not anticipate a major overhaul of the taxation system since the government is already working on implementing GST from April 1, 2016. We expect it to postpone general anti-avoidance rules (GAAR) by a few years.
By Kotak Institutional Equities