Budget 2018: It’s budget time! And market is raft with speculations as usual. Will it be a populist one, or will the government stay on course and continue its reform agenda as PM Modi suggested in an interview to a popular news channel? Macro triggers and intensifying competition across the world to attract investments suggest very little leeway for Indian Finance Minister Arun Jaitley to roll out a populist budget.
Trump administration, as per his election manifesto, has delivered tax cut for American corporates. Reduction of corporate tax from 35% to 21% has global repercussions and India is not an exception. The move will lead to reverse cash flow from emerging markets back to the US. Countering this reverse flow is the major task for FM Jaitley in the run up to the last budget of the present government.
In the Budget 2018, the Modi government is largely expected to cut corporate taxes to 25% from the current 35%. The move will bring cheer to India Inc. However, it will certainly spoil fiscal math for the Indian government. The move will certainly bring more companies into the tax bracket, but it will still impact the revenues of the government which is currently under stress as indirect tax collections are yet to pick up at pre GST levels.
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In this scenario, the Government will be forced to curb the expenses and stay on reform path in order to maintain fiscal prudence. India’s fiscal deficit is already expected to widen to 3.5% during FY18 breaching the target of 3.2%. Any further deviation will further discourage FIIs who are constantly on a hunt to find attractive investment destination. With the US throwing its hat in the puddle, the competition will only intensify. These compulsions will belie market expectations and leave little room for the government to doll out popular largesse which the market is expecting.
While rural stress a reality and which cannot be ignored for which the government will provide for, at the same time it is important to shield FIIs from being chased away. In order to generate further revenue divestment will be the theme to watch out for. In FY18, the government managed to achieve the divestment target of Rs 72,500 crore for the first time ever. The target is likely to jump to Rs 90,000 crore for FY19 with about 36 companies lined up for strategic sale, including Air India. Considering the fact, it is not always easy to get attractive valuation for PSUs; success of this strategy depends largely on the market sentiments. In order to search new revenue streams long term capital gain tax can also be expected to be levied. The move is unlikely to be welcomed by the market which might witness an immediate knee-jerk reaction. Therefore, it’s a path to be navigated carefully by the FM.
Prior to the Budget 2018, FM Jaitley is walking a thin rope. Will the focus be on winning general elections of 2019 or will the country’s long-term growth prospect get a nod? The clock is ticking and 1st February is not too far.
(By Jimeet Modi, CEO & Founder at SAMCO Securities)