Budget 2018: Fear of outright populism overdone, say analysts

Budget 2018

The current market rally a month before the Budget proposals are announced on February 1 is the best in over a decade, with the S&P BSE Sensex and the Nifty50 indices gaining over six per cent so far in calendar year 2018 and crossing the 36,000- and 11,000-levels, respectively, for the first time ever on Tuesday.

Though most analysts do not expect the proposals to be hugely populist, brokerages would keep a close watch on how the government manages the fiscal situation a year before the country goes to polls scheduled in May 2019, and changes, if any, to the existing norms of long-term capital gains tax (LTCG) on equities.

While analysts peg the fiscal deficit for FY19 to be around 3.2 per cent, any change to the LTCG tax structure on equities could be a sentiment damper, analysts say. Increased allocation for infrastructure such as affordable housing, roads, railways, and ports is also possible.

Here is a quick compilation of what leading brokerages and research houses expect:

CITI

We expect the government to project the fiscal deficit at 3.2 per cent of the gross domestic product (GDP) in FY19 from 3.5 per cent of GDP in FY18. Markets will keenly watch for the expenditure tilt (we expect focus on agriculture, infrastructure, and housing), revenue projections (first-ever goods and services tax or GST projection, divestment strategy, tweaks in LTCG for equity investment) and finally commitment to adopt Fiscal Responsibility and Budget Management (FRBM) recommendations.

We expect further details on PSU bank recapitalisation and higher allocation to rural infrastructure (housing, roads, and electricity) but fiscal consolidation to continue. Direct tax relief is unlikely for corporate houses, although there could be tweak in the lower slab for personal taxes. Any changes to long-term capital gain exemption rules for equities (for example, three-year holding period) will be a sentiment negative.

NOMURA

Prime Minister Narendra Modi’s recent statements suggest that fears of outright populism — spurred by the fact that this is the government’s last full Budget ahead of the 2019 general election — may be exaggerated. Outside the Budget, we expect the government to focus on measures (including via trade policy) to prevent farm prices from falling further

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