Fiscal slippages likely to spook market

Union Budget 2018-19 would be the toughest one for the BJP government so far in its current tenure. This is because it would be a tight-rope walk for the government in terms of garnering higher revenue collections amid challenges faced by mid and small corporates post GST. The short-term slowdown caused by GST and demonetisation are other factors. Meanwhile, rising crude and commodity prices beyond a particular level have already worsened the macroeconomic scenario in recent times.

While markets have already factored in the slight slippage in fiscal health in FY18 and has faith on the government’s ability to strike a good balance between populism and fiscal prudence, too much slippage will spook the market — both equity and debt. Also, guidance on the same for FY19 will be keenly watched amid rising crude/commodity prices and update on GST collections.

“2018-19 Budget will be presented against the backdrop of uncertainty over tax collections post implementation of the GST.We expect the government to revise its deficit target to 3.4 per cent of GDP for FY18 (higher than the budgeted estimate of 3.2 per cent) and to 3.2 per cent of GDP for FY19 (higher than the target of 3 per cent set last year). It means that the plan to meet the 3 per cent deficit target will be postponed by one year (to 2019-20) for the third time,” pointed out Motilal Oswal in a report.

“As GST-related dust is still settling down, the markets will be keenly watching fiscal deficit projections and whether the long-term fiscal consolidation path is adhered to. However, given the hard-achieved gains on fiscal consolidation, flexibility to go overboard on spending is limited,” it added.

Even Angel Broking echoed a similar view. “This year, the FM faces a unique dilemma of balancing growth and inflation amid rising crude oil prices and bond yield,” it said.

Any slippage on fiscal deficit would have ripple effects on government’s borrowing programme, inflation, bond yields, interest rates, etc.

Even as the common man has been affected due to lack of job creation for the past many years and then the demonetisation blow, the market does not expect the government to dole out freebies and expects only slight relaxation on the deductions under select heads or rationalisation of tax slabs.

Te market does not expect any change in corporate tax rate, except some reduction for mid-sized companies. There is also unlikely to be any major change to indirect taxes as the GST council is taking care of it. Moreover, market is not expecting a highly populist Budget either though there will be focus on areas such as infrastructure, social sector and rural economy. Consumer sector (especially rural and discretionary), retail, building materials (including cement) and infrastructure companies will benefit the most from the budget.

Stocks like Emami, Hindustan Unilever, UltraTech Cement, ICICI Bank, HDFC, Shriram Transport Finance, M&M, and L&T are some of the Budget top picks.

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