The Change Finance Minister Arun Jaitley chose to stay the course on fiscal deficit and stood firm on achieving 3.5 per cent fiscal deficit target in 2016-17. This has been received well by bond markets, where the yields have moved lower to 7.6 per cent, after ruling high at 7.8 per cent through most of last year. The Budget also proposes to increase retail participation in government bonds.

The RBI will facilitate participation in the primary and secondary markets through stock exchanges and access to the NDS-OM trading platform. It has also proposed several measures to deepen corporate bond market.

The background Jaitley has kept his word and met the fiscal target of 3.9 per cent for 2015-16. The fiscal deficit of 3.5 per cent for 2016-17, means that the gross market borrowing stands at ₹6 lakh crore, marginally higher than the ₹5.85 lakh crore in 2015-16. The net borrowing at ₹4.25 lakh crore is 3.5 per cent lower than that in 2015-16. Prima facie, the growth of 12 per cent in gross tax receipts appears achievable.

The Budget assumes ₹36,000 crore divestment proceeds from stake sales in PSUs and ₹20,500 crore by way of strategic sales. After setting a high standard of ₹69,500 crore in last year’s Budget, the Centre raised about ₹25,000 crore in 2015-16 by way of disinvestments. Going by this, the divestment target for the coming fiscal looks ambitious.

However, the payouts on account of the 7{+t}{+h} Pay Commission may play the spoiler, for which the Finance Minister has only made interim provision.

The Verdict The Finance Minister has put to rest an ongoing debate on whether the Centre should stay the course on fiscal consolidation or deviate to accommodate capital spending. By choosing to rein in fiscal deficit, he has given bond markets much to cheer about. The global investment community (including the rating agencies) were disappointed over the government’s inability to deliver on critical area such as the implementation of the GST. Staying on the fiscal track, has helped improve the sentiment on India, in a scenario where all emerging markets are getting hit.

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Also bond markets were worried about the oversupply of government bonds with the likelihood of a hefty amount of UDAY bonds (to fund the power discoms’ clean up) due to hit the markets. Keeping government borrowings at bay to some extent has allayed these fears. Lastly, a tight fiscal path has paved way for the RBI to cut rates further. This can lead to bond yields moving lower over the next year. The spread between the repo rate (6.75 per cent) and the yield on the 10 year G-Sec (now at 7.6 per cent), offer enough headroom for a bond rally.

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