Union Budget 2017-2018 Review: Motilal Oswal

The government pegs FY18 fiscal deficit target at 3.2% of GDP, lower than 3.5% for FY17, but slightly higher than the self-committed target of 3% of GDP. Since primary deficit and debt-to-GDP ratio are likely to narrow next year, we do not find a breach in the deficit target concerning.

It is notable that the government has budgeted realistic to conservative growth in tax collection and avoided inclusion of any windfall receipts from the potential extinguishment of RBI's liabilities due to demonetization, which lends credibility to its receipts estimates. The disinvestment target of INR725b, however, still looks ambitious.

It was heartening to see the government resisting calls for populist measures. Total spending is budgeted to grow at 6.6%, implying that spending will fall to 12.7% of GDP, marking the lowest level since mid-1970s. Further, with the share of capital spending rising to a decade high of 14.4%, the spending quality is also good.

Overall, we believe that the government has tried to make the maximum impact at minimum cost by providing relief to the low-income individual tax payers and reducing corporate tax for small companies - the most affected sections of the society. The government has kept inflationary bias at bay and its realistic math adds to its credibility.

We also believe that a credible and economy-sensitive Budget opens the room for the RBI to deliver a rate cut next month.

Market strategyThe FY18 Union Budget was presented at a time of mounting uncertainties on both the global and domestic fronts. With demonetization temporarily disrupting the business environment and moderating economic growth, the market was expecting the government to respond with a dose of populism (cut in tax rates, rural packages, rise in tax deduction limits, etc.) in the budget. At the same time, anxiety was high around factors like LTCG and service tax hike. Against this backdrop, we believe the finance minister (FM) in his third budget has managed to achieve a fine balance without deviating from the fiscal prudence path. As expected, the budget had measures to clamp down on black money (ban on cash transactions beyond INR 3 lakh) and promote digitization. The FM provided relief to the low-income individual taxpayers and reduced corporate tax for small companies – the segments most impacted by demonetization, in our view. Given the context of muted private capex investment cycle, the onus of driving investment rests on the government. Thus, the FM is budgeting for another year of double-digit (10.7%) capex growth in FY18, with higher allocation toward Roads, Railways, Rural Housing, Affordable Housing, Agriculture, Social sector, etc. Despite this, the government has pegged total spending growth at 6.6% for FY18 – the lowest in the last 12 years. This is achieved by containing revenue expenditure and keeping inflationary forces at bay. This, we believe, opens the window for one more rate cut by the RBI.