Room for rate cut opens up after Budget 2016: India Ratings

Devendra Pant, Chief Economist, India Ratings & Research
A look at the budget math indicates that the revenue expectation is highly optimistic and for the government to stay on the consolidation path, they will need to cut capital expenditure, says India Ratings and Research. The budget pegs revenue receipts to increase by 14.2 percent. This hinges on 18.1 percent growth in income tax, 12.2 percent growth in excise duty and 76.67 percent growth in non-tax revenue from communication services. The assumed buoyancy of income tax is optimistic; excise resilience seems believable on the back of the increase in clean environment cess and infrastructure cess. Non-tax revenue from other communication services appears to be optimistic. As usual disinvestment receipts (budgeted at Rs 360 billion) are dependent on market conditions and the government’s ability to stagger it throughout the year. Strategic disinvestments have proved to be a problematic area for the government in the past and will impact receipts. The budget is hopeful on the expenditure side and non-plan revenue expenditure excluding interest, subsidy, pension and salary is budgeted to decline by 7.1 percent, which is highly optimistic. In order to adhere to the 3.5 percent fiscal deficit to GDP target, the finance minister may follow the old route of cutting down capital expenditure, as has been the case even in 2015-16. Both capital expenditure and capital expenditure including grants for capital creation has declined as a proportion of GDP in 2015-16 (RE) from 2015-16 (BE).

Room for Rate Cut Opens Up: Ind-Ra believes rate reduction may be as early as April 2016 policy meeting, following the government sticking to both FY16 and FY17’s fiscal deficit target. Additionally, the ongoing supply pressure in the bond market is likely to ease in the near term- as government budgets for lower net borrowing of Rs 4.25 trillion in FY17 via dated securities (compared to Rs 4.41 trillion FY16RE). This along with the governments intent to enact the Insolvency and Bankruptcy Code is likely to benefit the domestic bond market outlook as well as have a salutary positive impact on the Indian currency. Although budget FY17 stuck to the road map presented earlier, it has announced constitution of a committee to review the implementation of the FRBM act with a view to make it more dynamic and counter cyclical. This will give the government more elbow room to undertake growth boosting measures, while adhering to fiscal discipline. Consequently, fiscal targets and its implementation during the coming years may undergo a change.  The union budget FY17, has also provided the structure of monetary policy committee with 3 members each from the government and the RBI. RBI governor will have the deciding vote in case of a tie. Ind-Ra believes while this arrangement will facilitate the two way flow of thinking and result in a better synchronisation of monetary and fiscal policy, it will also protect the supremacy of RBI in case of monetary policy.