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Budget 2017: Seven Things Markets Will Watch Out For 

Finance Minister Arun Jaitley will present the Union Budget 2017-18 on February 1 and we already know this one will differ from its predecessors for a variety of reasons. For starters, India will see an early Budget announcement on February 1 – and not on the last day of February as has been the norm so far. Also, the Railway Budget has been merged with the Union Budget for the first time this year.

But as usual, uncertainty and curiosity abound on the content of the budget document itself. Market experts anticipate a ramp-up in government spending to boost growth in the aftermath of the demonetisation of old high-value currency notes, reduction in corporate and individual taxes, sops for the rural and urban poor population, among others.

Here is a quick view from the top bosses of some of the leading India-focused investment houses that BloombergQuint spoke with on our weekly market chat Thank God It’s Friday.

Populist or Pragmatic?

India’s next general election is at least two years away but the build-up seems to have begun. The government is expected to focus on reforms or policies to soothe the rural economy after the demonetisation shock but opinion is divided on whether the government will roll out a populist budget.

A populist budget which either expands the budget deficit or invests whatever tax collections might be coming from improving growth into populism rather than into encouraging capital investment and encouraging more sustainable growth would be a negative from an investor point of view. So when we look at the budget which is only a couple of weeks away, we are a little nervous about how much populism will get in. Obviously ahead of an important state election, there will be some (populism). How much long-term investment and capital formation encouragement will be there in the budget will be the competing challenge that the government faces.
Arvind Sanger, Managing Partner, Geosphere Capital
If you go into populism so early – elections in 2019 are still two years away – you run the risk of the cost of populism coming back through inflation etc over the next two years. Secondly, if you go too populist now, in a way, you are acknowledging that the demonetisation has hurt. Thirdly, data points do not seem to suggest that the government is panicking about the impact of the demonetisation and therefore will come with a populist Budget or a stimulus package. 
Gautam Chhaochharia, Executive Director And Head Of India Research, UBS

Budget Stimulus?

The World Bank lowered India’s economic growth forecast to 7 percent from 7.6 percent in 2016-2017 post demonetisation, as a large part of transactions in India are cash driven. Investors expect the Budget to include extra spending to revive growth.

I think the sops are coming, definitely. They also perceive politically that the people have had a hard time and therefore you need to give them some positive vibes so that they can start spending again in a big way. So I would expect some fiscal stimulus of some kind or the other, either through reduced taxes or through increased spending or a combination of both, some recapitalisation for banks but a lot will depend on the final arithmetic and legal leeway that they get to transfer some of this money to the consumer.
Vibhav Kapoor, Group Chief Investment Officer, IL&FS

Also Read: Budget 2017: Four Things Arun Jaitley Can Do To Keep Economists Happy

Big Infrastructure Push?

The government’s support for the infrastructure sector would be another key focus area, according to analysts and market participants.

"We expect the government capital spending to increase by 26 percent. However, the government’s spending priorities are likely to remain directed towards creating assets rather than giving subsidies," Goldman Sachs said in a note dated January 19.

We all know that private sector investment is not going to start in a hurry. Our expectation is that private sector investments are at least a year away. This year, the government will have to kickstart the investment cycle because that will release money in the hands of the people, which will start consumption.
Rashesh Shah, Chairman And CEO, Edelweiss Financial Services

Tax Relief?

The Budget is also expected to provide some boost to consumption through lower taxes and support businesses via lower corporate tax rates. In Budget 2015, Jaitley had announced the government’s intention to gradually reduce corporate tax to 25 percent and market participants expect some clarity on this matter.

One of the most important things is some sops for rural India. For the urban middle class too, especially the salaried section earning between Rs 5-15 lakh, should get some income tax relief by increasing slabs and reducing tax rates....The finance minister had announced that they’ll bring down corporate taxes by financial year 2018-19 to 25 percent. This would be a good year to start that reduction, maybe remove the exemptions, but start cutting back the corporate rate. 
Rashesh Shah, Chairman And CEO, Edelweiss Financial Services

The stock markets will also watch out for any provisions related to long-term capital gains tax. At an event organised by market regulator Securities And Exchange Board Of India on December 24, Prime Minister Modi had hinted at tweaking laws concerning gains from the capital market, possibly alluding to an increase in the long-term capital gains tax on securities transactions. The very next day, however, Finance Minister Arun Jaitley clarified that the government has no intention to tax long-term capital gains on share transactions, an issue investors are hugely touchy about.

Analysts at Morgan Stanley and Kotak Securities expect the tenure for availing long-term capital gains tax to be increased from 1 year to 3 years, to bring it at par with the bond markets.

Also Read: Budget 2017 May Cut Tax Rates, Not Hike Exemption Threshold

Fiscal Math

Perhaps the most important headline number that both economists and the market will watch out for is the fiscal deficit target. There is also the likelihood that the government switches to a fiscal deficit range instead of a fixed target, something the committee on Fiscal Responsibility and Budget Management (FRBM) headed by former Revenue Secretary NK Singh was asked to review.

The existing FRBM Act requires that the government bring down its fiscal deficit to 3 percent of GDP in fiscal 2018. But market participants say that it is likely to be higher.

In general, the deficit target could be between 3-3.5 percent of GDP. It cannot be less than 3 percent because it’s the target, it can’t be more than 3.5 percent because the markets may not like it. But the government has in the past relied on extra-budgetary resources so when you are talking specific expenditure i.e. national highways, railways, they could use a lot more of extra-budgetary resources wherever they have to give a stimulus. 
Neelkanth Mishra, Head - Equity Strategy For India, Credit Suisse
We have a 3 percent Fiscal Responsibility And Budget Management (FRBM) target for financial year 2017-18. I don’t know if it will be met. I don’t think markets are going to take it very badly if the FRBM target is not met. 
Swanand Kelkar, Executive Director, Morgan Stanley Investment Management
Our base case is still fiscal consolidation. Now whether it is 3.2 or 3.5 percent, we can debate about it. But those are things that don’t really matter. And I do not think it will matter to the markets either. For the markets, the big picture is whether we consolidate fiscally or we expand fiscally. So if fiscal deficit remains within 3-3.5 percent, I don’t think it will be a big thing for the markets. If it goes to 4 percent, then obviously it matters.
Gautam Chhaochharia, Executive Director and Head of India Research, UBS

Also Read: Budget 2017: Will A 3% Fiscal Deficit Remain Elusive?

Clarity on Goods And Services Tax

The Goods and Services Tax (GST) regime is expected to be rolled out from July 1 this year. The market will watch out for government's projections for indirect taxes including excise, custom and service taxes, and how much tax revenue the Centre will transfer to states as businesses adopt GST.

Suppose we see GST implementation in next 6 months, there is no point in tinkering with excise duty rate just before GST. So, it the budget could be focussed on the direct tax area and not on indirect taxes.
S Naren, Executive Director and Chief Investment Officer, ICICI Prudential Asset Management

Digital Drive

The government has often touted the demonetisation of old Rs 500 and Rs 1,000 currency notes as part of its efforts to transition towards a digital economy from the current cash-dependent one. To that effect, market participants believe a further push towards Digital India can be seen in the upcoming budget.

This government has made it clear that we are looking forward to digital India, less black money... I think that is what they are looking at and the budget will be focused on these areas.
S Naren, Executive Director and Chief Investment Officer, ICICI Prudential Asset Management
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