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Government Posed With Growth Vs Fiscal Deficit Conundrum

The Budget will have to find ways to generate additional tax revenue while delivering on the promise made in its first budget of a cut in corporate tax.
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Union Budget FY19 would indeed be a coveted one, as it will be the last full budget by the incumbent government before general elections in 2019. This would be a tightrope walk for the government, given the need to balance populism with fiscal prudence amidst lower-than-expected GST revenues and expectations of corporate and direct tax cuts. The Budget will have to find ways to generate additional tax revenue while delivering on the promise made in its first budget of a cut in corporate tax.

On the divestments front, the government may target higher amounts than FY18, which have been the highest hitherto, while on the expenditure side, boosting rural economy, employment creation and thrust on infrastructure are likely to be on top of its agenda. Government capex will set the tone as far as investment climate is concerned for one more year hoping that private capex follows path in FY19. The Gujarat elections highlighted the need to focus more on rural spending to alleviate farm distress and increase farm incomes. Among other themes, the Budget may also announce measures to further incentive household savings in form of insurance and pension products in the backdrop of continued focus of shifting savers from physical to financial savings. Sectors such as automobiles, banks & NBFCs, agrochemicals, infrastructure, FMCG and cement are slated to be the key beneficiaries of the Budget.

With implementation of structural reforms like demonetisation, GST, the Bankruptcy Code and RERA, the government is posed with the growth vs fiscal deficit conundrum, which might culminate in a higher fiscal deficit of 20-30 bps in FY18/19, which we believe is taken well into cognizance by domestic and international investors, as they would be more concerned about long-term benefits of widened tax base and higher tax revenues, than a short-term blip in fiscal deficit.

(Jyoti Vaswani is Chief Investments Officer at Future Generali India Life Insurance)

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