Union Budget Expectations & Takeaways On Macroeconomics

The macro economy will be a key area where expectations are high in the forthcoming Union Budget. There are certain unique factors that are coming together in this Union Budget. Consider a few of them. Firstly, the nation is just about recovering from a bout of demonetization which has crunched liquidity in the system substantially. Secondly, banks are flush with liquidity right now as the demonetization has resulted in billions of dollars coming back into the banking mainstream. Thirdly, many customer facing sectors like FMCG, consumer durables and automobiles have borne the brunt of the demonetization exercise and hence the corporate profitability needs to be taken care of. Fourthly, the economy needs a growth push and the fine line between growth and fiscal deficit needs to be struck. Lastly, the protectionist approach of Donald Trump adds a new global dimension to risk in Indian markets and that needs to be factored in and provided for. Here are some of the key macroeconomic takeaways…

Big push for rural spending and infrastructure

This could be one of the key macroeconomic themes of the Union Budget. Rural India has already suffered due to weak Rabi sowing season and the fall in rural incomes have also hit rural people quite badly. The budget is likely to focus on putting big money in the hands of the rural people through rural spending programs and rural infrastructure investments. The intent is that this will trigger a virtuous cycle in rural India which will aid demand and consumption in rural areas. The budget is likely to focus heavily on irrigation projects, expanding agricultural acreage, focusing on the post-harvest infrastructure, investing in the “farm to fork” infrastructure etc. The Budget will make a genuine attempt to help rural India double farm incomes by 2022.

Putting more money in the hands of the people

One of the key macroeconomic themes will be to put more money and spending power in the hands of the people. This could be done in a variety of ways. Firstly, we expect the tax slabs to be rationalized and exemption limits to be enhanced. Secondly, the exemptions that people enjoy under Section 80C, Section 80D and Section 24 could be enhanced to put more money in the hands of the people in post tax terms. Thirdly, the government could also undertake a direct money transfer program into the accounts of the less privileged people. Remember, the government has earned Rs.50,000 crore from the Income Disclosure Scheme (IDS) and another Rs.75,000 crore from the cancellation of liabilities by the RBI after demonetization. Both these will combine into a total benefit of Rs.125,000 crore, which could be passed on directly to end consumers.

Giving a more realistic thrust to disinvestment…

We expect this budget to give a real and more realistic thrust to the divestment process. Firstly, the divestment targets may be made more pragmatic. Secondly, the government may focus on strategic sale. This involves sale of loss making units where the government may have to adopt a piecemeal approach to divesting. The template may be cleared in this budget. Lastly, the government may actually move towards privatization. They may become more willing to divest up to 49% in case of PSU banks and majority stakes in most key industries. This will go a long way in improving the quality of the divestment targets.

Fiscal deficit will continue to remain under check…

The government has a target of 3% for fiscal deficit in this year and the government may try its level best to adhere to this target. The FRBM Act permits a deviation of up to 50 basis points and that is the maximum leeway that the government will take in this case. Control on fiscal deficit is important as the economy will be viewed more positively by global investors. Secondly, lower fiscal deficit target may be consonant with subdued interest rates which will suit the interests of industry as well as the government fund raising program. Notwithstanding the demands for pump priming, we expect the government to work on the side of caution.

Big bank reforms for banking sector…

This could be the real theme of the Union Budget. Most PSU banks are facing the pressure of Gross NPAs in excess of 10% and combined with lower levels of capital adequacy, the situation is becoming untenable. The government is likely to increase the allocation for bank recapitalization substantially in this budget and that would give more leeway to banks to lend. The budget may also come out with a template for working out rescue packages for troubled sectors like metals, power, telecom and infrastructure which have the highest combined exposure to stressed assets. This could be the space to watch out for…

A shield against the economics of Trump…

While the government has been largely silent on this subject, we expect this budget to take concrete steps to de-risk India’s trade and commerce model from over dependence on the US. Consider a few possibilities. Considering the pressure that IT industry could be in due to border tax and visa woes, the government may provide substantive incentives for off-shoring. Government may also provide support to explore markets outside the US so that the overall risk for Indian industry gets spread out. Additionally, the government could have a real problem of trade deficit if oil prices start going up further. Expect some major export promotion programs which can give a big push to exports and reduce the risk of unsustainable trade deficit in India.

The Union Budget 2017 is likely to be pivotal from a macroeconomic standpoint. The Indian economy is standing at the crossroads with major challenges at the domestic and the global level. The Union Budget may be the opportunity to get up and take these challenges head on!