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* But fiscal deficit targets remain within desirable limits
* As widely expected, the government attempted to fulfill populist demands in its last budget before the general elections. Nevertheless, the total cost of such populist schemes was much lower than feared. The two major announcements were (i) direct annual cash transfer costing INR750b per year to rural (not necessarily poor) population and (ii) increase in tax exemption for income up to INR0.5m for individual tax payers, which will cost the government another INR185b. Both these announcements will further incentivize consumption (or hopefully savings).
* Overall, FY19 revised estimate (RE) and FY20 budgeted estimate (BE) of headline fiscal deficit of 3.4% of GDP are within the desirable limits and can broadly be achieved with no major slippages, in our view. Fiscal receipts and spending growth for FY19 and FY20, however, will likely be lower than the targets. While total spending is seen growing 13.3% YoY in FY20BE, following 14.7% in FY19RE, weaker receipts will make the achievement of the targets difficult. We, thus, do not consider the budget as highly expansionary.
* On the receipts front, while the government has rightly acknowledged a likely shortfall of INR1,000b in GST this year, aggressive targets for individual tax receipts and divestments reduce the possibility of achievement of FY19RE and FY20BE. Corporate and indirect tax receipts, however, appear more realistic and achievable. Our estimates suggest that there could be a shortage of at least INR500b in actual receipts in FY19, which implies that capital spending could be unchanged vis-à-vis FY18, as against FY19RE of 20.3% growth. Notably, FY19RE and FY20BE for capex stand at ~20% and ~6%, which confirms the government’s intent of maintaining good quality of spending. Further, while the government appears to have included the interim RBI dividend of ~INR200b in FY19, such receipts of INR850b for FY20BE appear ambitious.
* Finally, given that the government has decided to borrow additional INR440b this year (including INR80b of T-bills), there could be an impact on the bond market. Moreover, while the government has increased net market borrowings (of dated securities) to INR4.7t, up ~12% YoY in FY20BE, its expectation of securing INR490b worth of financing from public accounts (including state provident funds) is also quite high.
* Considering high G-sec borrowings in the last two months of FY19, we expect the RBI to conduct more open market operations to ease the bond markets. Further, we believe that reasonable headline fiscal targets and very comfortable inflation will allow the RBI to cut policy rates next week.
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