The new Finance Minister, Mr. Arun Jaitley, will present his maiden budget amid high expectations. The strong mandate in the elections and the recent announcement of railway passenger fares / freight rates hike have raised expectations about several reforms announcements from the budget. Markets are looking out for a forward-thinking and an ‘achievable’ budget. We expect the FM to lay down the new Government’s vision for the economy over the next five years.

The FM’s priority in the 2014-15 budget will be growth, along with fiscal rectitude. He will budget for higher plan expenditure (investments), financed by higher revenues (higher economic growth, divestment, auctions and better tax compliance) and a cut in non-plan expenditure (subsidies).

A lower fiscal deficit will leave more money available for the private sector, help in easing inflation and moderate interest rates. Thus, we expect revised targets under the FRBM Act to be set lower. We expect the FM to target a fiscal deficit of 4.1% for FY15 and budget for a gradual reduction of 40 bps in fiscal deficit to 2.5% deficit in 2018-19.

We also expect the FM to target real GDP growth of 5.5% in FY15 and bring it to over 8% in the next five years. Larger and targeted plan expenditure capital outlays, with strict implementation timelines, will likely be announced, to ensure economic recovery and sustainable growth. We expect plan expenditure growth target to be pegged at 16.7% . The budget will aim to provide an investment – led supply push to growth (with private sector participation) as against a consumption – led demand pull (higher subsidies, etc) of UPA era. Targets for subsidies will likely be controlled, especially fuel and fertilizer subsidies, we opine.

With CPI food inflation remaining at elevated levels of 8.28% (May 2014), we expect additional expenditure towards easing the supply bottlenecks for food-grains and other primary articles. We understand that, these initiatives can yield results only in the long term. However, they can help in containing inflationary expectations. On the other hand, non-food manufacturing (Core) CPI inflation has moderated to about 7.7%, but may rise on the back of improving growth.

Mr. Jaitley may signal the Government’s intention to move ahead with reforms on several fronts. We believe that, he will target the implementation of DTC and GST WEF FY16. Some enabling measures may be announced in the budget. A definitive roadmap for reducing the subsidy burden could also be announced. Effective targeting of the subsidies to the needy will also go a long way in reducing leakages. The budget may also announce new reforms including Insurance reforms, Pension reforms, etc. Some critical reforms like labour reforms, which need broader political consensus, may also be touched upon.

We expect stability in tax rates, though there may be some adjustments in the list of exemptions, deductions, etc, keeping in mind the eventual movement to GST and DTC. We expect some increase in basic exemption limits for individuals in line with the promise made by the PM and standing committee recommendations. Excise duty cuts announced in the vote-on-account have been extended till December 31, which is a positive for the auto and capital goods sectors. We also expect tax exemptions on targeted investments to be announced. We expect the divestment target to be increased to Rs.800bn v/s the target of Rs.370bn announced in the interim budget and Rs.160bn achieved in FY14.

We do not expect any major initiatives for the stock markets. Reduction in STT, if any, will be cheered by the markets. Thus, we believe that, the focus of the markets will be on fiscal prudence, on effective implementation of investments, and on sectors which are impacted by the budget proposals. Off-budget investment and governance reforms announcements will continue to impact the markets.

We believe that, the budget may have the following implications for the sectors:

Expected sectoral impact

Budget impact              Sector

Positive                        Automibiles, Aviation, Banking & NBFCs, Capital Goods, Cement,

Construction, Media, Metals, Oil & Gas, Power, Real Estate,

Shipping & Logistics

Neutral                         FMCG, Hotels, Information Technology

Source: Kotak Securities – Private Client Research

Source : Lokesh Shastri