Budget seeks to balance economic, political imperatives: DBS

India's Union Budget for 2018-19 mixed prudence with populism and sought to balance economic and political imperatives, Singapore's banking group DBS said today.

While there was an emphasis on social sector and rural sector schemes, these were balanced with plans to raise revenues, the bank said about the budget presented by Finance Minister Arun Jaitley in Lok Sabha yesterday.

Adopting a more modest consolidation path, the deficit targets for Fiscal 2018 and 2018-19 were raised, but kept below FY17's 3.5 per cent threshold.

The overall contractionary stance will see fiscal policy play a smaller role in supporting growth, though well- implemented reforms towards the farm and rural sector might help the consumption turnaround, DBS said.

"Along our expectations, the outgoing year marked a fiscal slippage, with the government revising up the FY18 fiscal deficit target to 3.5 per cent of Gross Domestic Product (GDP) - vs targeted 3.2 per cent," the bank said.

The FY19 target has been set at 3.3 per cent (the medium-term fiscal roadmap had envisaged a deficit of 3 per cent of the GDP).

The government remains optimistic on revenue collections in FY19, after a shortfall this year due to slower Goods and Services Tax (GST)-related and non-tax receipts, according to DBS.

As a percentage of the GDP, gross tax revenues are forecasted to improve by 0.5 per cent in FY19, while non-tax revenues and non-debt receipts (divestments) moderate. After consistently falling short of targets in recent years, divestment receipts were surprisingly strong this year, noted DBS in its comments on the budget. Notwithstanding this positive surprise, the government pegged the FY19 target at a conservative Rs 800 billion, hinging on a busy pipeline of stake sales and bullish momentum in the capital markets.

Expenditure on the other hand is projected to moderate into FY19.

Ahead of upcoming elections, however, plans to slow revenue spending (10 per cent YoY in FY19 vs FY18's 15 per cent) and raising capital expenditure from a decline this year might be a challenge, according to the bank. The moderation in revenue expenses is likely due to lower compensation pay outs, as interest payments (under threat of the recent rise in borrowing costs) and subsidies (on higher food and fertiliser allocations) are projected to increase. The primary deficit (excluding one-off revenues) is budgeted to narrow by 0.3-0.4 per cent of GDP in FY19, suggesting a mildly contractionary budget, which may be hard to attain given the political calendar.

This is especially the case since the government aims to increase tax collection by an ambitious 0.5 per cent of GDP and cut total spending by 0.2 per cent of GDP, said DBS.

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