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ICICIdirect Research Posted on 10:36am 27-Jan-2020

Budget Preview - 2020-21

The government is likely to bite the bullet of a fiscal slippage (I-direct estimate of fiscal deficit at 3.8% for FY20E) as we believe resurrecting growth will be the key prerogative. It has already embarked on a number of reforms over the last few months like creation of Alternative Investments Fund (AIF) for completion of stalled real estate projects, reduction in GST rates, including big corporate tax rate cuts. However, the benefits of the above measures will see their fruition with a lag. Hence, the current need of the hour is to spur consumption, accelerate the investment cycle and employment as GDP for FY20E has slowed down to sub 5.0%. Hence, in our view, a slide in the fiscal deficit path would be a welcome step at this juncture provided it spurs consumption and revives employment and economic growth. The key areas of the Budget to watch would be how the government initiates policy measures that would boost local manufacturing as well as support job creation.

On the infra side, we anticipate the government will step up the capital expenditure allocation at 11% YoY to | 3.8 lakh crore in the Budget despite fiscal constraint. Higher allocation would be on the back of the government’s renewed focused on infrastructure as the Finance Ministry recently unveiled a | 102 lakh crore infrastructure investment pipeline over the next five years to revive GDP growth.

To boost manufacturing as part of the 'Make In India' campaign, the government is expected to address the issue of inverted duty structure and rejig of custom duties on electronic products in Budget 2020-21. Further, the government may also look into non-tariff routes to restrict import of consumer durable segment like television sets, AC and mobile components, which would boost domestic manufacturing.

As India is blessed with a rich demographic dividend, we expect Budget 2020-21 to lay strong emphasis on job creation, through skill development and calibrated investments (given the strain on the fiscal front). We have identified apparels, leather & footwear, textiles and food processing as sectors that possess relatively higher job creation potential vs. investment incurred.

To fund this expenditure, the reliance on non-tax revenues like dividend income from financial institutions and RBI, spectrum revenue along with disinvestments would continue to remain higher for FY21IE. Also, we expect the government to restrict the subsidy burden to 1.4% of GDP in FY21IE against 1.6% reported in FY19RE. We also expect the government to revise the fiscal deficit target as per FRBM for FY21E from 3.0% to 3.5%, which would provide incremental room of | 113000 crore to kick-start the growth cycle.

Other key highlights of upcoming Budget

• Given the lower tax revenues amid major corporate tax cuts and a slowing economy, we anticipate the fiscal deficit target for FY20IE would remain higher at 3.8% vs. earlier budgeted target of 3.3%. While the government would likely forgo | 1.9 lakh crore and over | 1.0 lakh crore direct tax and indirect revenues, we expect the above loss to be somewhat compensated by curtailing revenue expenditure to the tune of | 1.3 lakh crore for FY20IE

• The disinvestment proceeds for this fiscal would remain lower by | 50,000 crore as the proposed big disinvestment of companies like BPCL, SCI and Air India have been rolled over to next year. However, the excess transfer of | 88,000 crore (| 58000 crore received plus additional | 30000 crore dividend) from RBI would make up for the shortfall for this fiscal

• For FY21IE, we expect the government to set fiscal deficit target of 3.5%, which would, in turn, provide additional buffer of | 113000 crore to kick in the growth cycle. As a result, we expect allocation towards capital expenditure to increase 11% YoY to | 3.76 lakh crore for infrastructure


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