With a hike in excise duties, increasing the target for divestments and for the dividend receipts, the government has made sure that overall revenue collections do not suffer. This was especially important at a time when the traction in GST and personal income tax collections remained muted. Now, with the downward revision in the collection target of these two categories, the overall revenue assumptions looks much more credible and pragmatic.
• On the expenditure side, the government has kept the targeted spending unchanged in order to support the economy – expenditure to GDP ratio remains high at 13.2% as outlined in the interim budget. This is a welcome step as there were concerns that the government might resort to expenditure cuts in the wake of revenue side concerns. In order to revive the economy, the government has focused on stimulating investments, by providing tax concessions in affordable housing and in the auto sector (electronic vehicles). Furthermore, recapitalization of the PSU banks and measures to support the NBFC sector are important steps that should help revive the ailing financial sector and consequently GDP growth.
• For the bond market, the new fiscal deficit target of 3.3% of GDP compared to the interim budget target of 3.4% should come as positive surprise and lead to ease in yields. Additionally, the comments from the Finance Minister that the government would raise part of its borrowing in foreign currency should take a lot of supply side concerns off the table. More foreign inflows on this account should also lead to some gains in the rupee. For the current year, while nothing additional has been budgeted for the overseas borrowing account, opening up of this route should benefit the bond market in the long term. The fact that the government will now be seeking external funds for sovereign needs reflects a fundamental shift in the budgeting process and in the budgeting philosophy in our view.
[Abheek Barua is the Chief Economist at HDFC Bank]