Let us begin by looking at how financial markets reacted to the interim Budget - while the Rupee is one of the worst performing currencies today, in the rates space - the 2028 yield has risen nearly 15 bps. Finally, the stock market has cut its gains in half. So what is making the markets nervous ?
Let us begin by looking at how financial markets reacted to today's interim Budget - while the Rupee is one of the worst performing currencies today, in the rates space - the 2028 yield has risen nearly 15 basis points (bps). Finally, the stock market has cut its gains in half. At the day's high, the Nifty was up a 153 points, by close it was up only 60 points.
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So what is making the markets nervous ? There are a couple of things at play,
Rightly or wrongly, both the bond and stock markets do obsess over the fiscal deficit number. The Budget today informed us that the FY19 fiscal deficit target of 3.3 percent of GDP will be exceeded, although by only 10 bps. The target for FY20 is 3.4 percent, which is higher than expectations. While optically the government is being fiscally prudent, the reality may be different. The market worries about the unknown. Is the government is assuming additional off-balance sheet borrowing ?
Government borrowing is another important and worrying number. The government's gross market borrowing is now seen at Rs 7.1 lakh core vs expectations that it would be around Rs.6.5 lakh crore. The prospect of significant incoming supply will likely continue to weigh on bonds.
The budget also makes revenue assumptions, which might be too rosy. While corporate tax collections are assumed to grow at a reasonable 13 percent in FY20, personal income tax collection growth is assumed at 17 percent despite the Rs 18,500 crores tax cut, hence implying implying tax buoyancy. Then there is the 18 percent growth in GST collections, which may prove to be a challenge given the record so far.
In what is being seen as a populist push, the government is allocating Rs 75,000 crore a year to support farmer incomes, and taxpayers will gain Rs 18,500 crores in tax relief. While the stock market was keeping a wary eye on the size and shape of the farmer package, many were hoping that a large package for farmers and sops to taxpayers would boost consumer spending in a big way. With the overall package now being lower than what was being expected – hopes of a boost to consumer spending are now deflated.
So where does it leave us ? While this is clearly a populist budget aimed at the upcoming general elections, I doubt any of the intended beneficiaries would be feeling beholden enough to give the BJP their wholehearted support.
Prashant Nair is the national news editor at CNBC-TV18.
First Published: Feb 1, 2019 4:39 PM IST