Missed the fiscal deficit: Nomura

The government missed its FY18 fiscal deficit target (of 3.2 per cent of GDP) due to lower revenues and higher spending, commented Nomura Securities on the Union Budget presented by finance minister Aru. Jaitley.

The government has revised its fiscal deficit target of 3.2 per cent of GDP,  revising it up to 3.5 per cent of GDP, as expected (Consensus and Nomura's projection: 3.5 per cent of GDP).

It expects to continue down a path towards fiscal consolidation in FY19, although at a more modest pace, targeting a deficit of 3.3 per cent of GDP, which is higher than expected (Consensus and Nomura's projection: 3.2 per cent of GDP).

•  Medium-term fiscal targets: The government announced its intention to accept the Fiscal Responsibility and Budget Management Committee's recommendation for the centre to reduce its debt to 40 per cent of GDP (with a fiscal deficit as the operational target).

•  Market borrowing: The government pegged its net market borrowing at Rs4.62 trillion (trn) in FY19, slightly higher than Nomura's  expectations  of Rs4.5trn.

•  Long-term capital gains: In a negative surprise, the government introduced a long term capital gains (LTCG) tax of 10 per cent on equity gains above Rs100,000.

•  Other key tax changes:

– Reduced the corporate tax rate to 25 per cent from 30 per cent for medium sized companies (i.e., those with turnover of less than Rs2.5 billion as opposed to INR0.5 bn limit earlier).

– No change in the personal income tax slab, but a Rs40,000 flat standard deduction offered to salaried citizens, which will increase disposable income.

•  Rural and 'common man' in focus: As expected, the budget focussed on the themes of rural development and the 'common man', given the election-heavy calendar.

Accordingly, allocations have risen for agriculture, healthcare and education sectors. To boost rural incomes, the government proposed fixing the minimum support price of all summer (kharif) crops at a minimum of cost plus 50%. The government also announced a national healthcare scheme that will cover an estimated 100 million families. In addition, it plans to maintain the increase to infrastructure spending on roads and railways.

Nomura's  comment
The fiscal deficit projection for FY19 is marginally higher than expected and suggests that, while fiscal consolidation will continue, the pace of consolidation will be slower than initial targets.

The focus on rural development and the 'common man' was largely expected, but announcement of the new cost-plus formula for minimum support prices and the introduction of a LTCG tax on equity is a negative surprise.

On the other hand, the corporate tax cut, commitment to medium-term fiscal consolidation and continued infrastructure spending are positives. Overall though, the budget outcome appears mildly disappointing relative to our expectations.