Against the economic backdrop and upcoming state elections, the key debate is whether the government will tilt towards activating fiscal easing to revive domestic demand and take a more populist stance in the budget and initiate transfers to households.
In our view, policy makers will remain on the path of seeking to consolidate fiscal deficit while boosting growth predominantly via encouraging public capex. As it is, fiscal space is limited with a consolidated national fiscal deficit of 6.4% of GDP in F2017 and government debt of 68.0% of GDP. Moreover, from a macro perspective, boosting capex remains the key towards ensuring productive growth – it will help utilise India’s growing working age population.
Thus far, even as the growth impact of the currency replacement program had become clearer over the course of November and December, policy makers have not indicated an inclination towards using fiscal easing as a means to boost growth. Indeed, this was corroborated by PM Modi’s televised address to the nation on 31 December 2016, in which he did not indicate any shift in the fiscal management philosophy then.
In this context, from a macro perspective, fiscal policy (and hence the budget) will still play more of an incremental role in supporting the economy rather than being a game Budget 2017-2018 changer per se. On the GST front, we expect to hear more operational details related to the implementation, and expect that the Finance Minister will reaffirm that GST will be implemented from 1 July 2017.
We identify five broad macro themes that we will be watching in the budget:
morgan stanley budget Click on the image to enlarge Will the government continue fiscal consolidation?
Will the balance of spending shift to the social sector with upcoming state elections?
Will the government continue its efforts to boost public capex?
Will there be significant changes in the tax structure?
Will there be further indications in the budget regarding the implementation of GST?