The broad theme of the FY18 budget remains on reducing the pain arising out of demonetization and continuity of focusing on infrastructure and housing, says India Ratings and Research (India Ratings). The fiscal deficit target at 3.2 per cent of GDP in FY18 is lower than expected and positive for money markets, this will ensure transmission of low rates and benefits to the banking sector, said the rating agency.
Higher MNREGA spending than was budgeted in FY17 budget and increasing allocation to Rs 480 billion aimed at reducing the demonetization pain. This could be seen from the focus areas of the budget on agriculture/rural, MSME/informal sector and people who are in the lower income bracket. The budget pegs 2016-17 (revised estimates) fiscal and revenue deficit at 3.2 per cent and 2.1 per cent of GDP respectively.
The same for 2017-18 are pegged at 3.2 per cent and 1.9 per cent respectively. This shows some improvement in the quality of deficit, which is a welcome step and soothes, the nerves of the debt market. Central government’s net tax revenues are expected to grow at 12.7 per cent in 2017-18 (2016-17: 15.4%) translating in a net tax revenue buoyancy of marginally higher than 1.
Aggregate net tax collection assumptions appear to be plausible, however, at sectoral level it appears to be slightly difficult. For the banking sector, the budget reinforced Ind-Ra’s thesis on rationing of growth capital for PSU banks, while keeping the option of providing bailout capital open. Modest growth target for agri lending also points to the fact that Govt. is cognizant and comfortable with PSU banks’ inability to grow at a rapid pace. Ind-Ra expects this to keep the demand for Additional Tier-1 bonds high even in FY18.
Affordable housing has been given infrastructure status enhancing funding access as well as reducing borrowing costs, pace of lending through NHB continues , eligibility parameters on tax benefits for developers have been expanded and higher spends are being directed through PM Awas Yojna.