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* Capex spending to moderate as fiscal constraints emerge:
We expect the fiscal consolidation glide path to get extended as we estimate a fiscal slippage of 20 bps for FY19 driven by shortfall in net tax revenue of Rs1.2tn (0.6% of GDP). Slippage in tax revenue is largely due to the shortfall in GST tax collection of ~Rs1.6tn (0.9% of GDP) while direct tax collection is estimated to be closer to the budgeted amount. Disinvestment could fall short by ~Rs100bn, though somewhat offset by non-tax revenue like dividend income from RBI & PSUs. In response to revenue shortfall, overall expenditure could see reduction either through shifting the spending offbalance sheet or outright cuts. Capital expenditure could be impacted more than revenue expenditure given the importance of tackling the farm distress.
A central farm relief package for small and marginal farmers (land ownership of less than two hectare) is most likely to be announced along with some tax relief to lowand middle-income group earning below Rs0.5mn per annum. Given tax exemption upto Rs0.25mn, contribution to income taxes by this group is minimal, less than 0.1% of GDP. Significant reform on the direct taxes front appears unlikely as the Task Force on Direct Taxes reform will submit its report to the government only by 28-Feb.
* Implications for equities:
As the thrust of spending moves towards revenue expenditure in the form of farm relief expenditure or tax relief for the EWS of the society, capex growth is likely to remain stagnant given the budget constraints. The above spending pattern of the government going ahead augurs well for consumption stocks with large rural footprint while it is negative for stocks driven by hopes of a capex revival. Coincidentally, the private capex revival has been weak so far as per our analysis (Abridged Balance sheet analysis dated 6-Dec’18) while the pace of government capex spending could be plateauing. Off-budget spending on capex by the government through the IEBR route could continue but face hurdles as dividend pay-out by PSU companies has been increasing, thereby constraining capex spend while agencies like NHAI are already growing their balance sheet at a fast pace. Our budget picks include companies benefitting from the likely pick-up in rural consumption: HUL and Dabur
* Announcement of Farm relief package likely but implementation will depend on final budget in Jul’19:
Small and marginal farmers (land holding of less than two hectares) have been the most affected by declining food prices which have impacted realisations adversely. A central farm relief package for marginal farmers is most likely to be announced and could cost the central government ~ Rs665bn – this is based on the assumption that only small and marginal farmers, who collectively own ~221mn acres of gross cropped area, will be eligible to access Rs5000/acre and that the centre picks up 60% of the burden while states contribute the rest. However it is difficult to envisage how such a package will be implemented given that it will be announced in an interim budget and will need the approval of the new government for it to be implemented in FY20. Also the execution of a farm relief package on a panIndia basis remains a challenge given the paucity of proper land records.
* Gross market borrowing to be ~Rs6.3tn:
Fiscal deficit is likely to come in at ~ Rs7.1tn (3.4% of GDP) in FY20 driven by stabilisation of GST and tax compliance gains. Redemptions of government bonds are likely to be ~ Rs2.4tn. We expect the government to try and keep the gross borrowing program of dated securities for FY20 at ~ Rs6.3tn and net borrowing at Rs4.2tn thereby relying majorly on small savings, short term borrowings, switches and cash drawdowns.
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