Budgeting is about making choices, typically in a resource-constrained environment, said BofA Securities’ analysts Sanjay Mookim, Nafeesa Gupta, and Shikha Gupta in a note.

The trio, in the January 23 research note, highlighted that slow revenue growth means resources are particularly constrained now. In their view, the options before the government include expenditure cutbacks or expansion in fiscal deficit. “Spending is already below forecasts and the government has large payables on various accounts,” they said in the note.

Though there is an argument for a ‘clean-up’ acknowledging the excesses and paying out all dues, which could lead to a significant expansion in deficits but the trio thinks “the government is more likely to keep FY20 deficit under 4% for FY21”.

Also, there is a dilemma for the government—whether fiscal policy should be stimulative or conservative? More aggregate spending can support the economy but may come in the way of the current loose monetary stance, the trio pointed out.

More importantly, the other choice is—to allocate towards social spends or support (urban) consumption. “Social spends are essential for the long term but a short-term demand stimulus may be needed to prevent a cyclical slowdown from turning into something structural,” the trio warned. “In the whole budgeting exercise, the last is a choice we think the government could realistically make,” they added.

In their view, some form of relief for taxpayers and for the market seems likely. “The market may end up liking [Union Budget] announcements on February 1,” the trio said.

Further, the trio thinks the market is looking for changes in personal income taxes and taxes for companies/investors. “There are expectations of some relief for taxpayers with incomes below a certain cut-off,” the trio noted.

Additionally, in their report, the trio quoted some media reports suggesting the government may remove/reduce long-term capital gains tax (LTCG) and the recently imposed tax on stock buybacks. “These are modest measures, but broader tax cuts are unlikely, given a lack of revenue and due to the recent large corporate tax cuts,” they highlighted.

Though increasingly these measures are becoming part of market expectations and their announcement may lead to small positive triggers in the market, but may not result in any significant de-coupling of India from emerging markets, the trio said. The real message, in their view, will be in reducing some of the current sense of economic despair, which could have a real economic impact.

The trio is hopeful that while the coming Union Budget could create an overall positive tone, they see a few sustainable themes. Consumer stocks have already done well and tax cuts are likely to be small as a percentage of gross domestic product (GDP). As every year, taxes can affect cigarette companies in the near term. “Overall, we think financials remain the best means to invest for an economic normalisation,” the trio said. “Along with IT (information technology), financials is a sector where implied growth expectations are still reasonable.”

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