What the markets will watch for in Budget 2020

Every action and word of finance minister Nirmala Sitharaman is being closely watched by investors who need a big dose of confidence to reaffirm their faith in India’s growth story. Budget 2020 can’t afford to be a damp squib.

Reserve Bank of India governor Shaktikanta Das has left the ball in the government’s court to revive the economy's animal spirits. With inflation at a five-year high of 7.35% in December, the Monetary Policy Committee has little room to cut benchmark rates to boost growth.

But, the government may not be able to crack the growth logjam with fiscal measures. The government is likely to miss its fiscal deficit target of 3.3% of GDP to ~3.7% due to faltering growth, a shortfall in tax revenue, and lower than budgeted divestment proceeds.

“On balance, we attach a higher probability to the outcome wherein the government avoids the choice of slipping even further, and overburdening the bond markets, and in the process increasing the risk of a sovereign rating downgrade, as a possible result. We expect the government to choose the path of consolidation over growth, although the pace of consolidation (fast vs. slow) is a close call,” Nomura observed in a report.

In this light, the markets seem to have factored in the likelihood of the government undertaking fiscally prudent policy measures to mend the fiscal gap, over sops to accelerate the growth cycle.

The markets expect Sitharaman to initiate policy measures to spur medium-term investment rather than push short-term consumption. An investment-and-export-focussed growth model can stimulate growth in the manufacturing sector and address unemployment.

“The government may also allocate more resources to welfare schemes, particularly around the employment guarantee programme, affordable housing, health, education, and sanitation. It may choose to expand its direct farmer income support scheme, PM-KISAN, that in its inception year in FY20, has remained underutilised given the challenge to identify beneficiaries. Overall, we believe the government will continue to allocate higher outlays to agriculture and rural development projects,” says Nomura in the report.

Some factions in the market also see the possibility of the government announcing a fresh round of capital infusion into public sector banks to address the credit crunch and stress in the financial sector. The real estate sector is also likely to be a focus area on February 1.

“Proposals being discussed include measures to clear unsold inventory, a one-time exemption of GST for first-time buyers, tax holidays for new housing projects, incentives to developers for taking on distressed projects, and increased outlay for government’s recent initiative to facilitate last-mile funding of stuck projects,” notes Nomura.

Investors are also betting on the government to ease the long term capital gains tax and dividend distribution tax for corporates. In a bid to attract capital, Nomura says, “The government may outline a roadmap for India’s inclusion in global bond indices to attract more foreign funds, although this is a close call.”

This is India’s first Budget to set the tone for the coming decade, and Sitharaman will have to get the Budget arithmetic right to steer the country’s sinking economy out of choppy waters.

The markets will be open for trade on Saturday, and investors will cue into Budget 2020 for a clear direction on the economy’s growth trajectory. Will Sitharaman rescue the economy as Manmohan Singh did in 1991? We will wait for the verdict.