With the BJP governmentgetting an absolute majority in the lower house of the parliament, expectation of the BJP implementing its poll manifesto is very strong. The incumbent government has already taken some steps with essential commodities being applicable to potatoes and onions which were removed by the UPA government in 2004. This should help tame inflation expectations in the coming months. The government has also started test runs of mini bullet train from Delhi to Agra.
We expect the government to stick to fiscal consolidation road map and reduce unwanted subsidies in the long run. The fiscal deficit is expected to be around 4.3% of GDP higher than the 4.1 % targeted in the interim budget. The revenue growth was targeted at 21 % , which seems to be on the higher side and the government may tone it down to 18 % levels.. The divestment target would be set at Rs 80000 croresas indicated by government officials. On the personal income tax front, we expect the income tax exemption limits to be increased from 2 lakhs to 2.5 lakhs. The government is expected to focus on job creation with emphasis given to tourism, agriculture and development of small scale industrires. This should led to incentives given to the SME sector and some relaxation on the labour laws for employment purposes. The government is also expected to give some tax holidays for dedicated freight corridors in the railway budget to boost transport of goods from railways. The government is expected to boost modernization of railways and increase its operation efficiency. The government is also expected to open the defence sector for the private sector and allow foreign direct investment in defence. The government is also expected to announce incentives for oil exploration. The highest amount of foreign exchange outflow happens in the defence and oil sector.
We expect the government to chart out a fiscal consolidation road map and reduce fiscal deficit by 0.5 % of GDP in the coming years. The government is also expected to reduce wasteful subsidies and to better target subsidies. The budget will set a roadmap for reduction of subsidies in the coming years. The bond markets should be bullish if the government comes with a roadmap for reduction of fiscal deficits in the coming years. With the improved in the economy expected in the coming years, the corporate bond are also expected to be bullish.
Pre Budget Expectation of Murthy Nagarajan, Head Fixed Income, Quantum AMC
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