Budgets always give rise to rumours and leaks. It's dangerous to speculate about these until they are substantiated. Yet, some issues must be addressed in the coming Union Budget, one way or another. How those are tackled will help shape sentiment.
There isn't much leeway for the Government of India (GoI) to increase public spending, if it is to keep the fiscal deficit close to the commitment of no more than 3.5 per cent of gross domestic product (GDP). Higher spending is already guaranteed, due to the pay commission. This expenditure is already discounted. Importantly, GoI has to start doing something about public sector banks (PSBs). The problem of huge non-performing assets is out in the open and it is evident big bailouts will be required. Numbers like Rs 2.4 lakh crore are being bandied around as necessary for recapitalisation. The eventual sum required might be more and the process could take years.
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How much the government allocates to ailing banks and how it handles the bailout process will be crucial. A crisis in banking could put a lid on growth acceleration. And, even a major recapitalisation might not be enough to restore confidence about PSB health.
Investors would like to see signs of banks being allowed operational freedom. There are rumblings within the PSB sector about political coercion and forced lending to infrastructure projects, which is where the worst exposures lie.
GoI must find ways to address those negative perceptions. That task starts with the Budget. If it does come up with a coherent, credible plan for easing bank stress, there could be positive impetus on this front.
There is also a need to set realistic targets in the disinvestment programme. It is absurd to set targets which are missed by miles every year. In practice, GoI will raise a little less than Rs 20,000 crore from divestment in this financial year. Not a bad sum in itself but ridiculous compared to the target of Rs 69,500 crore. If the Budget assumes divestments in 2016-17 will be much higher than, say, Rs 25,000 crore, the figure is likely to be treated with scepticism.
As part of the disinvestment assumption, GoI will also have to decide how it proceeds to sell stake. Will it sell only small ones, in more or less profitably going concerns (NTPC and Power Grid, for instance) and, thus, remain firmly in control of the businesses where it does sell stake? Will it sell strategic stakes and cede control in some businesses? Will it try to get to rid of big losers like Air India or shut these down? Will disinvestment continue to be a sham, with LIC (a wholly-owned government corporation) and SBI (a tightly controlled PSB) ordered to subscribe to every stake sale? The answers might not be obvious at the Budget itself but the market will try to glean a sense of GoI's intentions.
Another area of interest will be subsidy calculations for the petroleum, gas and fertiliser sectors. The government must make assumptions as to what the bill is likely to be. In turn, this depends on the price of crude oil and gas. It also depends on what the government intends to do. Does it intend to gradually eliminate kerosene and gas subsidies, for instance?
Price volatility is a given in energy markets. At this instant, some international players expect crude prices to fall to $20 a barrel or less by December 2016. Others with equally good credentials expect crude prices to rise till $60 a barrel by then.
GoI's subsidy estimates have to be based on some sort of projected prices. Those will have an error factor. Take that as read. If the market thinks the projections are credible or conservative, the response might be positive.
Beyond this, there are rumours about changes in tax rates and in the treatment of capital gains. Those would have large implications but the devil lies in the details. It is entirely possible that there will not be a great deal of change or it might be different from the rumours.
The contrarians can take heart from one thing. There has been no bullish build-up to the Budget and the mood has been downbeat. This could mean the bears have already sold and discounted down many of the possible negatives. If the Budget does have some positive surprises, it could trigger buying.
