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Madam FM, Budget for growth and go easy on deficit targets

Brokerages say the Budget is likely to be expansionary given the slowing economy.

, ET Bureau|
Last Updated: Jul 01, 2019, 07.36 AM IST|Original: Jul 01, 2019, 07.36 AM IST
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Brokerages believe that finance minister Nirmala Sitharaman may go for a one-off increase in fiscal deficit.
The Union Budget of 2019-20 is the biggest event to watch out this week. Brokerages say the Budget, to be presented on Friday, is likely to be expansionary given the slowing economy. They expect measures to recapitalise public sector banks and also focus on the rural economy and affordable housing. The interim budget in February had targeted fiscal deficit for the ongoing financial year at 3.4 per cent of GDP but brokerages believe that finance minister Nirmala Sitharaman may go for a one-off increase in fiscal deficit, and that such a move is unlikely to impact India’s sovereign rating. The Indian stock markets have been relatively muted in the run up to the Budget this time, partly due to the crisis in the non-banking finance space. Since May 23, when the Narendra Modi-led government scripted a decisive victory for the second time in national polls, the Sensex has gained 1.5 per cent. ET takes a look at expectations of brokerages from the upcoming Union Budget:

Anand Rathi
The brokerage expects the Budget to be expansionary, boosting consumption and investment through tax cuts and additional expenditure. The brokerage expects the finance minister to go for a one-off increase in fiscal deficit to Rs 8 lakh crore or 3.8 per cent of GDP, with the commitment to revert to fiscal consolidation next year. The expected budget-neutral market capitalisation would be positive for PSU banks, it said.

Bank of America Merrill Lynch
The firm expects finance minister Nirmala Sitharaman to try to boost investment by reducing capital costs without major fiscal impact. The interim budget’s fiscal deficit target of 3.4 per cent of GDP is likely to be retained, said BofAML, although it prefers 0.2-0.3 per cent of GDP of extra public spend. The bank expects the finance minister to earmark excess RBI capital to recapitalise PSU banks.

Centrum
Benign inflation trajectory coupled with the slowdown in consumption, exports and private investment establishes a strong footing for the government to defer the fiscal consolidation path for FY20 and announce economic stimulus package for reinvigorating growth impulses, said Centrum. The brokerage expects possibility of a downward revision in the targeted level of tax revenues and does not see much change in the divestment target.

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Edelweiss
The domestic brokerage said that the budget is likely to focus on the rural economy and affordable housing. Edelweiss does not expect material changes on the tax front. The brokerage said it will be prudent to lift government spending that can offset slowdown in the private sector. Reflation should be prioritised over reforms for now, the brokerage said.

Morgan Stanley
The financial services firm said the government is likely to focus on maintaining continuity in policy and spending on schemes allocated as per the interim budget. Morgan Stanley estimates fiscal deficit for FY20 at 3.5 per cent of GDP against interim budget estimate of 3.4 per cent of GDP. The firm expects the government to address capital needs of state-owned banks in the Budget.

Phillip Capital
The brokerage expects the government to maintain policy continuity with focus on agriculture, rural development and infrastructure spending. Phillip Capital said the time is ripe for the government to opt for fiscal expansion as economic growth is weakening. Fiscal deficit of 3.6-3.8 per cent of GDP will provide additional funds of Rs 40,000 crore to Rs 85,000 crore and will not have any adverse impact on Indian sovereign rating, said Phillip Capital. The brokerage does not expect the government to offer meaningful tax rebates (direct as well as indirect).

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Indian market last week continued to remain on the edge ahead of Union Budget and a much-awaited meeting between the US President Donald Trump and his Chinese counterpart Xi Jinping. With both the leaders agreeing to a trade truce, progress in monsoon and Budget remain the key factors that will guide Dalal Street this week. Here are some short-term stock recommendations that give decent returns to investors during the Budget week:
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