Budget Triggers Euphoria On Dalal Street, But Analysts Question Fiscal Math

Finance Minister Arun Jaitley's third Budget has been well-received by investors. After notching up its biggest one-day point gain in seven years on Tuesday, the Sensex extended its post-Budget rally by advancing 464 points on Wednesday. Bonds and rupee also staged a sharp recovery, signaling rising bullish sentiments on the Dalal Street.

Traders have been quick to link gains in stock markets with Monday's Budget, but many analysts are cautious about the Budget's ability to boost stock markets and growth.

The biggest debate among analysts is centered on next year's fiscal deficit target. The government factors in higher proceeds from disinvestment and spectrum sale to meet its fiscal deficit target, but at Rs 56,000 crore, FY17 disinvestment target is a tough ask considering the government has been able to collect less than 50 per cent of its current year's target from stake sale in state-run units.

"The most ambitious aspect of the Budget is the 3.5 per cent deficit number...Whilst the FM has realistically budgeted 11.8 per cent growth in tax revenues, he expects the proceeds from disinvestment plus telecom receipts to fetch Rs 1.6 lakh crore in FY17. If this jump in proceeds does not materialize then we will be looking at a Budget deficit overshoot," said Saurabh Mukherjea of Ambit.

Standard Chartered's Anubhuti Sahay said the finance minister has not only overestimated proceeds from disinvestment and telecom spectrum sale, but also underestimated expenditure related to salary hikes and food subsidies and provided a lower-than-expected allocation for bank recapitalization.

"The actual allocation of Rs 25,000 crore for their recapitalisation is clearly inadequate and will hurt banks' ability to fund growth," said domestic rating agency Crisil.

Girish Pai of Nirmal Bang Securities said petroleum product subsides have been calculated with current crude oil prices ($30-$35 per barrel) and any material increase in crude oil prices could create problems for the (fiscal deficit) math.

Questions have also been raised about the Budget's ability to boost growth. Mr Jaitley was expected to significantly raise capital expenditure and provide fully for 7th Pay Commission salary hikes, which could have driven consumer demand. But there is disappointment on both counts, analysts say.

Sanjeev Prasad of Kotak Institutional Equities says Mr Jaitley chose "consolidation over growth" by postponing a "significant" portion of 7th Pay Commission-related payments to next financial year and budgeting a "small" 4 per cent increase in capital expenditure.

"With government spending slowing down and private investment unlikely to kick-start meaningfully given the slack in the economy, there are downside risks to growth in FY17," said Jay Shankar, chief India economist of Religare.

Mr Jaitley on Wednesday took on commentators, who have been critical of the Budget. Speaking at an industry interaction, he said, "I think probably the most difficult job is of the finance minister, the easiest being that of the commentator who all feel that the global situation is terrible and therefore the Budget should create firewalls to protect India from global trends, the Budget must aim at spending more, it must also aim at collecting less taxes and still maintain the fiscal deficit."

The finance minister added, "It's the job of these commentators and columnists which I think is now become most envious as far as I am concerned."