Seven Announcements Markets Expect From Jaitley's Maiden Budget

Arun Jaitley's first budget will reveal the Modi government's priorities and thus will be looked at by the market as a policy document, UBS analyst Gautam Chhaochharia wrote in a note today.

The market will look at the budget as a policy guide/roadmap for the medium term, despite this being a Budget for FY15 only, he added. According to UBS, the government is likely to focus on inflation management in the near term and not worry too much about growth.

"We expect this budget to set the stage for a future pickup in growth, rather than drive acceleration in real GDP this year. In all it should be a good budget for the bond market," UBS said.

Fiscal deficit for 2014-15 is likely to be retained at 4.1 per cent of GDP and 3.6 per cent of GDP for 2015-16.

The investment bank does not expect significant efforts to raise new taxes or tax amnesties, though it believes that some effort to broaden the tax base and improve collection should be made.

The important policy announcements that will be tracked closely in this budget are,

1) GST rollout remains a key reform for augmenting tax revenues over the medium-term. Rollout timelines for GST is likely to be highlighted in the budget as an important agenda for the government, UBS said.

2) Insurance/Pension reforms: There are hopes the Modi government would raise foreign direct investment limit in the insurance sector to 49 per cent from 26 per cent. The government may also consider FDI for pension funds.

3) Housing: Prime Minister Narendra Modi has promised housing for all by 2022, when India completes 75 years of its Independence. The government may announce concrete proposals on how it intends to fulfill its promise.

4) Cut in urea/diesel subsidies: The government spends nearly $24 billion a year on diesel and cooking fuel subsidies. There are hopes that the government will bring down diesel and fertiliser subsidy.

5) Land and labour reforms: Archaic labour laws have often been cited as one of the deterrent to the labour-intensive manufacturing activity in the country. The BJP government in Rajasthan recently took significant steps towards reforming labour laws by clearing the amendment to three central labour laws, which will boost manufacturing activity. Analysts expect the central government to announce similar measures in the budget.

6) Bank recapitalization: The government may provide guidance on or increase funds for public sector bank recapitalization, UBS says. The interim budget provision of Rs 11,300 crore for the recapitalization of the Public Sector Banks in FY15 has been criticized as too low by the State Bank of India. The Nayak Committee Report suggested the government would need to pump between Rs 1,26,000 crore and Rs 3,50,000 crore over the period January 2014 - March 2018.

7) Disinvestment of State Owned Enterprises (SOEs) may be used as a way of encouraging participation by retail investors in the equity market, UBS says. If asset sales are carried out at reasonable valuations and these provide good returns to retail investors, it can arguably create a virtuous cycle in attracting more capital from them, the investment bank added. This would also ensure more productive deployment of savings in financial assets, UBS added.