What is likely to be the broad theme of Union Budget 2019

With the interim Union Budget coming up on 01st February, the question is back to the theme of the Union Budget. It is a budget that is being presented in the midst of interesting and challenging times. The global trade war is still unresolved and China has reported its slowest growth in the last 28 years. The IMF has already downgraded the global growth by 20 bps and that is likely to take a toll on global demand. 

Domestically, the markets are just about coming out of a liquidity crunch and the valuation challenges are still high. Farm incomes have stagnated and farm stress is at an all time high. The fiscal deficit threatens to spill this year and in the midst of all these macro challenges there is Election 2019 that is coming up. It is in this background that the Union Budget 2019 will be presented. There are likely to be 5 broad themes for the Union Budget 2019..

Farm rescue package could be the principal theme
There are no two opinions that the MSP has not really succeeded in reducing the troubles of farmers. They still seem to be realizing prices that are substantially lower than the MSP. This budget could look at a shift by giving subsidies to farmers. Instead of paying subsidies, where the full benefits are not realized, the government may look at direct cash transfers as states like Telangana have done quite successfully. This cash transfer alone is expected to cost nearly Rs.70,000 crore. Two additional things in the budget could be a full-fledged rural employment program as well as sharply higher levels of bank lending for the rural segments. However, the government may try to underplay farm loan waivers in the budget.

Fiscal deficit could see spillage in this budget
Signals of a fiscal deficit spillage are already there after the full year fiscal deficit targets were breached by October itself. Then there are problems on the revenue front. GST collections are likely to fall short by nearly Rs.100,000 crore while the divestment program is expected to fall short by nearly Rs.20,000 crore. These two shortfalls are expected to stretch the fiscal deficit from 3.3% to 3.5%. We expect the government giving itself a bigger leeway on the fiscal deficit front. As a big push approach, that makes sense. For example, China is also going in for a big fiscal boost to prop growth and the Indian budget could follow a similar line on stretching its fiscal discipline in this year.

Watch out for a big shift in disinvestment program
Apparently, the government has realized that the traditional disinvestment program is too dependent on the stock market levels and that has dampened sentiments in the last one year. The budget may look at a more comprehensive approach to disinvesting government companies which could include strategic sale, splitting and consolidation of PSU companies, limited stake sale, selling land parcels, divesting intangible assets, licensing monopoly assets etc. These may get a clearer structure in the budget, despite it being an interim budget. This is one area that could get considerably reshaped in this budget.

Putting more money in the hands of people
The latest wealth report put out by Oxfam has shown how the top 9 wealthy families in India have wealth equal to 50% of the Indian population. That has obviously not gone down well with the public at large. One way to placate the people would be to give them more tax incentives which will increase the disposable incomes in the hands of the people. This budget could see a lot of people-friendly policies on the tax front. For example, the basic exemption slabs could be raised, the Section 80C limit could be made more realistic and Section 24 is likely to be made more relevant to purchase of property. The government may also look at more special incentives for senior citizens.

Some relief for equity markets could be on the cards
That could be the good news for markets. It is still not clear what form it will take but it could either be the abolition of LTCG tax on equities or at least extending the benefit of indexation to long term gains on equity and equity mutual funds. This may be more meaningful for long term financial planning. There have been demands for abolition of STT but that is unlikely to happen considering that it is much easier to collect and administer.

Overall, the theme is going to be predicated on putting more money in the hands of the people and giving out a farm rescue package. How the government handles the macro implications of these outlays remains to be seen.