The main requirement from this budget will be to have a balanced act of fiscal management and growth. The government has been able to do so over the last 2-3 years, but this time the hesitation comes because it may be the last budget before the next national elections and the big state elections scheduled in 2018. To be populist may be the tantrum of the ruling party by focusing more on the rural economy by over-spending on rural-segments, agriculture and job schemes. More than that if the government offers overwhelming benefits to the rural & agriculture segment due to reduction in poll confidence primarily on account of difficulties caused by demonetisation and GST, it may revert as a risk to the market.

The risk comes due to fiscal slippage, higher government papers and interest rates. Market is very curious to see whether the government will be able to manage the slip or maintain the target of 3.2% fiscal deficit for 2018. Government’s 10 year yield had risen by 80bps over the last 6 months to 7.35%. Similarly, whether the fiscal target for FY18 be maintained at 3% or increased will be watched by the market.

Like last year, rumours are also making rounds regarding a possible hike in STT, which didn't materialise giving a relief rally to the market previously. In taxation, having completed the reform on indirect taxes, we can expect government to shift the focus to direct tax. The government had earlier suggested to cut the corporate tax rate to 25% in the Union budget of 2015-16 and therefore we can expect some implementation in this regard. However, given the disruption caused by GST implementation, any action on this behalf will be based on government's confidence in the resultant fiscal projections.

For individual direct tax there is a long pending request to increase the limit in 80C from 1.5 lakh to 2.0 lakh, which will be a bonanza to the already increased investment in equity through MFs. There are expectations to cut GST rate in food and non food items but we expect this is unlikely to be addressed in this budget since it has to be processed under the GST council.

Market is contemplating a risk posed by the likely populist agenda. Market is under pressure due to higher inflation & oil prices. Currently, it is consolidating on a narrow range. But we expect the government to maintain its growth-oriented measures. The key to the budget will be fiscal prudence and direct tax reforms.

The Writer Head of Research Geojit Financial Services