The budget for FY19 was keenly awaited, being the first after the introduction of GST and the last full budget before the next general elections. Accordingly, it had to balance higher spending and fiscal consolidation in an environment beset with uncertainty regarding revenue buoyancy.

The revenue uncertainty in FY18 was led by both tax and non-tax revenues. Following the introduction of GST, a portion of the government’s indirect tax revenues in FY18 would be collected for 11 months instead of the full year. Moreover, dividends from PSUs and the RBI, and inflows from the telecom sector are estimated to contract in FY18, weighing upon the revenue growth of the government.

But the revenue situation is set to improve in FY19. The budget has forecast no­m­inal GDP growth at 11.5 per cent for FY19, in line wi­th our expectations. Excluding the GST compensation cess, the pace of growth of the gross tax revenues would rise to 15.7 per cent in FY19 budget estimates from 9.8 per cent in FY18 revised estimates, benefiting from the receipt of GST for the full year as well as improved co­m­pliance after the introduction of the e-way bill. Moreover, the revenue foregone from direct tax changes appears modest, particularly when compared with the fu­nds collected by way of anti-evasion measures. Additionally, non-tax revenue collections are set to grow by 4 per cent in the FY19, after the sharp contraction in FY18.

In line with expectations, the budget has introduced measures to enhance farmer incomes and the social security net, and also support the SME sector. Moreover, it focused on augmenting rural and other infrastructure, which would spur job creation as well as demand for the core sectors. In particular, the outlay for infrastructure is forecast to expand 21 per cent in FY19BE, which would provide a sustainable boost to the economic growth momentum in the coming year. Nevertheless, the ability to ramp up execution in a short period of time remains critical.

Largely in line with our expectations, the government has pegged its fiscal deficit for FY18 and FY19, respectively, at 3.5 per cent and 3.2 per cent of GDP, a slippage of 30 bps each relative to the previously announced targets of 3.2 per cent and 3 per cent of GDP, respectively. After a pause in the current year, fiscal consolidation is set to resume at the earlier pace of 20bps in FY19. But the curtailment of the fiscal deficit to 3 per cent of GDP has now been defe­r­red to FY21, even as the government has targeted to reduce its total debt to 40 per cent of GDP by FY25. An area of concern is the sharp rise in the revenue deficit for FY18 relative to the budgeted level, which has resulted in a worsening of the quality of the fiscal deficit.

The fiscal slippage and somewhat higher-than-exp­e­cted net long term market borrowings for FY19, resulted in a rise of over 15bps in G-sec yields, which had ha­r­d­ened substantially over the last three months given concerns regarding the rise in CPI inflation, looming fiscal risks, elevated crude oil prices and rising global rates.

Given the crystallisation of concerns related to a fiscal slippage as well as the uptick in inflation since the last policy review, we expect the to­ne of the upcoming moneta­ry policy review to be hawkish. Nevertheless, the monetary policy committee may prefer to wait for more data before hiking the repo rate.