BSE Building new
BSE Building newReuters file

Budget 2016 will be "run of the mill," given the constraints the Indian government is facing, but there could be still some surprise, according to a note released by Nomura Global Markets Research.

With the Narendra Modi government's overall revenue collections in the current fiscal expected to fall short of budget estimates due to multiple factors and expenditure set to shoot up in FY2017, it would have to do some "tightrope walk," said the market analyst.

The surprise element could come in the form of the government sticking to its commitment of reining in fiscal deficit to 3.5 percent of the gross domestic product (GDP) by the end of FY2017, the firm said, subject to "credit assumptions."

Most analysts and economists are expecting Finance Minister Arun Jaitley to relax the 3.5 percent target to accommodate higher spending to boost growth. 

"We expect the government to meet its fiscal deficit target of 3.9 percent of the GDP in FY16, but expect slippage to 3.7 percent of the GDP in FY17 (earlier target: 3.5 percent)," Nomura said.

The government's own estimates released a few days ago had said the shortfall in direct tax collections would be about Rs 40,000 crore in FY2016, though it would be offset by a similar rise in indirect taxes.

State enterprises to the rescue 

State-owned enterprises are expected to contribute in a big way to the Indian exchequer in FY2017, notwithstanding the steep fall in disinvestment proceeds in the current fiscal due to poor market sentiments.

"We expect the government to target INR500bn (Rs 50,000 crore) through disinvestments and strategic stake sales in FY17 versus INR133bn (Rs 13,300 crore) garnered in FY16," said Nomura Global Markets Research in the note.

The gameplan could be to look beyond just stake sale and explore selling physical assets and list unlisted state enterprises. 

"The government may present a plan for three types of stake sales: (1) winding up some of the loss-making PSUs (public-sector undertakings), including selling their physical assets (land, office buildings); (2) strategic stake sales of profitable PSUs to the private sector with the aim of inducting new technology and better governance; and (3) regular disinvestment (stake sales without privatisation) and public listing of select PSUs such as state-owned insurers, where FDI (foreign direct investment) limits have also been liberalised (to 49 percent from the earlier 26 percent)," Nomura said.

However, the challenge to the Narendra Modi government could come in the form of higher outgo on account of the implementation of the One Rank One Pension (OROP) scheme and the 7th Pay Commission recommendations, which are together expected to spike its expenditure by Rs 1.10 lakh crore.

"Overall, we expect revenue expenditure, which covers the government's running expenses, to rise to 11.5 percent of the GDP in FY17 from 11.1 percent in FY16. In contrast, we expect capital expenditure to remain unchanged at 1.7 percent of GDP," the note said.

[1 lakh = 100,000 | 1 crore = 10 million | 100 crore = 1 billion]