budget 2017, fm arun jaitley, pm modi, taxation, pay commission, ids, tax collection, repo rate cut
Finance Minister Arun Jaitley chairing the 16th FSDC Meeting, in New Delhi on January 5, 2017 (representational image).PIB India

The Supreme Court will be hearing on January 20 the plea for postponing the presentation of the Union Budget on February 1 till the state assembly elections are over. Presuming the apex court rejects the PIL filed by advocate Manohar Lal Sharma, February 1 could see a fine-balancing act by the Modi government in the wake of demonetisation, the upcoming state assembly elections and the expected tilt by PM Narendra Modi from bold economic reforms to populism.

Read: RBI governor Urjit Patel conveys subtle message to Modi Govt before Budget 2017

A BofA Merrill Lynch Global Research report released on Monday said that finance minister Arun Jaitley is positioned reasonably well to absorb the burden due to the implementation of the recommendations of the 7th Central Pay Commission (CPC), thanks to the proceeds from the second amnesty scheme launched last year (Pradhan Mantri Garib Kalyan Yojana, 2016) by the NDA government and fiscal dividend from the demonetisation drive.

The total outgo in a financial year as estimated by the CPC is about Rs 1,02,100 crore, of which the Centre had provided for Rs 70,000 crore in Budget 2016.  

On the flip side, there is a possibility of the government relaxing the fiscal deficit for the financial year 2017-18 to 3.5 percent from the earlier targeted 3 percent.

The report also said that the Reserve Bank of India (RBI) could lower repo rate from the current6.25 percent to 6 percent when it meets next month (February 7-8) and by another 50 basis points by September this year.

Here are the highlights of the BofA Merrill Lynch Global Research report written by Indranil Sen Gupta:

  • The MoF (Ministry of Finance) should net about Rs1500 bn (Rs 1,50,000 crore) from IDS and RBI dividend.
  • We expect Finance Minister Jaitley to target a fiscal deficit of 3.5 percent of GDP - same as FY17's - in FY18. This excludes the impact of merging the Rail Budget this year. We assume that the N K Singh Committee will relax the FY18 fiscal deficit target to 3-3.5 percent of GDP from 3 percent.
  • We expect the Finance Minister to: (i) fund higher government salaries and allowances due to the 7th Pay Commission award and (ii) step up PSU bank recapitalization out of the Rs1000bn (Rs 1,00,000 crore) that we expect from the Income Disclosure Scheme II. This should also enable the Center to fund public capex at budgeted levels without having to cut during the year.
  • The government will likely utilize the Rs500bn of RBI 'special'dividend to increase public spend in the run up to the 2019 General Elections.
  • With our oil strategists forecasting $61/bbl in 2017, we see a Rs 260bn risk to the fisc, beyond $55/bbl at Rs67/USD, if the Center wants to hold diesel prices at their previous peak.
  •  We grow more confident of our call that banks will cut lending rates by 50-75bp by September. Banks have already cut their MCLR. A soft risk-free 6-6.5% 10y should create the headroom for lower lending rates. Second, banks will likely retain about Rs 2000bn (Rs 2,00,000 crore) of additional deposits from demonetisation after the churn is over. Finally, a step up in PSU bank recapitalization should help banks to cut rates to lend.