Opinion | Markets cheer headlines, BUT fine print is worrying

The numbers related to the fiscal deficit appear far too sanguine, which is worrying

Finance minister Piyush Goyal sure knows how to please the stock markets. No, he didn’t pander to the markets’ demands of revisiting long-term capital gains tax or lowering securities transaction tax. But he has managed to get investors excited by the thrust to consumption in the interim budget.

“Given the uncertainty in the global economy, the sops to the rural population and the middle class will help support consumption demand and insulate the Indian economy to some extent," says a portfolio manager. In any case, the stock markets love anything that has the potential to aid growth, and their positive reaction is not surprising.

It remains to be seen how far the sops will help in boosting demand, although it’s heartening that the distress in rural incomes is being addressed.

The bond markets, however, are understandably worried about what these additional spends would do to the fiscal deficit and the government’s borrowing. The gross borrowing figure of over 7 trillion was way above the markets’ estimates, and the even more worrying bit is that the numbers related to the fiscal deficit appear far too sanguine. For instance, the government now expects taxes on companies to grow 17.5% this fiscal year, about double the rate it had budgeted at the start of the year.

Analysts say the aggregate tax collections of listed companies hasn’t been growing anywhere near that rate, and there could be disappointment on that front. Likewise, assumptions on the goods and services tax for the current fiscal year remain aggressive, even though they have been cut.

It must be noted here that Budget Estimates for FY20 use the current fiscal year’s estimates as a base, and hence, the next year’s deficit numbers may also be understated. “There are some worries about revenue assumptions," says Prabhat Awasthi, who heads India operations at Nomura.

The all-important question is if the monetary policy committee of the Reserve Bank of India is convinced enough to cut rates. It’s quite likely questions on the maths behind the budget may lead them to be conservative, in which case the markets may end up being disappointed.