Union Budget 2016: Top five fundamentals that market will look at

Among spate of announcements coming out of Jaitley's budget briefcase later today, marketmen will broadly look at following five key economic figures that would make or mar the market movement.

By Aprajita Sharma  
Monday, February 29, 2016

As Finance Minister Arun Jaitley gets ready to head towards Parliament to present the much-awaited Budget 2016, the S&P BSE Sensex opened on a flat note. Among spate of announcements coming out of his budget briefcase later today, marketmen will broadly look at following five key economic figures that would make or mar the market movement post Budget and will also set the course for stock specific actions:

1) Fiscal deficit

The government had revised its fiscal deficit target for fiscal year 2015-16 from 3.6 per cent of the gross domestic product (GDP) to 3.9 per cent in the Budget 2015. In all likelihood, Jaitley will meet the fiscal deficit target of FY15. Market would, however, be on the precipice to find out fiscal number for FY16. The fiscal deficit figure beyond the projected 3.9 per cent of the GDP may throw market in a tizzy. Shrey Jain, Founder and MD, SAS online.com believes rating agencies will closely monitor the government's actions. Any adverse comment on fiscal deficit will trigger rating downgrades, which will impact bond and equity market alike. Jain advised government to avoid going down the path of fiscal adventurism and set realistic targets for the coming years.

Independent market analyst Ambareesh Baliga, however, said global rating agencies have appreciated the possibility of slight deviations from targets.

"Slippage in fiscal deficit could be negative in the short run but positive in the longer run if it results in asset creation," Baliga said.

"Despite the multiple challenges up ahead, we expect the government to stick to its 2016-17 fiscal deficit target of 3.5 per cent as a share of GDP. We see limited scope of the government deviating from its long-term fiscal consolidation efforts given the heightened risk aversion in the markets," said HDFC Bank in a pre-budget note.

2) Capital Expenditure

While government expenditure is required to revive investment cycle in the economy, excess of the same may turn out to be inflationary. In spite of this, a high capex commitment in infrastructure will help market sentiment in the in short term"The consequences of pump-priming should be weighed seriously. Heavier expenditure by the government could be inflationary, undoing the good work that the RBI has done on this count over the past couple of years. If inflationary pressures mount, that will shrink the room for rate cuts by the central bank," said Jain.

However, the expert added some specific stocks may even react positively on capex announcement. "If a stimulus package for rural India is announced, stocks of companies with rural markets-FMCG, tractor, two-wheelers, fertilisers and seeds-may react positively," added Jain.

3) Tax revenue target

Market is keeping its fingers crossed if the government will meet the tax revenue target of Rs 9,19,842 in the current fiscal year . More important will be the number which Jaitley puts for the next fiscal year. It is important from the market perspective because this figure is based on budget's growth assumptions and also indicate likely scenario of GDP and inflation. A realistic tax revenue target will make the budget more credible in the eyes of market players.

Independent market analyst Sudip bandyopadhyay believes revenue target, particularly from disinvestment and strategic sale, will be hiked in the Budget 2016 with specific proposals and timelines to ensure bringing credibility to projects.

4) Divestment

Divestment is the process through which government raises non tax revenues via selling its stake in public sector undertakings. The capital, thus generated, is used in funding various infrastructure projects. The government has set the divestment target of Rs 69,500 crore for the current fiscal year, which is the highest set by any government since the disinvestment process began.

The government, however, looks set to miss the target for the sixth consecutive year in FY16, mainly on account of protests by trade unions and unfavorable market conditions.  "We expect the government to be more aggressive on the disinvestment front in FY17, although the track record of past several years indicates a persistent shortfall relative to targets. In our base case, we expect FY17 disinvestment target to be approximately Rs 45,000 crore, providing a tailwind of just 0.1 per cent of GDP," brokerage Edelweiss Securities said in a pre-Budget note.

5) Recapitalizing Public Sector Banks

Another major focus area is how government plans to recapitalize public sector banks. Experts believe PSBs are in dire need of capitalization to the tune of Rs 1,00,000 crore to Rs 5,00,000 crore by fiscal year 2019.

"In order to kick start the growth process, banking system needs to be adequately capitalised. Government had planned to infuse 70,000 crore by FY19, which in our view should be at least Rs 1,00,000 crore," told Alpesh Mehta, Analyst - Banking & Finance, Motilal Oswal Securities to Business Today online.

Bandyopadhyay also said 4,00,000-5,00,000 crore capitalization is required for the PSBs.

Now, it's over to Budget 2016 as to how much elbow room Jaitley gets to offer sufficient capitalization to the beleaguered banks.

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