India Insight:FY17budget expectations –meeting the impossible trinity

Need to create fiscal space of 1.2% of GDP in FY17

We believe this time around the finance minister needs to fine tune balancing thethree key but competing objectives in the upcoming budget – (1) meeting thefiscal consolidation requirement of 0.4% of GDP as envisaged under FRBM Act,(2) continue to boost public capex (additional 0.2% of GDP) and (3) provide for ahigher wage and pension bill under the seventh pay commission and OROPscheme (another 0.6% of GDP fiscal space). At the same time, we expect thegovernment to provide clarity on timeline for GST implementation and a clearroadmap for corporate tax reduction (from 30% to 25% over the next four years).

Meeting FY17 fiscal target – challenging but not impossible

Considering the government had already deviated from the fiscal consolidationpath in FY16 by targeting a higher than expected deficit, doing it for the secondconsecutive time after coming into power might raise questions regarding thecredibility of their commitment. At the same time, it will push up borrowing costsand affect public sector debt dynamics considering nominal GDP growth hasdecelerated significantly. We believe the government will try to stick to thefiscal target of 3.5% of GDP in the upcoming budget.