(MENAFN- Gulf Times) If Morgan Stanley is right, Indian Prime Minister Narendra Modi's first full-year budget on Saturday may be the most important since India opened its economy in 1991.
Expectations for Modi have been high since his party won India's biggest mandate in 30 years last May. A disappointing interim budget in July, coupled with the failure to pass key legislation in parliament, have only raised the stakes.
"This government has been given the benefit of the doubt for a long time and investors have begun questioning whether anything has been happening on the ground," said Rakesh Arora, head of research at Macquarie Capital Securities India Pvt.
"The government will have to go the extra mile in the budget." Using a tradition passed down from the British, Finance Minister Arun Jaitley on February 28 will stand and read the budget for the fiscal year starting on April 1. It's only the second time in India's history that it's been unveiled on a Saturday, when local stock, bond and currency markets are normally shut.
Stock markets will be open during the budget speech.
Besides investors, central bank Governor Raghuram Rajan will be paying close attention. He's linked further reductions in India's benchmark interest rate to "high-quality fiscal consolidation" in addition to softer inflation. Last month's unscheduled cut showed he's not afraid to act before the next scheduled policy review on April 7.
Undoubtedly, India has a lot going for it at the moment.
The country's stocks and currency are among the world's best performers in the past year; its economy is poised to become the fastest growing among major emerging markets as China slows; and oil's slide has improved its public finances.
Still, the investment community wants more. While praising Modi's pro-business approach since the election, it's looking for concrete details on his plans to boost local manufacturing, improve infrastructure and cut back on food and fuel subsidies.
"The budget now matters more than ever," Citigroup Inc's Rohini Malkani wrote in a February 22 note. "The market will look for something to excite, differentiate." Here are eight numbers that will indicate whether Modi impresses or disappoints.
India's biggest money managers have said they'll forgive Jaitley if he projects a wider shortfall than the 3.6% of gross domestic product targeted by the previous administration for the next fiscal year € as long as the cash is used to fund roads and power plants rather than food and fuel subsidies. The government is aiming to hit a target of 4.1% of GDP in the year through March, which would be the lowest in seven years. More funds for roads, bridges, highways and ports are crucial to spur an economy where private investment as a share of GDP is at the lowest in at least a decade. Economists including Andrew Tilton at Goldman Sachs Group and Samiran Chakraborty at Standard Chartered predict Modi will boost capital expenditure to at least 2% of GDP, up from about 1.8% in the previous budget. That would signal a rise to Rs2.8tn ($45bn) from $2.3tn in the previous budget.
While this is lower than the 2.4% of GDP budgeted after the 2008 global meltdown, the government may also offer state-run companies incentives to encourage them to spend their cash hoards. Jaitley might also increase import taxes on crude oil to pay for more infrastructure spending, Chakraborty wrote in a February 19 report. Food, fuel and fertiliser subsidies have risen to about 15% of total spending from 10% a decade ago, as the government looks to support living standards in a nation where 59% of the population lives on less than $2 a day.
Spending on subsidies will drop to about Rs2.49tn, or 1.7% of GDP, from Rs2.61tn, or 2% budgeted the previous year, UBS Group AG's Ed Teather predicts.
This is largely due to the 45% drop in Brent crude prices over the past year and the expansion of Modi's programme to reduce waste in the sale of subsidized goods through direct cash transfers to beneficiaries.
Although fuel and fertiliser spending is falling, those gains could be offset by increased food subsidy spending that is mandatory under a 2013 food security law, Teather said.
Economists questioned Jaitley's revenue projections in the interim budget in July, saying they looked unrealistic. And indeed, tax revenues grew just 7% by the end of December compared with the budgeted 20% increase, leaving the government 44% short of its full-year goal of Rs9.8tn.
With the economy now recovering and lower oil prices allowing the government to raise taxes on fuel without stoking inflation, net collection from levies will increase in the coming fiscal year to Rs10.6tn, Goldman Sachs predicts.
Another number being looked at is the revenue deficit, which is the difference between collections and expenditure minus any debt. The shortfall is estimated at Rs3.78tn for the year through March, with revenue expenditure at Rs1.57tn.
Modi will probably cut this spending to Rs1.52tn for the next 12 months, according to HSBC Holdings' Pranjul Bhandari. Together with lower subsidies, this would result in a smaller revenue deficit, giving the government room to borrow more for capital expenditure.
Yes Bank Ltd's Vivek Kumar sees net borrowing rising slightly to Rs4.7tn from last year's Rs4.6tn, while Goldman Sachs and Morgan Stanley predict it will drop to Rs4.4tn. Gross borrowing will rise to Rs6.23tn from Rs6tn, according to Morgan Stanley. It predicts the government will also look to buy back debt or swap bonds maturing in the coming months with longer term maturities to rein in interest costs that now make up 24% of total spending.
Modi needs to inject at least Rs200bn of capital into Indian banks to prevent their credit profiles from deteriorating, according to the local unit of Fitch Ratings.
That compares with the Rs112bn Modi budgeted for the current year to prop up a sector battling the highest levels of stressed assets since at least 2001.
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