The government has reiterated the importance of the rural economy in its communications, and will take steps to provide relief to the rural economy. The Finance Minister could look at increasing the allocation for public irrigation systems, revamp of MGNREGA and rural infrastructure development initiatives.In January 2016, the government also announced a fresh version of the national crop insurance scheme, hence we could expect increased budgetary allocations for the same.
Another sector that needs attention is banking. Due to the balance sheet clean up ordered by the Reserve Bank of India, NPAs in the quarter ended December 2015, have increased by one trillion from the previous quarter, and provisions against bad loans have surged 90 per cent (Q-o-Q).
The government is likely to provide a substantial amount for the recapitalisation of banks to restrict further pain in this sector. There is also a possibility of the government introducing a consolidated tax payment system at group levels for infrastructure companies. This will help the sector as most companies have an extremely stressed balance sheet coupled with some unviable projects. Hence, reducing the tax burden to a certain extent will be positive for the sector.
In terms of the ongoing debate on whether the government will maintain its FRBM target of 3.5 per cent fiscal deficit for FY16-17, we believe the government is likely to loosen it only slightly, if at all, to accommodate increase in infrastructure spending, as well as support rural economy.
Stock markets have seen a large correction ahead of the Budget, and expectations are quite subdued. In this scenario, the Budget may have an advantage in signaling that the government remains even more committed to the reforms process.
Global headwinds are dominating the trend in stock markets currently, and we are advising investors to wait for clarity from the budget to scout for specific investment opportunities.