Union Budget FY27: 5 decisions that could shape markets, Kotak Securities says

The Union Budget is arguably the most significant economic policy document presented by the Government of India annually. It outlines the government's revenue and expenditure for the upcoming fiscal year (April 1 to March 31). Kotak Securities' projections for the FY27 Budget offer crucial insights into the likely direction of fiscal policy, emphasizing 'stability' over aggressive consolidation, sustained capital expenditure, and reliance on traditional revenue streams.

**Background Context and What Happened:**

Historically, the Union Budget is presented by the Finance Minister, typically on February 1st, for the fiscal year starting April. It is a comprehensive financial statement detailing the government's receipts and expenditures for the preceding, current, and projected fiscal years. The post-COVID-19 era has seen the Indian government grappling with the dual challenge of reviving economic growth while managing a higher fiscal deficit incurred during the pandemic. Fiscal consolidation, which refers to reducing the fiscal deficit and public debt, became a key policy objective, often guided by the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. This Act aims to ensure inter-generational equity in fiscal management and long-term macroeconomic stability. In recent years, the government has also significantly ramped up capital expenditure (capex) – investments in infrastructure like roads, railways, and ports – believing it has a high multiplier effect, boosting job creation and private investment.

Kotak Securities' outlook for FY27 suggests a pragmatic approach. They anticipate 'slower fiscal consolidation,' meaning the government might not aggressively cut its deficit to meet the FRBM targets quickly. This implies a trade-off: prioritizing growth and sustained spending over rapid debt reduction. The 'sustained capex' is a continuation of the current strategy, aiming to crowd in private investment and enhance long-term productive capacity. The expectation of 'limited populism' suggests a move away from broad-based welfare schemes or handouts, possibly focusing on targeted interventions. Revenue generation is predicted to lean heavily on 'tax collections,' reflecting economic recovery and improved compliance, and the 'Reserve Bank of India (RBI) surplus.' The RBI, as the nation's central bank, transfers its surplus profits to the government, which has been a significant non-tax revenue source in several years. Finally, the projection of 'higher borrowing' by the government to fund its expenditures, especially with slower fiscal consolidation, is expected to 'pressure bond markets.' Higher government borrowing increases the demand for funds, potentially driving up interest rates and making it more expensive for both the government and private sector to borrow.

**Key Stakeholders Involved:**

1. **Government of India (Ministry of Finance):** The primary architect of the Budget, responsible for setting fiscal policy, allocating funds, and managing public debt. Their decisions directly influence economic stability and growth. The Finance Ministry's Economic Division prepares the Economic Survey, which provides context for the Budget.

2. **Reserve Bank of India (RBI):** The central bank, whose surplus transfers contribute to government revenue. More importantly, the RBI's monetary policy (interest rate decisions) interacts significantly with the government's fiscal policy. Higher government borrowing can impact interest rates, influencing the RBI's decisions.

3. **Indian Public/Taxpayers:** Directly affected by tax policies, government spending on public services, and the overall economic environment created by the Budget.

4. **Domestic and International Investors (Bond and Equity Markets):** Their sentiment and investment decisions are heavily influenced by the Budget. Government borrowing directly impacts bond yields, while overall economic policy influences equity valuations.

5. **Economists and Rating Agencies (e.g., Kotak Securities):** These entities analyze and forecast economic trends and government policies, providing crucial inputs that shape market expectations and investor confidence.

**Significance for India and Future Implications:**

This outlook holds profound significance for India. Slower fiscal consolidation, while potentially delaying the achievement of specific deficit targets, could provide the government with more fiscal space to support economic growth, especially through sustained capex. Capital expenditure is vital for India's long-term growth potential, as it addresses infrastructure bottlenecks, improves logistics, and enhances productivity. It has a 'multiplier effect,' meaning every rupee spent on infrastructure generates more than one rupee in economic activity. This strategy aims to 'crowd in' private investment by improving the business environment.

However, higher government borrowing could lead to several challenges. It might 'crowd out' private investment by making capital more expensive and less available for the private sector. It could also put upward pressure on inflation and interest rates, impacting households and businesses. The reliance on RBI surplus, while a legitimate revenue source, is also debated, as some argue it might compromise the RBI's balance sheet strength or independence. For bond markets, increased supply of government bonds due to higher borrowing typically leads to lower bond prices and higher yields, increasing the cost of borrowing for the government and potentially for corporations. The 'limited populism' suggests a focus on fiscal prudence, which could be positive for India's credit ratings, but might also mean reduced immediate relief for certain vulnerable sections of society, requiring more targeted welfare measures.

**Constitutional Provisions, Acts, and Policies:**

* **Article 112 of the Indian Constitution** mandates the presentation of the 'Annual Financial Statement' (commonly known as the Union Budget) to Parliament each financial year. It details the estimated receipts and expenditures of the government.

* **The Fiscal Responsibility and Budget Management (FRBM) Act, 2003,** and its subsequent amendments, aim to introduce transparency and accountability in India's fiscal management. It sets targets for fiscal deficit, revenue deficit, and public debt, guiding the government towards fiscal prudence. The current projections of 'slower fiscal consolidation' would be assessed against these FRBM targets.

* **The Finance Act**, passed annually after the Budget, gives legal effect to the financial proposals of the Central Government, including tax changes.

* **The Reserve Bank of India Act, 1934,** governs the functioning of the RBI, including its role in managing government debt and transferring its surplus profits to the government.

In essence, Kotak Securities' predictions paint a picture of a government balancing growth aspirations with fiscal realities. The emphasis on stability and capex, alongside a measured approach to fiscal consolidation, reflects a strategy to nurture long-term economic strength, albeit with potential implications for borrowing costs and market dynamics. This strategic direction will be crucial in shaping India's economic trajectory in the coming years, impacting everything from inflation to investment and job creation.