The Budget 2016 Cheat Sheet gives you the numbers that are relevant and helps you focus on the impact of the numbers on the market. Government bond yields fell and the INR appreciated against the USD on the budget sticking to fiscal deficit targets. Global rating agencies will view the target favorably and FIIs will buy INR bonds on expectations of rate cuts and the fact that global bond yields are trending down in most of the developed world.
The one all important number for bond markets is the fiscal deficit. The government has shown an absolute lower fiscal deficit number from budget estimates for fiscal 2015-16 and a growth of 4.39% over last year numbers. Government maintained fiscal deficit to GDP ratio at targeted levels of 3.9% of GDP despite nominal GDP growth coming off from 11.5% to 8.6%. Fiscal deficit is down by Rs 200 billion or 3.6% from budgeted numbers.
The government is assuming a nominal GDP growth of 11% for fiscal 2016-17 and fiscal deficit target is set at 3.5% of GDP. Fiscal deficit in absolute terms will fall by 0.39%. Government borrowing is expected to fund 85% of fiscal deficit with net borrowing at Rs 4538 billion up 2.8% while gross borrowing is set at Rs 600 billion up 2.5% from revised estimates.
Government has targeted bond switches for Rs 750 billion , 106.6% increase from 2015-16 revised estimates of Rs 363 billion (Rs 500 billion budget estimates). Bond switches will help elongate maturity of government debt and lower near term pressures on redemption. Read our note on Bond Switches to understand the switches.
On the Expenditure side, total expenditure is expected to rise by around 11% with the government implementing the pay commission recommendation in full and recapitalizing banks and spending on infrastructure. Food subsidy bill is higher while fertilizer and petroleum subsidies are down. Interest costs are rising by 11%. Non plan expenditure is budgeted to rise by 9% while plan expenditure is budgeted to rise by 15%.