Market participants would closely watch the capital expenditure allocation Finance Minister Arun Jaitley works out in his third budget, which will be presented on February 29.
"We are looking at a scenario where the fiscal construct should be on the expansionary side in the context that we have seen a drag on growth till now both with respect to overall economic growth and with respect to corporate performance," said Dhananjay Sinha, head of research- economist & strategist with Emkay Global Financial Services.
According to Mr Sinha, the government is likely to expand its 2016-17 fiscal deficit target to 4 to 4.3 per cent of gross domestic product (GDP) from its previous target of 3.5 per cent of GDP. That's because the nominal GDP in FY16 will be much lower at 8-8.5 per cent compared to the earlier estimate of 11-11.5 per cent, he said.
Given the recommendations of the Seventh Pay Commission and One Rank One Pension (OROP), and a higher allocation of funds to the rural sector, on a realistic basis, fiscal deficit has to be revised on the higher side, Mr Sinha said.
He warned that while the government's aim would be to expand capital expenditure, but that would have its implications on government bonds.
"While the government would like to expand, the pressure would be on higher sovereign papers in supply. You will have high supply of government of India papers; we have this UDAY scheme which will also translate into higher sovereign papers," Mr Sinha said.
Investment strategies
Mr Sinha says there will be opportunities in the consumer space, especially in urban consumption space, given high spending on OROP and Seventh Pay Commission. On the other hand, he says, banks, cyclicals and rate sensitive stocks will be under pressure.
Banks with asset liability mismatch will remain under pressure, while the government's re-capitalization plan would also be eyed for banking stocks, he said. If the government allocates more than it has set aside under the Indradhanush scheme, then that will be positive for the banking sector, he added.
In the near term, the markets would closely watch out how the budget session of Parliament pans out in light of recent political developments, Mr Sinha said.
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