Our discussions with investors and commentary in the local press suggest a near impossible mix of expectations building up from the Budget again. Post demonetisation, expectations of measures to boost demand are high – in the form of personal income tax cuts and higher social spending especially targeted at lower income population. Hopes of government further supporting a languishing capex cycle remain intact – our view remains public capex role in capex cycle is limited. Allowances component of Pay Commission (0.2% of GDP possibly) may also need to be provided. Of course, most global investors hope for macro stability and local investors presume sustained low interest rate regime – needs fiscal discipline continuity. GST implementation and demonetisation uncertainty makes this Budget even more dependent on uncertain presumptions.

Historically, equity markets haven’t necessarily done much before or after Budget, though there have been more instances of higher positive returns one-month post. FY18 is likely the last year of fiscal consolidation in line with the medium-term roadmap, in the backdrop of elections due in 2019. Our analysis suggests the fiscal impulse will be less of an incremental drag on growth in FY18 than in previous years.

Our base case is of continued fiscal consolidation with the government likely budgeting in a fiscal deficit of 3% of GDP in FY18 (at most flat at 3.5% as in FY17). The government may be able to do this while still implicitly providing a boost through an increase in spending, utilising 1) excessive direct tax collections (corporate and personal income) as a result of demonetisation – disclosure or better compliance, and 2) one-time higher RBI dividend if at all. Whether this is 'stimulus' or not depends on the extent of associated reduction in private spend. Using higher taxes for spending is actually a transfer of income, unless the amount in question was lying idle as a stock of wealth – in which case private spending is not directly impacted while government spend rises. The counter argument is that there is no such thing as idle money, people hold money by choice and will thus rebuild the stock – this will be over time though and thus may still be an effective stimulus.

Where the government spends more, with or without 'stimulus', will have different sectoral implications. 1) Any fiscal transfers to Jan Dhan accounts or move towards "Minimum Basic Income" would be positive for Consumer Staples. 2) Greater focus/spend on Housing would be positive for cement, consumer discretionary, home improvement and financiers. 3) Agri-related spending increase would be positive for Fertilisers, Consumer Staples, Tractors and 2Ws. 4) A reduction in personal tax rates could benefit Consumer Discretionary and Autos. 5) Higher infra spending would be positive for Cement, Roads, Railways, Logistics and CVs.

Fiscal consolidation could add to pressure on RBI to ease policy and so could an explicit Govt policy push to support credit growth. We expect 2 further rate cuts – fiscal policy sharing bulk of RBI's burden is a key risk. Conversely, a deviation from the fiscal consolidation path would be a near-term negative for the rupee – add to this under-priced demonetisation impact and higher oil prices.

Over a longer term, risk of a looser fiscal policy in FY19 and evidence of higher inflation would weaken the rupee (FY18 INR forecast 73). Our Nifty target for end-2017 is 8,800, with upside/downside scenarios of 9,700/6,400. This combined with the rupee view implies negligible returns in US$ terms and unattractive risk-reward near term.