Mar 17, 2012, 11.19 AM | Source:

Budget 2012-13: Aditya Birla Money says there's a long way ahead

Aditya Birla Money has come out with its report on Union Budget 2012- 13.

Aditya Birla Money has come out with its report on Union Budget 2012- 13.

The market’s initial reaction to the budget for 2012-13 has not been positive. Big picture in terms of policy reform action from the budget has been missing. Though, the budget has indicated towards GST getting operational from August 2012 onwards, a clear cut roadmap seems to be absent. Also passing mention of FDI in retail and aviation has been made, but likelihood of them seeing the light of day seems remote at the moment. Post the Railway budget, cut in the EPF rate and given that the next budget is likely to be populist, the market had assigned a small probability towards a progressive and reformist project. With the budget lacking a big picture and doubts about government’s projections on the subsidies front, the market has reacted disappointingly. However, when the market examines the budget coolly over the weekend, it is likely to see that the budget has done reasonably well in the objective of fiscal consolidation through (1) hikes in indirect tax rates (excise duty, service tax) and (2) containment of revenue non-plan expenditure.

The headline numbers (fiscal deficit) and the overall indirect tax proposals (2% hike in excise and service tax; negative list for service tax) are very much in line with the expectations. Fiscal deficit for FY13E is projected at 5.1%. The reduction in the fiscal deficit is predicated on (1) increase in tax revenues (both direct and indirect) based on nominal GDP growth rate of 14% (2) hike in indirect tax rates (excise duty, service tax) (3) substantial increase in non-tax revenues (projected at ~` 912bn) and (4) limited increase of 6.1% in revenue non-plan expenditure to `8.65tn.

The budget has also done a good job of improving its quality of spending by its focus on infrastructure and capital expenditure and restraint in growth of non-plan expenditure. Planned expenditure (35% of total budget expenditure) is expected to increase 22.1% to `5.21tn. The moderate growth of 6.1% in revenue non-plan expenditure is predicated on a reduction in subsidies by `262.8bn to `1.9tn. The markets are likely to have strong doubts about the government’s ability to achieve this given the fragile political climate and its dismal performance on this front in FY12. The post budget interviews by the FM has indicated fuel price increases down the line. Disinvestments targeted at ~`300bn looks reasonable.

Overall the budget is closer to realism but away from hard decision making. It has somewhat of a boring aspect to it. Maybe that’s a good thing. Given the fragile dynamics of coalition politics, it is perhaps best to keep reform policy action out of the budget. The investor response to the budget is likely to continue for a day or two after which it is like to be back to usual.

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