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Mar 17, 2012, 01.29 PM IST | Source: Moneycontrol.com

Budget 2012-13: Budget overview by Prabhudas Lilladher

Prabhudas Lilladher has come out with its report on Budget overview.

Prabhudas Lilladher has come out with its report on Budget overview.

Fiscal deficit target a tall order: In the wake of rising current account deficit and fiscal deficit, the government was expected to announce a transparent and credible fiscal consolidation roadmap in the Union Budget. With one of the highest ever current account deficit of 3.6% of GDP in FY12 and large slippage in fiscal deficit from a budgeted 4.6% to 5.9% of GDP in FY12, the imperative was all the more to spell out how the government planned to curtail fiscal deficit. It has announced a sharp reduction of fiscal deficit to 5.1% of GDP in FY13. If achieved, this will be a significant move towards fiscal consolidation. However, its achievement looks difficult in the wake of unrealistic assumptions on the subsidy front. We believe the realistic deficit number should be closer to 5.5%. Control over fiscal deficit is necessary for anchoring inflationary expectations and achieving reduction in interest rates. The RBI, in its policy, had unambiguously mentioned that although interest rates have peaked, the extent and pace of reduction in interest rates would be primarily guided by clarity in government’s fiscal consolidation plan.

Tax collections expected to be strong: The budget has made no change in the corporate tax rates and marginally tinkered personal income tax slabs. Peak customs duty has been kept unchanged at 10% and customs receipts are expected to go up by 22%. Income tax and corporate tax receipts are expected to grow by 14%, excise duty and service tax receipts are expected to zoom up by 29% and 31%, respectively. The sharp hike can be partially attributed to an across-the-board 20% hike in both, excise duty and service tax, from 10% in FY12 to 12% in FY13. The ambit of services in service tax net has been increased with just 17 services that are on negative list left out of the tax ambit.

Non-Tax revenues to grow at 32%: While net tax revenues in FY13 are budgeted to grow at 20%, the non-tax revenues growth will be stronger at 32%. This sharp upmove is underpinned by a 76% jump in other non-tax revenues (mainly comprising revenues from communication sector like proceeds expected from 2G auction during the course of the year) from Rs534bn in FY12 to Rs941bn in FY13.

A more credible disinvestment target: After falling massively short of its disinvestment target in FY12 by a whopping Rs245bn (as against Rs400bn of budgeted estimate in FY12, the government has barely achieved Rs154.9bn), the government has pegged a more modest and achievable target of Rs300bn in FY13. With strong global liquidity flooding the equity markets in general and emerging markets (including India) in particular, we expect the target to be achieved this year.

Strong growth in plan expenditure but unrealistically low growth in non-plan expenditure: Although the total expenditure growth in FY13 has been budgeted at 13%, the growth in non-plan expenditure, which forms 65% of total expenditure, has been pegged at an unrealistically low 9%. This has been based on a 14% drop in subsidies from Rs2,085bn in FY12 to Rs1,796bn in FY13. With no movement in dismantling administered pricing mechanism in diesel, kerosene and LPG and oil expected to remain at elevated levels due to geo-political concerns in the Middle East as well as possibility of massive global liquidity chasing commodities, the revised fuel subsidy budget in FY13 could be in the range of Rs800 to Rs1,000bn as against the budgeted number of Rs436bn. Similarly, with no decontrol of urea prices, we estimate the under-provision in fertilizer subsidy of Rs60bn. As per our estimates, the fertilizer subsidy for FY13 would be at Rs670bn as against Rs620bn provided in the budget. Plan expenditure at 34.9% of total expenditure is expected to grow by 22% from Rs4,266bn in FY12 to Rs5,210 in FY13.

Upside risks to inflation: The government is assuming a real GDP growth of 7.6% in FY13. In the assumptions for calculating fiscal deficit as a percentage of GDP, it is assuming nominal GDP to grow at 13.8% (thus assuming average inflation at 6.2% for the year). Strong supply-side bottlenecks in infrastructure sector continue along with the danger of elevated commodity prices, especially crude oil hitting government’s finances in the wake of its refusal to substantially hike diesel/kerosene/LPG/urea prices.

Key reform initiatives deferred: Several key reform initiatives expected by the market to stimulate investments, kick-start growth and dispel the impression of policy paralysis have been paid lip service. A credible roadmap for rollout of DTC, GST, New Companies Bill was expected. All hopes on roll-out of liberalization measures in foreign capital participation in sectors like multi-brand retail, insurance, pensions and aviation have been deferred. The government has refused to bite the bullet and ducked these contentious yet much-needed reforms by announcing its intention to try and forge a political consensus over the course of the year.

Some positive announcements: The move to a direct cash transfer system through the Unique ID (UID) system to provide for direct cash transfers in a larger number of districts. The budget does offer many sops to boosting infrastructure sectors like power, roads, irrigation, urban & rural infrastructure, warehousing etc. by adding more infrastructure sectors as eligible for viability gap funding from the government and increased allocations. Although budget allocations have gone up, the markets would closely watch the progress in implementation of the programs. The introduction of the Rajiv Gandhi Savings scheme is a clear positive for the equity market by way of increased long-term investor participation. In addition, reduction in STT on delivery by 20% is a move in the right direction.

Market to remain range bound: In our last strategy report on February 27, 2012, we had urged investors to be wary of the minefields in March namely oil, UP elections and Budget. All three have disappointed the markets. However, the continuing surge in global liquidity leading to strong risk-on trade in equities remains the sole factor driving the equity markets. This would limit any further downside and markets would continue to remain range-bound between 5200 and 5700 levels. Any decisive breach of the upper range is predicated on the government walking-the-talk in so far as key reform initiatives as outlined above are concerned. Any stronger-than-expected subsidy reduction through hike in administered prices of fuel, fertilizer and electricity, although inflationary in the short-term would be viewed by the markets positively as it would strengthen the markets’ belief in government’s resolve towards fiscal consolidation and making large resources available to private sector for jumpstarting moribund investment cycle.

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