Budget Reactions: Inclusive, realistic & balanced Budget: Aditya Birla Money

Aditya Birla Money has come out with its report on Union Budget 2013-14.

Budget Highlights: An inclusive budget. Realistic and Balanced….Not as bad as made out to be

Against the backdrop of a highly challenging macro-economic environment -- high inflation, low growth, high CAD, high FD, and weak global economic growth -- the FM was faced with the unenviable task of balancing the conflicting needs of containing the fiscal deficit to soothe the nerves of the rating agencies and the political compulsion to enhance social expenditure given this being the last budget ahead of the general elections. Given the trying circumstances, we believe the budget has tried to deliver the best. The FM has delivered on his promise of fiscal consolidation, projecting a fiscal deficit at 4.8 percent of GDP for FY14, in line with consensus expectations and has provided the required space for the RBI to cut interest rates. The RE of the FY13 fiscal deficit is 5.2 percent, better than the revised budget target of 5.3 percent of GDP.

Revenue: The fiscal consolidation in FY14E has been sought to be achieved through a combination of (1) higher tax revenues, (2) increased non-tax revenues from divestment and auction proceeds and dividend distributions from PSUs and (3) containment of growth-distorting subsidies. The 19.1 percent increase in gross tax revenues is predicated on (1) a 13.4 percent nominal GDP growth, (2) wider tax compliance and (3) increased direct income tax surcharges on corporates and people with incomes above 1 crore.  The projections seem credible in light of high gross tax collections (16.7 percent yoy growth ) in FY13RE relative to expected nominal GDP growth. Excise duty and service tax rates have been maintained. Government asset sales are expected to rise 132.6 percent YoY to Rs558 bn in FY14E while dividends are expected to rise 33.2 percent YoY to Rs738.7bn. On the subsidies front, a substantial decline of 10.3 percent YoY in allocation to Rs2.31tn has been penciled in, with only a Rs100bn additional allocation for food, which should comfort the markets given concerns on the food security bill.

Expenditure: On the expenditure front, what is important is that the budget seeks to drastically contain growth-distorting and inflationary expenditure like subsidies and at the same time is not drastically containing overall government expenditure, which would have negative growth implications as already seen in the Q3GDP numbers. It will take a while before increase in private investment can adequately replace government expenditure to boost economic growth. The budget seeks to enhance social expenditure through higher allocations for rural development, health and education. The overall government expenditure is expected to rise 16.4 percent YoY to Rs16.7tn, with planned expenditure rising 29.4 percent YoY to Rs5.6tn. Total revenues, on the other hand, are expected to grow 23.4 percent YoY to Rs11.2tn, thus narrowing the FY14E fiscal deficit to 4.8 percent (at Rs5.4tn) from 5.2 percent (at Rs5.2tn) in FY13E.
 
Capital Markets: To channelise household savings into financial products that provide long term capital to finance infrastructure and industrial investment, the budget has announced plans to create infrastructure debt funds, to increase allocation of tax free infrastructure bonds to Rs500bn in FY14E from ~Rs250bn in FY13E and introduce inflation-indexed bonds. To boost the capital markets, STT on Equity Futures has been cut to 0.01 percent from 0.017 percent. KYC for foreign portfolio investors would be made easy – following the best practices for FIIs and FDIs abroad - thereby making it easy for Pension funds, SWFs to make an entry. FIIs are also permitted to participate in the currency market. For the FIIs trading in derivative segment, collateral by way of corporate bonds and government securities for margin requirements is permitted. Pension and Insurance Funds have been allowed to invest in ETFs. CTT was introduced on non Agri commodities at par with equity futures.

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Outlook: Overall, against the backdrop of an extremely challenging macro-economic environment and the danger of populism that elections invoke, the FM has done a reasonably good job and delivered a workman-like boring budget which was the need of the hour. While the budget has not been cheered by the markets, it has created the space for RBI to cut rates and at the same time protected growth. Incremental supply side measures in the following weeks and months along with monetary easing and could make the market realize the prudence of the Budget.  The current market weakness might create more opportunity for medium-to-long term investors. Time to accumulate quality stocks!

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