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Budget FY12 – A Preview
Passive fiscal consolidation to continue
Overall expectations from the budget are modestly positive for
almost all sectors except Autos. Despite concerns regarding
likely increase in fiscal deficit in FY12, we expect cash balance
transfer from FY11 to FY12 to improve the fiscal situation
substantially.
Fiscal consolidation to continue. FY12 budget is not likely to
see any one-off revenue bonanza as in FY11. On our assumption
of 16.5% growth in tax revenue and 9.6% growth in total
expenditure, we estimate the fiscal deficit at 4.5% in FY12.
Market borrowing to be low. In FY12, net market borrowing is
likely to be `3.5trn. However, the carrying forward, from FY11 to
FY12, of a substantial cash balance (~`700bn) would substantially
reduce the need for market borrowing in FY12.
Emphasis on agriculture. The major focus is likely to be on
agriculture, with special emphasis on improving productivity
through greater investment, technology use and innovation.
Modestly positive for most sectors. While most sectors – Cap
Goods, Consumer, Oil & Gas, Cement, Construction, Financial
Services, Pharmaceuticals, Power and Technology – expect
modest positive impact of the budget, the Auto sector is likely to
be impacted negatively.
Stock ideas. We expect positive impact of the budget on Oil
PSUs, Educomp, Everonn and NIIT.
Macro: Budget FY12 – Passive fiscal
consolidation to continue
The FY12 budget throws up many challenges for the Finance
Minister. While economic growth has bounced back, high and sticky
inflation is the main macro concern. The FY11 fiscal deficit is likely
to be 4.7%, lower than the budgeted 5.5%, due to high tax revenue,
healthy one-off revenue from the 3G auction and higher-thanestimated
nominal GDP. While no major jump in revenue is likely in
FY12, expenditure, especially on the social sector, is likely to be
elevated. In view of the likely large cash transfer from FY11, we
expect the fiscal deficit to decrease further, to 4.5% of the GDP in
FY12.
FY11: Year of positive surprises
Passive correction in fiscal deficit in FY11. The budgeted fiscal deficit
for FY11 (as percent of GDP) declined sharply, from 5.5% to 4.8%,
because of a major rise in nominal GDP growth (by 18.3%) from the
implicit budget estimates (12.5%). Besides, proceeds of 3G and related
spectrum auctions surpassed the budget estimates by a huge margin.
Moreover, buoyancy of all major tax revenues during Apr-Dec ’10 was well
ahead of the budget estimates. As a result, even after incorporating higherthan-
budgeted expenditure, we expect the fiscal deficit for FY11 to be
4.7% of GDP.
Better-than-estimated revenues. During Apr-Dec ’10, gross tax revenue
rose 26.8% (FY11 budget estimates: 17.9%) as personal income tax and
customs duties rose 13.1% and 65.8%, respectively, against the FY11
budget estimates of -3.6% and 36.1%, respectively (Fig 1). Moreover, a
significant one-off boost came from 3G and related auctions, of ~`1.06trn,
compared to budgeted estimates of ~`350bn.
Expenditure also exceeds budget estimates. Expenditure during Apr-
Dec ’10 grew 11.2%, against the full-year budget estimate of 8.5% (Fig 2).
For the first nine months of FY11, non-Plan revenue and Plan capital
expenditure were ahead of the budgeted growth rate while Plan revenue
and non-Plan capital expenditure were behind the budgeted growth rate.
The better revenue performance than the rise in expenditure has resulted in
a considerable positive cash balance for the government with the RBI. By
mid-Jan ’11, the government had a cash balance with the RBI of `1.15trn.
No major revenue bonanza in FY12
What to expect
Direct tax: No major change. The share of direct tax in overall tax
collection in India has been on the rise and touched 61% in FY10 (Fig 3).
The persistence of high inflation, especially elevated food prices, is
affecting consumption. In view of this, we do not expect any rate hike for
personal income tax. At the same time, given the lack of revenue drivers in
FY12, any major rate cut is unlikely. The Direct Tax Code (DTC),
scheduled to be implemented only from next year (Apr ’12), envisages an
exemption limit up to `200,000 for personal tax. We, however, expect the
exemption limit in this budget to be enhanced by `20,000 to `180,000.
Pending the introduction of the DTC, we do not expect any major move
on corporate income tax; further clarity on tax breaks and increases in the
rate of the Minimum Alternative Tax (MAT) are likely.
Broadening of service tax. The share of indirect taxes in overall tax
collection has declined in the last decade (Fig 3), especially due to tax cuts
as part of stimulus measures in FY09 (Fig 4). While normalization of
indirect tax rates started in FY10, in view of high inflation and the likely
implementation of the Goods and Services Tax (GST) in FY13, we see
modest changes in excise rates although customs rates may revert to precrisis
levels. The service tax net is likely to be widened to bring more
services (retail services, gas and water distribution, etc.) under its net.
More clarity on tax reforms. In the coming budget, we expect more
clarity on the rollout period of the Direct Tax Code (DTC) and the Goods
and Services Tax (GST).
Duty adjustment for petroleum products. In the petroleum sector, the
government is faced with three issues: 1) high international crude prices,
2) the need to introduce phased decontrol of administered oil prices in
order to rein in the large under-recoveries by oil-marketing companies, and
3) control high domestic inflation. In this context, the budget is likely to
indicate a major re-jig in the customs and excise structure on petroleum
products as part of further decontrol of prices. However, since a major part
of levies on these products comes from state governments, the overall
approach towards decontrol is linked to the introduction of the GST.
Emphasis on agriculture. The government’s endeavour to control food
inflation and to promote inclusive growth is likely to make agriculture a
major focus area of the budget, with special emphasis on improving
agricultural productivity through greater investment, technology use and
innovation. We expect specific policies to improve agricultural input and
land usage, emphasis to improve irrigation facilities, better access of funds
for agriculture, reforms in the public distribution system and measures to
improve agricultural storage, transportation and marketing.
Focus on social sector reform. Social sector spending has seen a major
jump since FY08 budget (Fig 5). Keeping the coming state elections in
mind and continuing with the government’s resolve to render the growth
process inclusive, the FY12 Budget is likely to increase fund allocation for
the social sector. We expect a roadmap for the Food Securities Act and
announcements in areas relating to universal education, gender equality,
and welfare of weaker sections.
Food security bill implementation. The government is likely to
implement the food security bill in the FY12 budget. High food and
commodity prices in international markets are likely to keep the food
subsidy bill high. The food subsidy allocation in FY11 was budgeted at
`550bn; and our estimates suggest that the actual outlay is likely to cross
the allocation for FY11.
NREGA outlay to be nearly flat. The FY11 budgeted spending on the
scheme, at `401bn, was 3.6% of the expenditure of the government (Fig 6).
The government has linked wages under the Mahatma Gandhi National
Rural Employment Guarantee Act (MGNREGA) to the consumer price
index (CPI) for agricultural labourers. This would require additional
allocation for the scheme in the FY12 budget. During Apr-Dec ’10,
`208.5bn had been spent under the scheme, leaving a significant amount
unspent for the Jan-Mar ’11 period. Despite the increase in wages, we do
not expect a steep increase in the allocation for FY12 as any unspent
amount would be carried forward.
Ambitious divestment in FY12. So far in FY11, the government has
successfully conducted divestment worth `220bn. The ONGC FPO in Feb
’11 is scheduled to add another `120bn. We expect the government to keep
the divestment figure in FY12 at `400bn, similar to that in FY11.
Five states going in for elections in 1HCY11. The finance minister is
faced with the huge challenge of a budget when five large states would be
conducting assembly elections (the first half of 2011, Fig7).
Fig 7 – Expected election calendar
In 2011 States
Apr-11 Assam
May-11 Kerala
May-11 Tamil Nadu
May-11 Pondicherry
Jun-11 West Bengal
In 2012
Feb-12 Manipur
Feb-12 Punjab
Feb-12 Uttarakhand
May-12 Uttar Pradesh
Jun-12 Goa
Dec-12 Gujarat
Dec-12 Himachal Predesh
Source: Election Commission
Fiscal consolidation. India’s fiscal deficit in FY08 had come down to
2.6% of the GDP before it shot back to 6% in FY09 as the government
had to announce fiscal stimuli to weather the global economic crisis. In last
year’s budget, the government partially rolled back some of the stimuli
measures. However, since the global growth outlook was yet uncertain, it
could not take comprehensive measures to achieve the fiscal consolidation
aim as set out by the Fiscal Responsibility and Budgetary Management
(FRBM) Act. Nevertheless, government revenues received a massive oneoff
boost from the auction of 3G and broadband wireless access (BWA)
spectrum. This helped lower the FY11 fiscal deficit. This year’s budget
(FY12), however, is not likely to see any similar one-off revenue bonanza.
On our assumption of 16.5% growth in tax revenue and 9.6% growth in
expenditure, we estimate the fiscal deficit at 4.5% in FY12. We expect the
government to continue with its divestment plan in FY12 as well.
Market borrowing to be low in FY12. The government net market
borrowing in FY11 is likely to be `3.25trn, lower than the `3.45trn
budgeted earlier. In FY12, net market borrowing is likely to be `3.5trn.
However, the carrying forward, from FY11 to FY12, of a substantial cash
balance (~`700bn) would substantially reduce the need for market
borrowing in FY12 even with little levers for revenue but large expenditure
outlays. Thus, the effective net market borrowing may be `3trn only. This
would boost the debt market.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Budget FY12 – A Preview
Passive fiscal consolidation to continue
Overall expectations from the budget are modestly positive for
almost all sectors except Autos. Despite concerns regarding
likely increase in fiscal deficit in FY12, we expect cash balance
transfer from FY11 to FY12 to improve the fiscal situation
substantially.
Fiscal consolidation to continue. FY12 budget is not likely to
see any one-off revenue bonanza as in FY11. On our assumption
of 16.5% growth in tax revenue and 9.6% growth in total
expenditure, we estimate the fiscal deficit at 4.5% in FY12.
Market borrowing to be low. In FY12, net market borrowing is
likely to be `3.5trn. However, the carrying forward, from FY11 to
FY12, of a substantial cash balance (~`700bn) would substantially
reduce the need for market borrowing in FY12.
Emphasis on agriculture. The major focus is likely to be on
agriculture, with special emphasis on improving productivity
through greater investment, technology use and innovation.
Modestly positive for most sectors. While most sectors – Cap
Goods, Consumer, Oil & Gas, Cement, Construction, Financial
Services, Pharmaceuticals, Power and Technology – expect
modest positive impact of the budget, the Auto sector is likely to
be impacted negatively.
Stock ideas. We expect positive impact of the budget on Oil
PSUs, Educomp, Everonn and NIIT.
Macro: Budget FY12 – Passive fiscal
consolidation to continue
The FY12 budget throws up many challenges for the Finance
Minister. While economic growth has bounced back, high and sticky
inflation is the main macro concern. The FY11 fiscal deficit is likely
to be 4.7%, lower than the budgeted 5.5%, due to high tax revenue,
healthy one-off revenue from the 3G auction and higher-thanestimated
nominal GDP. While no major jump in revenue is likely in
FY12, expenditure, especially on the social sector, is likely to be
elevated. In view of the likely large cash transfer from FY11, we
expect the fiscal deficit to decrease further, to 4.5% of the GDP in
FY12.
FY11: Year of positive surprises
Passive correction in fiscal deficit in FY11. The budgeted fiscal deficit
for FY11 (as percent of GDP) declined sharply, from 5.5% to 4.8%,
because of a major rise in nominal GDP growth (by 18.3%) from the
implicit budget estimates (12.5%). Besides, proceeds of 3G and related
spectrum auctions surpassed the budget estimates by a huge margin.
Moreover, buoyancy of all major tax revenues during Apr-Dec ’10 was well
ahead of the budget estimates. As a result, even after incorporating higherthan-
budgeted expenditure, we expect the fiscal deficit for FY11 to be
4.7% of GDP.
Better-than-estimated revenues. During Apr-Dec ’10, gross tax revenue
rose 26.8% (FY11 budget estimates: 17.9%) as personal income tax and
customs duties rose 13.1% and 65.8%, respectively, against the FY11
budget estimates of -3.6% and 36.1%, respectively (Fig 1). Moreover, a
significant one-off boost came from 3G and related auctions, of ~`1.06trn,
compared to budgeted estimates of ~`350bn.
Expenditure also exceeds budget estimates. Expenditure during Apr-
Dec ’10 grew 11.2%, against the full-year budget estimate of 8.5% (Fig 2).
For the first nine months of FY11, non-Plan revenue and Plan capital
expenditure were ahead of the budgeted growth rate while Plan revenue
and non-Plan capital expenditure were behind the budgeted growth rate.
The better revenue performance than the rise in expenditure has resulted in
a considerable positive cash balance for the government with the RBI. By
mid-Jan ’11, the government had a cash balance with the RBI of `1.15trn.
No major revenue bonanza in FY12
What to expect
Direct tax: No major change. The share of direct tax in overall tax
collection in India has been on the rise and touched 61% in FY10 (Fig 3).
The persistence of high inflation, especially elevated food prices, is
affecting consumption. In view of this, we do not expect any rate hike for
personal income tax. At the same time, given the lack of revenue drivers in
FY12, any major rate cut is unlikely. The Direct Tax Code (DTC),
scheduled to be implemented only from next year (Apr ’12), envisages an
exemption limit up to `200,000 for personal tax. We, however, expect the
exemption limit in this budget to be enhanced by `20,000 to `180,000.
Pending the introduction of the DTC, we do not expect any major move
on corporate income tax; further clarity on tax breaks and increases in the
rate of the Minimum Alternative Tax (MAT) are likely.
Broadening of service tax. The share of indirect taxes in overall tax
collection has declined in the last decade (Fig 3), especially due to tax cuts
as part of stimulus measures in FY09 (Fig 4). While normalization of
indirect tax rates started in FY10, in view of high inflation and the likely
implementation of the Goods and Services Tax (GST) in FY13, we see
modest changes in excise rates although customs rates may revert to precrisis
levels. The service tax net is likely to be widened to bring more
services (retail services, gas and water distribution, etc.) under its net.
More clarity on tax reforms. In the coming budget, we expect more
clarity on the rollout period of the Direct Tax Code (DTC) and the Goods
and Services Tax (GST).
Duty adjustment for petroleum products. In the petroleum sector, the
government is faced with three issues: 1) high international crude prices,
2) the need to introduce phased decontrol of administered oil prices in
order to rein in the large under-recoveries by oil-marketing companies, and
3) control high domestic inflation. In this context, the budget is likely to
indicate a major re-jig in the customs and excise structure on petroleum
products as part of further decontrol of prices. However, since a major part
of levies on these products comes from state governments, the overall
approach towards decontrol is linked to the introduction of the GST.
Emphasis on agriculture. The government’s endeavour to control food
inflation and to promote inclusive growth is likely to make agriculture a
major focus area of the budget, with special emphasis on improving
agricultural productivity through greater investment, technology use and
innovation. We expect specific policies to improve agricultural input and
land usage, emphasis to improve irrigation facilities, better access of funds
for agriculture, reforms in the public distribution system and measures to
improve agricultural storage, transportation and marketing.
Focus on social sector reform. Social sector spending has seen a major
jump since FY08 budget (Fig 5). Keeping the coming state elections in
mind and continuing with the government’s resolve to render the growth
process inclusive, the FY12 Budget is likely to increase fund allocation for
the social sector. We expect a roadmap for the Food Securities Act and
announcements in areas relating to universal education, gender equality,
and welfare of weaker sections.
Food security bill implementation. The government is likely to
implement the food security bill in the FY12 budget. High food and
commodity prices in international markets are likely to keep the food
subsidy bill high. The food subsidy allocation in FY11 was budgeted at
`550bn; and our estimates suggest that the actual outlay is likely to cross
the allocation for FY11.
NREGA outlay to be nearly flat. The FY11 budgeted spending on the
scheme, at `401bn, was 3.6% of the expenditure of the government (Fig 6).
The government has linked wages under the Mahatma Gandhi National
Rural Employment Guarantee Act (MGNREGA) to the consumer price
index (CPI) for agricultural labourers. This would require additional
allocation for the scheme in the FY12 budget. During Apr-Dec ’10,
`208.5bn had been spent under the scheme, leaving a significant amount
unspent for the Jan-Mar ’11 period. Despite the increase in wages, we do
not expect a steep increase in the allocation for FY12 as any unspent
amount would be carried forward.
Ambitious divestment in FY12. So far in FY11, the government has
successfully conducted divestment worth `220bn. The ONGC FPO in Feb
’11 is scheduled to add another `120bn. We expect the government to keep
the divestment figure in FY12 at `400bn, similar to that in FY11.
Five states going in for elections in 1HCY11. The finance minister is
faced with the huge challenge of a budget when five large states would be
conducting assembly elections (the first half of 2011, Fig7).
Fig 7 – Expected election calendar
In 2011 States
Apr-11 Assam
May-11 Kerala
May-11 Tamil Nadu
May-11 Pondicherry
Jun-11 West Bengal
In 2012
Feb-12 Manipur
Feb-12 Punjab
Feb-12 Uttarakhand
May-12 Uttar Pradesh
Jun-12 Goa
Dec-12 Gujarat
Dec-12 Himachal Predesh
Source: Election Commission
Fiscal consolidation. India’s fiscal deficit in FY08 had come down to
2.6% of the GDP before it shot back to 6% in FY09 as the government
had to announce fiscal stimuli to weather the global economic crisis. In last
year’s budget, the government partially rolled back some of the stimuli
measures. However, since the global growth outlook was yet uncertain, it
could not take comprehensive measures to achieve the fiscal consolidation
aim as set out by the Fiscal Responsibility and Budgetary Management
(FRBM) Act. Nevertheless, government revenues received a massive oneoff
boost from the auction of 3G and broadband wireless access (BWA)
spectrum. This helped lower the FY11 fiscal deficit. This year’s budget
(FY12), however, is not likely to see any similar one-off revenue bonanza.
On our assumption of 16.5% growth in tax revenue and 9.6% growth in
expenditure, we estimate the fiscal deficit at 4.5% in FY12. We expect the
government to continue with its divestment plan in FY12 as well.
Market borrowing to be low in FY12. The government net market
borrowing in FY11 is likely to be `3.25trn, lower than the `3.45trn
budgeted earlier. In FY12, net market borrowing is likely to be `3.5trn.
However, the carrying forward, from FY11 to FY12, of a substantial cash
balance (~`700bn) would substantially reduce the need for market
borrowing in FY12 even with little levers for revenue but large expenditure
outlays. Thus, the effective net market borrowing may be `3trn only. This
would boost the debt market.
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