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1. INDIA BUDGET – The devil is
in the detail
Indian federal budgets are almost always about
incremental changes, partly because there is very
little room for extreme outcomes – positive or
negative. In that sense, the Budget for 2011-12
stayed the course but with the much-needed fiscal
consolidation and some reforms but without
jeopardising growth (see Triple A - India Budget:
time to shape up, 16 February). However, the
actual improvement in the fiscal deficit will be less
than what the Budget would have you believe.
The Budget expects to cut the federal fiscal deficit
to 4.6% of GDP in 2011-12 from a better-thanexpected
outcome of 5.1% (Budget estimate: 5.5%).
Since the government has discontinued its policy of
off-budget subsidy bonds, the improvement in the
fiscal deficit should be seen in the context of the
peak fiscal deficit of 7.8% of GDP in 2008-09
(including the off-budget subsidy bonds for oil and
fertilizer). As part of its guidance, the government
expects to cut the fiscal deficit to 4.1% of GDP and
3.5% in 2012-13 and 2013-14, respectively.
The nominal GDP growth of 14% assumed in the
Budget appears conservative, and the actual
outcome will be slightly higher. Still, the
government has stuck with fiscal consolidation via
greater spending discipline rather than higher taxes.
Thus, total spending is expected to increase 3.4%
over the revised estimate for 2010-11 while total
revenue will increase a mere 3.6%. Net tax revenue
is forecast to rise17.9% in 2011-12, but non-tax
revenue will fall 43% owing to the outside jump last
year following the windfall from the auction of
telecom spectrum.
Admittedly, the government is relying on tax
buoyancy, and expects the corporate tax to increase
an ambitious 25.1%. Divestment is pegged at
INR400bn, 76% higher than the downwardly
revised INR227bn in 2010-11, and appears
reasonable, subject to market conditions.
Importantly, net borrowing by the government for
2011-12 is INR3.43trn, lower than last year’s and
better than market’s expectations.
The individual exemption limit was raised to
INR180,000 from INR160,000, mainly to offer
some respite from the higher inflation. Also, the
surcharge on the corporate tax was tweaked lower to
5.0% from 7.5%. The government unexpectedly
maintained the excise duty and the service tax (both
at 10%), but increased the number of services under
the service tax, and also lowered the number of
exemptions under the excise duty. Both moves are
sensible in light of the anticipated transition to a
goods and services tax (GST) sometime in 2012-13.
The reason we think that the improvement in the
fiscal will be less than what has been budgeted is
because of the under-budgeting of subsidies.
Consequently, the final subsidy bill could push up
the fiscal deficit by around 0.5ppt. It goes without
saying that the government will have to increase
petrol and diesel prices soon, especially since the
much anticipated cut in oil duties did not occur.
However, the focus on this shortfall will likely
emerge later in the year via the supplementary
demand for grants.
The most unexpected – and positive – reform
announcement in the budget was a massive increase
in the FII limit in local currency corporate bond to
USD25bn (from USD5bn) for infrastructure bonds
of residual maturity of more than 5 years. The
withholding tax for infrastructure debt funds has
been cut to 5% from 20%, and foreign retail
investors can now directly invest in local mutual
funds. In the final tally, the Budget did not do any
damage, but announced some reforms, and focused
on fiscal consolidation. There will be some slippage
in the actual fiscal outcome relative to the Budget,
but the improving trend of the fiscal should play out
2. INDIA GDP – Moderation in
growth
India’s real GDP growth moderated to a slowerthan-
expected 8.2%YoY in October-December,
compared to an average of 8.9% in April-September.
The December quarter outcome was lower than the
market’s expectation of 8.6%, partly because of the
upward revision to the October-December 2009
GDP growth to 7.3%YoY from 6.5%.
Fiscal YTD real GDP grew 8.6%, in line with the
advance GDP estimate of 8.6% for 2010-11. The
headline GDP growth was powered by an outsized
8.9%YoY surge in the output of the agriculture
sector. Consequently, non-agriculture GDP growth
decelerated to 8.0%YoY, the slowest pace in six
quarters. Industrial output increased at a slower pace
of 6.4%YoY (but this was expected), while the
service sector grew by a weaker-than-expected 8.8%.
Relative to our expectation, the agriculture growth
was higher while the increase in service sector’s
output was lower.
Fullyear GDP growth for 2010-12 is likely to be
around the official advance estimate of 8.6%. We
maintain our 2011-12 GDP growth of 8.3%, which
is lower than the government’s guidance of 9.0%.
Note that the government has so far not made public
the revision to the quarterly GDP growth for
January-March 2010, but has announced the revised
GDP growth for the fullyear 2010-11 in the
advanced estimate. Thus, caution must be exercised
in using the two sets of data until they are both on
the same wavelength, as the existing summation of
the quarters does not add up the fullyear number.
Most likely, following the likely revision, 1Q11
GDP growth will be better than that for 4Q10, partly
owing to better tone for service sector. Still, the
moderation in non-agriculture growth should
prompt the RBI to adopt a more cautious tightening
stance in order to avoid over tightening.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
1. INDIA BUDGET – The devil is
in the detail
Indian federal budgets are almost always about
incremental changes, partly because there is very
little room for extreme outcomes – positive or
negative. In that sense, the Budget for 2011-12
stayed the course but with the much-needed fiscal
consolidation and some reforms but without
jeopardising growth (see Triple A - India Budget:
time to shape up, 16 February). However, the
actual improvement in the fiscal deficit will be less
than what the Budget would have you believe.
The Budget expects to cut the federal fiscal deficit
to 4.6% of GDP in 2011-12 from a better-thanexpected
outcome of 5.1% (Budget estimate: 5.5%).
Since the government has discontinued its policy of
off-budget subsidy bonds, the improvement in the
fiscal deficit should be seen in the context of the
peak fiscal deficit of 7.8% of GDP in 2008-09
(including the off-budget subsidy bonds for oil and
fertilizer). As part of its guidance, the government
expects to cut the fiscal deficit to 4.1% of GDP and
3.5% in 2012-13 and 2013-14, respectively.
The nominal GDP growth of 14% assumed in the
Budget appears conservative, and the actual
outcome will be slightly higher. Still, the
government has stuck with fiscal consolidation via
greater spending discipline rather than higher taxes.
Thus, total spending is expected to increase 3.4%
over the revised estimate for 2010-11 while total
revenue will increase a mere 3.6%. Net tax revenue
is forecast to rise17.9% in 2011-12, but non-tax
revenue will fall 43% owing to the outside jump last
year following the windfall from the auction of
telecom spectrum.
Admittedly, the government is relying on tax
buoyancy, and expects the corporate tax to increase
an ambitious 25.1%. Divestment is pegged at
INR400bn, 76% higher than the downwardly
revised INR227bn in 2010-11, and appears
reasonable, subject to market conditions.
Importantly, net borrowing by the government for
2011-12 is INR3.43trn, lower than last year’s and
better than market’s expectations.
The individual exemption limit was raised to
INR180,000 from INR160,000, mainly to offer
some respite from the higher inflation. Also, the
surcharge on the corporate tax was tweaked lower to
5.0% from 7.5%. The government unexpectedly
maintained the excise duty and the service tax (both
at 10%), but increased the number of services under
the service tax, and also lowered the number of
exemptions under the excise duty. Both moves are
sensible in light of the anticipated transition to a
goods and services tax (GST) sometime in 2012-13.
The reason we think that the improvement in the
fiscal will be less than what has been budgeted is
because of the under-budgeting of subsidies.
Consequently, the final subsidy bill could push up
the fiscal deficit by around 0.5ppt. It goes without
saying that the government will have to increase
petrol and diesel prices soon, especially since the
much anticipated cut in oil duties did not occur.
However, the focus on this shortfall will likely
emerge later in the year via the supplementary
demand for grants.
The most unexpected – and positive – reform
announcement in the budget was a massive increase
in the FII limit in local currency corporate bond to
USD25bn (from USD5bn) for infrastructure bonds
of residual maturity of more than 5 years. The
withholding tax for infrastructure debt funds has
been cut to 5% from 20%, and foreign retail
investors can now directly invest in local mutual
funds. In the final tally, the Budget did not do any
damage, but announced some reforms, and focused
on fiscal consolidation. There will be some slippage
in the actual fiscal outcome relative to the Budget,
but the improving trend of the fiscal should play out
2. INDIA GDP – Moderation in
growth
India’s real GDP growth moderated to a slowerthan-
expected 8.2%YoY in October-December,
compared to an average of 8.9% in April-September.
The December quarter outcome was lower than the
market’s expectation of 8.6%, partly because of the
upward revision to the October-December 2009
GDP growth to 7.3%YoY from 6.5%.
Fiscal YTD real GDP grew 8.6%, in line with the
advance GDP estimate of 8.6% for 2010-11. The
headline GDP growth was powered by an outsized
8.9%YoY surge in the output of the agriculture
sector. Consequently, non-agriculture GDP growth
decelerated to 8.0%YoY, the slowest pace in six
quarters. Industrial output increased at a slower pace
of 6.4%YoY (but this was expected), while the
service sector grew by a weaker-than-expected 8.8%.
Relative to our expectation, the agriculture growth
was higher while the increase in service sector’s
output was lower.
Fullyear GDP growth for 2010-12 is likely to be
around the official advance estimate of 8.6%. We
maintain our 2011-12 GDP growth of 8.3%, which
is lower than the government’s guidance of 9.0%.
Note that the government has so far not made public
the revision to the quarterly GDP growth for
January-March 2010, but has announced the revised
GDP growth for the fullyear 2010-11 in the
advanced estimate. Thus, caution must be exercised
in using the two sets of data until they are both on
the same wavelength, as the existing summation of
the quarters does not add up the fullyear number.
Most likely, following the likely revision, 1Q11
GDP growth will be better than that for 4Q10, partly
owing to better tone for service sector. Still, the
moderation in non-agriculture growth should
prompt the RBI to adopt a more cautious tightening
stance in order to avoid over tightening.
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