Union Budget Review - stated fiscal consolidation over ambitious: Edelweiss

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n  Union Budget 2011-12: High on inclusive growth, low on reforms

The Union Budget 2011-2012 continues to stress on inclusive growth (increasing allocation to social sector by 17% Y-o-Y to INR 1.61 tn), while having an unrealistically low assessment of fiscal deficit target. On the reform front although the government has liberalized portfolio flows and indicated its intention to move towards direct transfer of cash subsidy for kerosene/ LPG and urea, big-ticket reforms such as FDI have largely been absent.

n  Revenue growth achievable; expenditure growth unrealistically low

Gross tax revenue growth at 18.5% Y-o-Y seems reasonable in the light of an expanding excise duty base. However, disinvestment target of INR 400 bn may be difficult to achieve given the market conditions.

Budgeted expenditure growth, however, looks significantly understated on account of unrealistically low subsidy burden (given rising crude oil prices and possible introduction of food security bill). Budgeted subsidy burden, which stands at INR 1.44 tn, is likely to catapult by ~INR 450 bn in our assessment. 

n  FY12 fiscal deficit/borrowing targets overly ambitious; slippages likely

We foresee slippages in the budgeted fiscal deficit target (4.6% of GDP), which as per our estimate, may go as high as ~5% of GDP, thereby raising the net market borrowing requirement beyond the budgeted INR 3.43 tn. Further, the budgeted revenue deficit of 3.4% of GDP in FY12 is same as FY11, implying no consolidation on revenue account. Assuming additional subsidy bill of ~INR 450 bn, revenue deficit shoots up to ~3.9% of GDP, which is significantly higher than last year.

n  Budget supportive of consumption growth

With increased social sector spending combined with no major change in headline tax rates, the Budget is supportive of consumption growth. Yet, sustained boost to consumption will also be inflationary. Meanwhile, thrust on infrastructure in terms of tax-free bonds and increase in budgetary allocation will help investment activity in the economy.

However, the government’s net market borrowing is likely to be higher than stated. In such a scenario, either private investment activity will remain weak due to rise in cost of capital in the economy or corporates will be forced to borrow abroad, leading to further increase in India’s external debt (which has been on an uptrend and currently is equal to India’s forex reserves). This adds to macroeconomic vulnerability of the country.

n  Budget neutral for most sectors

The budget was neutral for most sectors, although there were pockets of positive as well as negative announcements on the margin. Sectors which stand to benefit include fertilisers (benefit of investment linked deduction extended to fertilizer production) and FMCG (no increase in excise duty) while the imposition of MAT on profits from SEZs is expected to impact both SEZ operators and units functioning within them. Further, ad valorem export duty of 20% both on lumps and fines is expected to be negative for iron ore exporters. Among others, no mention of liberalization of FDI norms is a negative for the retail sector.