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India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
‘Twin deficit’ concerns back on the radar. The latest data points on the fiscal and
trade balance situation have raised concerns regarding the weakening macro conditions
of India, apparent in the risks emerging out of the ‘twin deficit’ problem. Given the
emerging risks of shortfalls in revenue collections—both on the tax and non-tax sides,
the government is expected to slip on its fiscal deficit targets for FY2012E. We expect
that the fiscal challenges could continue into FY2013E as well. The trade deficit has also
been widening and leading to an emerging debate of a ‘twin deficit’ problem in India.
In an atmosphere of global risks, any adverse change in market sentiments could lead
to a sharp depreciation of the currency, high interest rates, low private and public
investments and thus hurting growth.
1HFY12 tax collection confirms our doubts on fiscal consolidation
The higher-than-normal refunds in direct taxes coupled with a slowing economy has arguably put
pressure on the revenue receipts of the government. Corporate tax growth in 1HFY12 has been a
meager 3.4% due to higher-than-usual refunds of Rs480 bn against Rs192 bn for the same period
last year. Customs and excise duty collection had already been expected to be lower than budget
estimates given the removal of customs duty on crude oil and reduction of excise duty on
petroleum products. On the other hand, expenditures have continued to remain strong leading to
a fiscal deficit which is already ~70% of the budget estimate. The large cash requirement of the
government is apparent from the increased issuance of Cash Management Bills. This raises serious
concerns on the fiscal side, given that even non-tax revenues such as divestments and revenues
through sale of spectrum are to falter. Expenditure containment is also likely to be difficult in the
face of rising oil subsidy burden as the currency remains under depreciation pressure.
October exports data hint at the start of export growth moderation
According to initial estimates from the Ministry of Commerce and Industry, exports in October
grew by 10.8% to US$19.9 bn. This compares with September growth of 36.2% (US$24.8 bn)
and October 2010 growth rate of 19.4% (US$17.7 bn). The trade deficit for October has been
~US$20 bn, the highest since April 1994. Our strategy report (‘Exploring the money trail’)
specifically addressed the issue of the credibility of the high growth rate in exports and looks at
data from companies which point to a much lower growth rate. Industrial production growth has
also been muted which further strengthens the belief that the high export growth numbers are
unsustainable. Our understanding for FY2012E and FY2013E is that the capital account will
continue to be at a knife-edge and will be significantly dependant on external conditions as also
weakening domestic macro fundamentals, including a weak fiscal. News flows such as downgrade
for the Indian banking sector are also unlikely to help insofar as capital flows are concerned.
Further aggravation of twin deficit likely to add to the macroeconomic risks
Even though historically India has been a twin deficit country, the risks have now magnified in the
light of weak global conditions. Weakening macro-fundamentals in India could lead to lower
capital flows that could be insufficient to cover for the CAD. Hence the BoP situation remains
under some risk and this is likely to keep the domestic currency on a depreciation path, with its
implications on liquidity. With fiscal deficit large, higher funding needs of the government also
increase the risks of crowding out investments. The ability to withstand any crisis is reduced as
space to provide for a fiscal push is limited. Rupee depreciation pressure will also keep up the
pressure on inflation, thereby leading to the RBI being unable to provide much comfort also
through its monetary policy.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
‘Twin deficit’ concerns back on the radar. The latest data points on the fiscal and
trade balance situation have raised concerns regarding the weakening macro conditions
of India, apparent in the risks emerging out of the ‘twin deficit’ problem. Given the
emerging risks of shortfalls in revenue collections—both on the tax and non-tax sides,
the government is expected to slip on its fiscal deficit targets for FY2012E. We expect
that the fiscal challenges could continue into FY2013E as well. The trade deficit has also
been widening and leading to an emerging debate of a ‘twin deficit’ problem in India.
In an atmosphere of global risks, any adverse change in market sentiments could lead
to a sharp depreciation of the currency, high interest rates, low private and public
investments and thus hurting growth.
1HFY12 tax collection confirms our doubts on fiscal consolidation
The higher-than-normal refunds in direct taxes coupled with a slowing economy has arguably put
pressure on the revenue receipts of the government. Corporate tax growth in 1HFY12 has been a
meager 3.4% due to higher-than-usual refunds of Rs480 bn against Rs192 bn for the same period
last year. Customs and excise duty collection had already been expected to be lower than budget
estimates given the removal of customs duty on crude oil and reduction of excise duty on
petroleum products. On the other hand, expenditures have continued to remain strong leading to
a fiscal deficit which is already ~70% of the budget estimate. The large cash requirement of the
government is apparent from the increased issuance of Cash Management Bills. This raises serious
concerns on the fiscal side, given that even non-tax revenues such as divestments and revenues
through sale of spectrum are to falter. Expenditure containment is also likely to be difficult in the
face of rising oil subsidy burden as the currency remains under depreciation pressure.
October exports data hint at the start of export growth moderation
According to initial estimates from the Ministry of Commerce and Industry, exports in October
grew by 10.8% to US$19.9 bn. This compares with September growth of 36.2% (US$24.8 bn)
and October 2010 growth rate of 19.4% (US$17.7 bn). The trade deficit for October has been
~US$20 bn, the highest since April 1994. Our strategy report (‘Exploring the money trail’)
specifically addressed the issue of the credibility of the high growth rate in exports and looks at
data from companies which point to a much lower growth rate. Industrial production growth has
also been muted which further strengthens the belief that the high export growth numbers are
unsustainable. Our understanding for FY2012E and FY2013E is that the capital account will
continue to be at a knife-edge and will be significantly dependant on external conditions as also
weakening domestic macro fundamentals, including a weak fiscal. News flows such as downgrade
for the Indian banking sector are also unlikely to help insofar as capital flows are concerned.
Further aggravation of twin deficit likely to add to the macroeconomic risks
Even though historically India has been a twin deficit country, the risks have now magnified in the
light of weak global conditions. Weakening macro-fundamentals in India could lead to lower
capital flows that could be insufficient to cover for the CAD. Hence the BoP situation remains
under some risk and this is likely to keep the domestic currency on a depreciation path, with its
implications on liquidity. With fiscal deficit large, higher funding needs of the government also
increase the risks of crowding out investments. The ability to withstand any crisis is reduced as
space to provide for a fiscal push is limited. Rupee depreciation pressure will also keep up the
pressure on inflation, thereby leading to the RBI being unable to provide much comfort also
through its monetary policy.
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