India Equity Research: FY13 Budget Review - Not much to cheer about

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After record high fiscal slippage (~1.3% of GDP) in FY12, the Union Budget for FY13 too failed to cheer. While FY13 fiscal targets are certainly more credible than last year, we see clear upside risks, possibly to the tune of 0.4% of GDP. Gross tax revenue growth (~19% YoY), while high, is still achievable given the hike in excise & service tax. However, non-tax revenues look optimistic while subsidies are clearly underprovided. Accordingly, FY13 fiscal deficit could reach 5.5% of GDP, implying only a mild consolidation from 5.9% in FY12. Accordingly, the net budgeted market borrowing of INR4.8trn also faces upside risks, implying that bond yields could come under pressure. Meanwhile, the policy announcements for reviving investments were incremental at best. In nutshell, we feel that the Budget did make an attempt to be effective but reached only so far.

Record fiscal slippages in FY12; subsidies key factor

Slowing economic growth, elevated energy prices and govt’s inability to take tough measures led to the staggering fiscal slippages of ~1.3% of GDP in FY12. Slowing growth and unfavourable market conditions led to a shortfall in revenues, while high crude prices led to large slippages on subsidies target. Indeed, it is the elevated fiscal deficit in the past couple of years that is partly responsible for unfavourable macro-mix of high inflation and sluggish investments.

Fiscal slippages in FY13 could be as high as 0.4% of GDP

Govt. announces fiscal deficit for FY13 at 5.1% of GDP (against 5.9% in FY12), which may be difficult to achieve. We see risks of slippages, and expect fiscal deficit to be as high as ~5.5% of GDP. While tax revenues are not unrealistic, fuel subsidy is clearly underprovided and revenues from telecom auction also look optimistic. Meanwhile, the plan expenditure growth was budgeted at ~22% YoY, almost double of 11% growth seen in FY12. Overall, there is some attempt towards consolidation, but not enough to mark a shift in the overall fiscal stance.

Borrowing likely to exceed target; yields to face pressure

We believe that G-sec supply (net) in FY13 is likely to be ~INR5.25trn against budgeted target of ~INR4.8trn. Such a heavy govt. borrowing would keep bond yields under pressure. Moreover, unlike last year, in FY13 govt. might not be able to rely heavily on T-bills to fund the deficit. Hence, the possibility of bond yields inching up towards 8.5-8.6% (YoY) range in the near term cannot be ruled out.

Construction and fertiliser sectors most benefited

The budget was most supportive of construction and fertilisers. As expected, excise duties were increased which is likely to impact autos and consumer goods. Upstream oil companies such as Cairn India, ONGC, and OIL are likely to get negatively impacted due to rise in cess from INR 2,500/MT to INR 4,500/MT. This apart, the budget was neutral for other major sectors such as banks, metals & mining and cap goods.

FY13 Budget Review - Not much to cheer about