FY13 Indian Budget Review :: Centrum

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FY13 Indian Budget Review

Play-it-safe budget. Attempt at stoking investment cycle. Aggregate earnings will see modest downside

m  Increasing credibility quotient: The FY13 budget has been an attempt to balance: (1) the need for strong fiscal consolidation (2) ensure longevity of the UPA government. At 5.1% GDP, the fiscal deficit looks more realistic than the 4.6% estimate of FY12 (revised to 5.9% eventually). The deficit is still vulnerable to slippages as oil subsidies are under provided at current levels of crude price and is leaning on large non-tax revenues - 0.7% of GDP (PSU divestment – 0.3% and spectrum sale – 0.4%).

m  Material decline in interest rates unlikely in FY13, investment…: With the estimated net borrowing of Rs4.8trn (gross at Rs5.7trn) being 10% higher than FY12RE, we do not see the budget acting as a catalyst for any material decrease in interest rates over FY13 (unless crude trades significantly lower). Therefore, interest rates by themselves are unlikely to kick off the investment cycle in FY13. Likely recognizing this, the infra sector has been armed with incentives to borrow more from overseas sources. In our view infrastructure build out is equally dependant on addressing issues like land acquisition, availability of fuel, improving financial health of utilities/consumers, etc and not just on financing.  However, the budget has laid ground for an improvement in the investment cycle over the medium term, if there is policy follow through in the succeeding years.

m  Risks to 7.6% growth number exist, current earnings estimates could see modest downside:We see modest risks to the 7.6% FY13 GDP growth estimate from weaker than expected investment uptick. We believe consumption would also take a small knock as increase in indirect taxes would impact volume growth as some of it is likely to be passed on to customers.  Aggregate corporate earnings will be impacted as some of the tax increases will have to be absorbed in a demand environment that is soft, impacting margins. Besides, there have been company specific earnings hits in the oil sector. Aggregate Sensex earnings, which after a prolonged downgrade cycle has been recently been stable will see a modest downgrade, post the event. Earnings could see a larger downgrade should the growth be lower than 7% in FY13.

m  Higher Taxation to bridge the fiscal gap. Spending mix better: The fiscal gap which was at 5.9% was brought down to a BE of 5.1% on the back of higher taxation. The spending has continued to grow. Against gross/net revenue increase of 20%, the total expenditure increase has been estimated at 13%. Both excise and service tax rates were increase by 2 pp each. A negative list on the services side has been introduced in the budget. While corporation tax growth at 14% is in line with GDP growth estimate, we see modest downside to the number as stated above. However, the quality of the spend has improved. Both plan expenditure as well as capital expenditure is estimated to grow at 22% and 31% respectively. However, the latter is a little less than 15% of the total spending.

m  Medium term fiscal responsibility road map debate – academic at best in light of the political calendar: The government indicated its resolve to go back to the path of fiscal rectitude by indicating a road map till FY15 (4.5% fiscal deficit for FY14 and 3.9% for FY15).  It also said that the subsidies would be capped at 2% of GDP in FY13 and would be brought down to 1.75% by FY15. We believe these numbers are academic as the country will most likely to go into an election mode in 2013/2014. We believe the FY13 budget is possibly the last ‘normal’ budget of this government.

m  Other critical reforms pushed back to a later date: The GST and DTC related moves have been pushed back, though some elements of it have been implemented in the current budget. It was indicated that the increase in FDI limits in a number of sectors is still an ongoing exercise.

m  Non inflationary from a spend perspective, but higher taxes if passed on could push up prices:With the spending on social programs capped and in the case of NREGA, reduced, the inflationary impact from the demand side is unlikely to be high. Rural consumption/investments which have been driving growth for a number of sectors would have to be supported by higher MSPs and higher Agri credit alone in FY13.

m  Market Outlook: The rally in Indian equities - CYTD - has been driven by strong FII flows –by rising risk appetite, improving Euro Banking situation and economic data from the US. Domestic fundamentals are yet to take a positive turn. Despite a play-it-safe budget we believe market downside could be limited if liquidity flows continue to be very strong. In case the markets do suffer a risk off situation we believe Indian markets could potentially exhibit high–beta on the downside. We would continue to be defensive from a portfolio stance perspective. We believe that steady earnings compounding sectors/areas of the market should be favored.

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