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● This note is a summary of a longer report analysing India’s fiscal
position and previewing the country’s 16 March budget.
● While India has the highest budget deficit of the Non-Japan Asian
economies we cover, it would be wrong to suggest that the
country is facing an unsustainable rise in government debt of the
sort plaguing many developed countries. The key difference is
that India’s money GDP is growing at a double-digit rate.
● Nevertheless, it would still be prudent for the government to
tighten the fiscal purse strings and indeed we expect the finance
minister to announce a few restrictive measures. These together
with an upbeat assumption about divestment proceeds and a
robust growth forecast is likely to lead to an official central
government budget deficit forecast of around 5%. Our own
projection is for a 5.8% outturn.
● We expect the budget to deliver just about enough to allow the
RBI to start cutting the repo rate at its 15 March meeting. In our
view, the repo rate will be reduced 175bps by January next year,
leading the 10 year bond yield to drop to 7.5% by end-2012.
First, the good news. India, contrary to the belief of many, is a long
way from experiencing the kind of ‘fiscal horror show’ that has
engulfed many developed world countries in recent times. While the
country’s (central and state) budget deficit is running at around 8% of GDP,
similar to that of many western countries, India has the huge advantage of
double-digit money GDP growth. With bond yields pegged back by captive
buyers, in the form of the commercial banks, this means general
government debt is falling rather than rising as a share of GDP in India.
But this is not to say that the Finance Ministry can relax and kick
back ahead of the budget. The Reserve Bank of India, for one, will be
looking for some tough measures to be delivered, while a lower budget
deficit would help reduce the current account deficit and the ‘crowding out’
of private investment.
Budget measures. As such, we believe Finance Minister Pranab
Mukherjee is likely to announce an increase in the breadth of the services
tax and, possibly, a rise in the excise and services tax rate itself, as well
as an increase in subsidised fuel prices on 16 March. He may also set
out a medium-term fiscal consolidation plan, involving further details
concerning the introduction of the Direct Tax Code (DCT) and Goods and
Services Tax (GST), both of which have been delayed. The finance
minister will, however, do well to convince stakeholders of the credibility of
such a program, in our view.
Fiscal forecasts. Put such measures together with a roughly 8% real
GDP growth forecast as well as an upbeat assessment of divestment and
telecom spectrum receipts and we suspect Mukherjee will forecast a 5%
of GDP central government deficit in 2012/13, down from a revised 5.6%
in 2011/12.
RBI likely to cut rates in mid-March and beyond. Although we doubt
such a figure will be achieved (we forecast a 5.8% outturn in 2012/13), we
suspect the budget will deliver just about enough to start the repo rate
cutting ball rolling at the 15 March RBI meeting. It seems inconceivable
that the contents of the budget will not have been presented to the central
bank by the time of its meeting. A further big upward move in the oil price
is the main risk to this view.
We continue to look for a total of 175bps of repo rate reductions by
early-2013. With wholesale price inflation falling a little further and
staying in the comfort zone through 2012 and the economy experiencing
a further protracted period of sub-trend real GDP growth, the RBI is likely
to take back some of the 500bps in effective tightening it delivered during
2010-11.
We expect the curve to bull steepen and 10y bond yields to fall
below 8% in 3 months and trade to 7.5% by end 2012. The easing
cycle and expectations of some moderation of the significant liquidity
deficit should support bonds. We do not expect much market reaction
from the FY13 borrowing total, INR4.1tn net, as markets will likely be
focused on RBI’s policy rate actions and guidance coupled with the
outlook for liquidity conditions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
● This note is a summary of a longer report analysing India’s fiscal
position and previewing the country’s 16 March budget.
● While India has the highest budget deficit of the Non-Japan Asian
economies we cover, it would be wrong to suggest that the
country is facing an unsustainable rise in government debt of the
sort plaguing many developed countries. The key difference is
that India’s money GDP is growing at a double-digit rate.
● Nevertheless, it would still be prudent for the government to
tighten the fiscal purse strings and indeed we expect the finance
minister to announce a few restrictive measures. These together
with an upbeat assumption about divestment proceeds and a
robust growth forecast is likely to lead to an official central
government budget deficit forecast of around 5%. Our own
projection is for a 5.8% outturn.
● We expect the budget to deliver just about enough to allow the
RBI to start cutting the repo rate at its 15 March meeting. In our
view, the repo rate will be reduced 175bps by January next year,
leading the 10 year bond yield to drop to 7.5% by end-2012.
First, the good news. India, contrary to the belief of many, is a long
way from experiencing the kind of ‘fiscal horror show’ that has
engulfed many developed world countries in recent times. While the
country’s (central and state) budget deficit is running at around 8% of GDP,
similar to that of many western countries, India has the huge advantage of
double-digit money GDP growth. With bond yields pegged back by captive
buyers, in the form of the commercial banks, this means general
government debt is falling rather than rising as a share of GDP in India.
But this is not to say that the Finance Ministry can relax and kick
back ahead of the budget. The Reserve Bank of India, for one, will be
looking for some tough measures to be delivered, while a lower budget
deficit would help reduce the current account deficit and the ‘crowding out’
of private investment.
Budget measures. As such, we believe Finance Minister Pranab
Mukherjee is likely to announce an increase in the breadth of the services
tax and, possibly, a rise in the excise and services tax rate itself, as well
as an increase in subsidised fuel prices on 16 March. He may also set
out a medium-term fiscal consolidation plan, involving further details
concerning the introduction of the Direct Tax Code (DCT) and Goods and
Services Tax (GST), both of which have been delayed. The finance
minister will, however, do well to convince stakeholders of the credibility of
such a program, in our view.
Fiscal forecasts. Put such measures together with a roughly 8% real
GDP growth forecast as well as an upbeat assessment of divestment and
telecom spectrum receipts and we suspect Mukherjee will forecast a 5%
of GDP central government deficit in 2012/13, down from a revised 5.6%
in 2011/12.
RBI likely to cut rates in mid-March and beyond. Although we doubt
such a figure will be achieved (we forecast a 5.8% outturn in 2012/13), we
suspect the budget will deliver just about enough to start the repo rate
cutting ball rolling at the 15 March RBI meeting. It seems inconceivable
that the contents of the budget will not have been presented to the central
bank by the time of its meeting. A further big upward move in the oil price
is the main risk to this view.
We continue to look for a total of 175bps of repo rate reductions by
early-2013. With wholesale price inflation falling a little further and
staying in the comfort zone through 2012 and the economy experiencing
a further protracted period of sub-trend real GDP growth, the RBI is likely
to take back some of the 500bps in effective tightening it delivered during
2010-11.
We expect the curve to bull steepen and 10y bond yields to fall
below 8% in 3 months and trade to 7.5% by end 2012. The easing
cycle and expectations of some moderation of the significant liquidity
deficit should support bonds. We do not expect much market reaction
from the FY13 borrowing total, INR4.1tn net, as markets will likely be
focused on RBI’s policy rate actions and guidance coupled with the
outlook for liquidity conditions.
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