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India Union Budget preview: Expect some fiscal
consolidation
The 2012 Union Budget will be presented on March 16 at a time when there has been
a significant deterioration in the government’s finances. We expect the central
government’s fiscal deficit to rise to 6% of GDP in FY12E from 4.7% in FY11.
We estimate the general government deficit may rise to 9% of GDP in FY12E, largely
due to a fall in tax revenues driven by the economic slowdown, and a big increase in
fuel subsidies.
Given the extent of the potential increase in the deficit, we expect the budget for FY13
to focus on fiscal consolidation. We think the central government may budget for the
deficit to go down to 5.3% of GDP from an expected 6%.
Our expectations are that the fiscal consolidation will be driven largely by revenues—
we estimate an increase in excise and service taxes could reduce the deficit by 0.5
pp of GDP in FY13E.
With a reduction in the above line fiscal deficit, we expect the net market borrowing
requirement of the government to be similar to that in FY12, which we think is
marginally positive for government bonds.
Our fiscal impulse estimates suggest that adjusting for cyclical factors, the
government will impart a negative impulse of 0.5 pp of GDP to domestic demand for
FY13E.
Our sector analysts expect the budget to be positive for infrastructure companies and
power developers, and negative for autos, consumer goods, and oil marketing
companies.
India’s 2012 Union Budget will be presented at a time when there has been a significant
deterioration in the government’s finances. We did not believe that the budget presented in
February 2011 would meet its targeted deficit of 4.6% of GDP (see India Union Budget—a fiscal
promise to keep and miles to go before it succeeds, Asia Economics Flash, March 1, 2011) due to
under-budgeting of subsidies and optimistic forecasts for revenue. As the economy slowed more
than expected, we estimated the deficit at 5.8% of GDP, which was significantly above consensus
(see India: A worsening of the fiscal-monetary policy mix, Asia Economics Analyst 11/18,
October 20, 2011). Slowing growth, higher oil prices, and highly optimistic budgeting suggest to
us that even our above consensus fiscal deficit targets may be exceeded.
The budget to be presented on March 16 represents an opportunity to break from the recent
trajectory. Budgets in India are perceived to be determined more by political economy
considerations than purely economic ones. Therefore, the outcome of regional elections in India’s
largest state, Uttar Pradesh, and four other states may have a significant bearing on the budget (see
Takeaways from Delhi policy visit, India Notes, February 3, 2012).
A combination of a back-against-the-wall feeling, the need to arrest a sharp deterioration in
public finances, and the best opportunity before the 2014 polls to focus on economic issues
suggest a focus by the government on fiscal consolidation. First, the economic slowdown (the
government is now forecasting GDP growth of 6.9% in FY12 compared with its initial forecast of
8.75%) has heightened policy sensitivity and given rise to a “back against the wall” feeling among
policy makers, which is generally when things get done on economic policy. Second, the sharp
deterioration in the fiscal deficit and high borrowing requirements, which led to a sharp jump in
bond yields in October-November, before the Reserve Bank of India (RBI) bailed the government
out by buying its bonds, has demonstrated to the government that there is little option but to focus
on consolidation. Third, the budget represents the best opportunity before general elections in
2014 to focus on economic issues, as there are very few elections in the rest of 2012. That said,
the level of fiscal consolidation we envisage may at best be marginally positive for the markets.
The risk to this view is a “business as usual” budget which aims to get the fiscal deficit down but
with few tax increases or explicit expenditure cuts. This would support the market’s scepticism
and negative view about the ability to reduce the deficit, even if the intentions were there.
I. A large fiscal deterioration in FY12
We think the central fiscal deficit may rise to 6% of GDP in FY12E from 4.7% in FY11, and
a budgeted deficit of 4.6%. Of the deficit increase, we estimate that 45% can be explained by tax
revenue shortfalls, and a further 22% by unbudgeted subsidy increases. On the expenditure side,
there were significant overruns in subsidies—nearly twice of what was budgeted. Particularly in
fuel, we expect the subsidy bill to be Rs900 bn (US$19 bn) a nearly four-fold increase over the
budgeted Rs236 bn (US$5 bn). Other expenditures—both current and capital—have progressed
largely as budgeted.
On the revenue side, the shortfall is likely to be marked. Against a budgeted growth in
revenues of 17.3%, we estimate the actual growth could be closer to 10%. The big shortfalls
are in corporate income tax and excise duties or production level taxes. These suggest that the
shortfalls are mostly to do with the slowdown in economic activity.
The general government deficit may rise to 9% of GDP in FY12 from 7.3% in FY11. The
states’ deficit which tends to move in line with the central deficit, and driven by economic
activity, we expect to widen to 3% of GDP in FY12 from 2.6% of GDP in FY11. Part of the
increase in the general government’s deficit was expected by the market given that the 3G auction
receipts, which contributed 1.3% of GDP in FY11 is no longer there. In addition, against the
planned privatization receipts of Rs400 bn (US$8 bn), we think the government will likely
achieve only Rs100 bn (US$2 bn). The very large fiscal deficit and low privatization has increased
the government’s market borrowing by 26%. Thus, the government has already borrowed Rs4.6 tn
(US$96 bn) from the market, which is well above the Rs4.2 tn (US$87 bn) that it had budgeted
for. This has put a lot of strain on bond yields (see India: A worsening of the fiscal-monetary
policy mix, Asia Economics Analyst 11/18, October 20, 2011), and had to be compensated by the
RBI coming in to do open market operations (OMOs).
II. Some fiscal consolidation in the FY13 budget
We expect a focus on fiscal consolidation in the upcoming budget with tax measures
dominating. We expect the budget to contain tax measures amounting to 0.5 percentage point
(pp) of GDP. These are: 1) an increase in excise duties from 10% to 12%; 2) an increase in the
service tax from 10% to 12%; and 3) moving from a positive list in service tax to a negative list.
We estimate that a 2 pp increase in excise duties could give 0.3 pp increase in tax revenues, while
the increase in service taxes and increasing its base can provide another 0.2 ppt increase in
revenues. Therefore, we expect the revenue side to drive the fiscal consolidation.
On the expenditure front, while we expect increases in food subsidies due to the implementation
of the Food Security Bill, we expect the budget to have growth in total expenditure lower than in
FY12. We think this will likely come from slower growth in non-subsidy current spending.
The government’s borrowing requirements will largely be similar to FY12. While we think
the fiscal deficit above the line may be similar to FY12, on a gross basis, due to larger repayments
than in FY13, the market borrowing may be a tad higher at Rs5.4 tn (US$114 bn). However, the
general government market borrowing may remain very similar to that in FY12, due to an
expected reduction in the above-the-line fiscal deficits of the states.
III. Impact of the budget on bond yields
We think the budget will likely be marginally positive for bond yields. Our calculations show
that the general government borrowing requirement in FY13 can be financed through growth in
bank deposits, insurance, mutual, and pension funds. We assume that the government may allow a
further US$5 bn of investment by foreign investors in government securities. We also assume that
the RBI may do OMOs of the order of Rs300 bn (US$6.3 bn), less than a third of the OMOs in
FY12. That said, current long-end bond yields are being artificially depressed due to the large
OMOs at the long-end that the RBI has conducted, and would have been higher otherwise.
Therefore, we think some fiscal consolidation, and monetary easing at the short end should lead to
a steepening of the yield curve. We forecast 10-year bond yields to be in the 7.75%-8.00% range
for FY13.
IV. We think the government may impart a negative fiscal impulse in FY13
Our fiscal impulse indicator1 suggests that the government may impart a positive impulse of
about 1.1 pp of GDP to aggregate demand in FY12 compared to the previous year. To put
this in perspective, this impulse is second only to that during the global financial crisis (GFC) in
FY09 over the past decade. The fiscal impulse indicator allows us to estimate the contribution to
demand from the fiscal side by stripping out the impact due to cyclical factors. Starting from the
change in the fiscal deficit, we make two adjustments—first, if revenues increase proportionately
with increases in nominal GDP then they are cyclically neutral (revenue stabilizer). Second, if
expenditures rise in proportion to increases in nominal potential GDP, then they are cyclically
neutral (expenditure stabilizer). These automatic stabilizers and their contributions to the change
in fiscal deficit are shown in Exhibit 6.
Our budget expectations suggest that the government may impart a negative impulse of 0.5
pp of GDP to aggregate demand in FY13. This is primarily due to the forecast reduction in the
budget deficit. In FY12, we estimate that the budget deficit component of fiscal impulse rose
sharply, while the revenue component of the automatic stabilizer fell due to the slower growth of
GDP. The expenditure component of the automatic stabilizer also fell in FY12 due to the
reduction in India’s potential GDP (see India’s growth potential—lower but still tiger-like, Asia
Economics Flash, September 14, 2011). In FY13, with our forecast of actual GDP and potential
very similar to those in FY12, we do not expect a sharp change in either of the automatic
stabilizers.
V. Cross-country comparisons suggests that fiscal consolidation is an
imperative
India’s general government fiscal deficit is one of the highest among growth markets (see
Exhibit 7). This is largely due to a low tax base, rather than too much spending. Hence, it is
imperative that the government increase the tax-to-GDP ratio, and there are low-hanging fruits in
increasing revenues. While we expect the FY13 budget to begin fiscal consolidation, we do not
envisage the tough, structural reforms that are necessary to lead to a sustainable increase in the
tax-to-GDP ratio. These would comprise broad-basing the tax regime, implementing the Goods
and Services Tax, and improving tax administration to reduce the extent of the underground
economy.
The high fiscal deficit raises several well-known macro concerns for India which are worth
reiterating:
Keeps bond yields higher than otherwise, and crowds out the private sector.
Keeps aggregate demand high and spills over into a current account deficit.
Reduces “insurance cover” to deal with future shocks and enact counter-cyclical policies.
Leads to an excessive reliance on monetary policy to fight against inflation.
To the extent that the current fiscal deficit creates grounds for future deficits, such as the
proliferation of entitlement programs, it raises structural concerns.
While the large fiscal deficit is a key macro concern, we do not think it is an immediate
vulnerability. The deficit is financed almost entirely domestically, primarily by banks, pension,
and insurance funds. Thus, there is a captive demand for government bonds, and little threat of
large-scale selling by foreigners, in our view. Government debt is high, but has been stable in
recent years, driven by high nominal GDP growth. High inflation over the past two years has had
the effect of keeping the debt/GDP ratio stable.
VI. Risks to our expectations
The risks to our expectations of fiscal consolidation come from higher oil prices impacting fuel
subsidies, higher phosphate and potash prices impacting fertilizer subsidies, and the economic
slowdown persisting into the majority of FY13. Further, an early implementation of the Food
Subsidy Bill could further expand the deficit.
The upside on fiscal consolidation comes from larger privatization receipts, including the reauctioning
of 2G licenses, greater buoyancy in tax revenues, and a quick pass-through to
consumers of higher oil prices—particularly in diesel and LPG. We assess the risks to our fiscal
deficit and market borrowing targets for FY13 to be balanced at this stage.
Sector Key expectations from budget Probability/Impact
(Analyst name)
Cement
(Pritesh Vinay)
Rationalization of excise duty from 10% to 6‐8% (to bring cement industry at par with other
infrastructure industries).
Low/Positive
Review of import duty on coal, pet coke, gypsum and other fuels. High/Positive
CENVAT credit may be allowed on Clean Energy Cess so as to mitigate impact on costs. High/Positive
3% duty on imports under EPCG scheme may be abolished to promote exports/investments. Low/Positive
Metals & Mining
(Pritesh Vinay)
Rise in import duty on Hot Rolled Coils (steel) from prevalent 5% to 10%. Low/Positive for domestic steel
producers
Expect no change in export duty of iron ore (currently at 30% for fines and lumps). High/Neutral for ore exporters
IT Exemption of MAT (as high as 20%) on developers of SEZ and/or units operating under them. High/Low
(Rishi Jhunjhunwala) Extension of the carry forward and set off of MAT credit entitlements (currently allowed for a period of
10 years).
Low/Low
Dual levy of VAT and Service tax on licensing of software . Low/Low
Telcos
(Sachin Salgaonkar)
Based on the judgment of the Supreme Court on license cancellations, the government may look to
auction c.480MHz of freed‐up 2G spectrum and raise between Rs224bn (1/3rd of 3G winning prices) and
Rs673bn (equal to 3G license winning prices). The TRAI is working on the pricing mechanism and
expected to come out with recommendations in the next 6‐12 weeks.
Medium/Positive for incumbents
We expect the government to generate recurring revenues of Rs146bn in FY13. High/Neutral
Consumer Goods
(Puneet Jain)
Mid double‐digit increase in cigarette excise taxes. Companies will resort to price increases affecting
volumes.
High/Negative
We could also see a 200bp increase in excise rates for consumer products, with a potential impact on
volume growth.
Real Estate
(Puneet Jain)
Incentives for affordable housing such as a) an increase in the limit for income tax deduction on interest
on home loans, which is currently Rs150,000 and/or b) an increase in the limit for income tax deduction
on interest on home loan principal payments, which is currently Rs100,000.
Medium/Positive
Utilities Reduction of customs duty on imported coal which is currently stands at 5%. High/Positive
(Durga Dath) Hike in customs duty on imported equipment. Moderate
Financial relief for SEBs in the form of new schemes in power distribution. Moderate
Continued Tax sops for setting up power projects based on renewable energy. Moderate
Assistance to raise low‐cost and long‐term resources to re‐finance power projects. Moderate
Fertilizers Inclusion of Urea in NBS Scheme, price decontrol. Increased subsidy budgets. Moderate
(Durga Dath)
Automobiles
(Sandeep Pandya)
Potential increase in excise duties for the sector, particularly for diesel powered vehicles, which will be
immediately passed on to consumers in our view.
Negative
We believe this could present challenges to demand growth and pricing power of companies going into
FY2013E.
Banks Increase in exemption limit for borrower on housing loans. Positive for the CRE segment
(Tabassum Inamdar) Withdrawal of tax benefit to housing companies. Negative for HFCs
Reduce tax arbitrage that exists between FMPs and deposits. Positive for banks
Capital Goods
(Ishan Sethi)
Levy of duty on imported power equipment ‐ supporting domestic manufacturing. Likely to be a
maximum of 19.5%
High/ Slightly positive
A potential increase in excise duty rate from current 10% Moderate/Negative
Infrastructure
(Ishan Sethi)
Incremental allocation to infrastructure sectors ‐ roads, rail etc ‐ especially focused on social spending
through schemes such as Bharat Nirman, JNNURM, RGGVY.
High/Positive
Facility to streamline debt market for infrastructure ‐ possibly through allowing higher investment in the
Infrastructure tax saving bond. Current limite being Rs 20,000 ‐ may be increased to Rs 50,000 or even
higher.
High/ Very Positive
A more streamlined definition for Infrastructure sector defining inclusions and exclusions from the
definition
High/ Positive
Possible announcement of an appropriate body to handle the infra sector holistically, new infra ministry
etc.
Moderate/ Positive
Logistics Clarity on the timeline and implementation of GST. High/ Positive
(Ishan Sethi) Concrete steps to expedite work on the Dedicated Freight corridors and Delhi Mumbai Industrial
Corridor.
Moderate/ Positive
Media
(Sachin Salgaonkar)
High/ Positive
Oil & gas Re‐introduction of excise duty on diesel with a concomitant increase in diesel price. Moderate/Negative
(Nilesh Banerjee) Extension of last date for eligibility for tax holiday for new refinery units constructed. Low/Positive
Govt. bears balance under‐recoveries post the upstream discounts. Moderate/Positive
As per the timeline for mandatory digitization of cable TV (Jul’2012 for metros and Mar’13 for Tier1
cities), the government may generate additional revenues of c. Rs800 mn as the under‐declaration of
cable TV revenues decrease and analog cable TV subscribers come under the addressable digital
medium.
Source: GS Global Investment Research estimates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Union Budget preview: Expect some fiscal
consolidation
The 2012 Union Budget will be presented on March 16 at a time when there has been
a significant deterioration in the government’s finances. We expect the central
government’s fiscal deficit to rise to 6% of GDP in FY12E from 4.7% in FY11.
We estimate the general government deficit may rise to 9% of GDP in FY12E, largely
due to a fall in tax revenues driven by the economic slowdown, and a big increase in
fuel subsidies.
Given the extent of the potential increase in the deficit, we expect the budget for FY13
to focus on fiscal consolidation. We think the central government may budget for the
deficit to go down to 5.3% of GDP from an expected 6%.
Our expectations are that the fiscal consolidation will be driven largely by revenues—
we estimate an increase in excise and service taxes could reduce the deficit by 0.5
pp of GDP in FY13E.
With a reduction in the above line fiscal deficit, we expect the net market borrowing
requirement of the government to be similar to that in FY12, which we think is
marginally positive for government bonds.
Our fiscal impulse estimates suggest that adjusting for cyclical factors, the
government will impart a negative impulse of 0.5 pp of GDP to domestic demand for
FY13E.
Our sector analysts expect the budget to be positive for infrastructure companies and
power developers, and negative for autos, consumer goods, and oil marketing
companies.
India’s 2012 Union Budget will be presented at a time when there has been a significant
deterioration in the government’s finances. We did not believe that the budget presented in
February 2011 would meet its targeted deficit of 4.6% of GDP (see India Union Budget—a fiscal
promise to keep and miles to go before it succeeds, Asia Economics Flash, March 1, 2011) due to
under-budgeting of subsidies and optimistic forecasts for revenue. As the economy slowed more
than expected, we estimated the deficit at 5.8% of GDP, which was significantly above consensus
(see India: A worsening of the fiscal-monetary policy mix, Asia Economics Analyst 11/18,
October 20, 2011). Slowing growth, higher oil prices, and highly optimistic budgeting suggest to
us that even our above consensus fiscal deficit targets may be exceeded.
The budget to be presented on March 16 represents an opportunity to break from the recent
trajectory. Budgets in India are perceived to be determined more by political economy
considerations than purely economic ones. Therefore, the outcome of regional elections in India’s
largest state, Uttar Pradesh, and four other states may have a significant bearing on the budget (see
Takeaways from Delhi policy visit, India Notes, February 3, 2012).
A combination of a back-against-the-wall feeling, the need to arrest a sharp deterioration in
public finances, and the best opportunity before the 2014 polls to focus on economic issues
suggest a focus by the government on fiscal consolidation. First, the economic slowdown (the
government is now forecasting GDP growth of 6.9% in FY12 compared with its initial forecast of
8.75%) has heightened policy sensitivity and given rise to a “back against the wall” feeling among
policy makers, which is generally when things get done on economic policy. Second, the sharp
deterioration in the fiscal deficit and high borrowing requirements, which led to a sharp jump in
bond yields in October-November, before the Reserve Bank of India (RBI) bailed the government
out by buying its bonds, has demonstrated to the government that there is little option but to focus
on consolidation. Third, the budget represents the best opportunity before general elections in
2014 to focus on economic issues, as there are very few elections in the rest of 2012. That said,
the level of fiscal consolidation we envisage may at best be marginally positive for the markets.
The risk to this view is a “business as usual” budget which aims to get the fiscal deficit down but
with few tax increases or explicit expenditure cuts. This would support the market’s scepticism
and negative view about the ability to reduce the deficit, even if the intentions were there.
I. A large fiscal deterioration in FY12
We think the central fiscal deficit may rise to 6% of GDP in FY12E from 4.7% in FY11, and
a budgeted deficit of 4.6%. Of the deficit increase, we estimate that 45% can be explained by tax
revenue shortfalls, and a further 22% by unbudgeted subsidy increases. On the expenditure side,
there were significant overruns in subsidies—nearly twice of what was budgeted. Particularly in
fuel, we expect the subsidy bill to be Rs900 bn (US$19 bn) a nearly four-fold increase over the
budgeted Rs236 bn (US$5 bn). Other expenditures—both current and capital—have progressed
largely as budgeted.
On the revenue side, the shortfall is likely to be marked. Against a budgeted growth in
revenues of 17.3%, we estimate the actual growth could be closer to 10%. The big shortfalls
are in corporate income tax and excise duties or production level taxes. These suggest that the
shortfalls are mostly to do with the slowdown in economic activity.
The general government deficit may rise to 9% of GDP in FY12 from 7.3% in FY11. The
states’ deficit which tends to move in line with the central deficit, and driven by economic
activity, we expect to widen to 3% of GDP in FY12 from 2.6% of GDP in FY11. Part of the
increase in the general government’s deficit was expected by the market given that the 3G auction
receipts, which contributed 1.3% of GDP in FY11 is no longer there. In addition, against the
planned privatization receipts of Rs400 bn (US$8 bn), we think the government will likely
achieve only Rs100 bn (US$2 bn). The very large fiscal deficit and low privatization has increased
the government’s market borrowing by 26%. Thus, the government has already borrowed Rs4.6 tn
(US$96 bn) from the market, which is well above the Rs4.2 tn (US$87 bn) that it had budgeted
for. This has put a lot of strain on bond yields (see India: A worsening of the fiscal-monetary
policy mix, Asia Economics Analyst 11/18, October 20, 2011), and had to be compensated by the
RBI coming in to do open market operations (OMOs).
II. Some fiscal consolidation in the FY13 budget
We expect a focus on fiscal consolidation in the upcoming budget with tax measures
dominating. We expect the budget to contain tax measures amounting to 0.5 percentage point
(pp) of GDP. These are: 1) an increase in excise duties from 10% to 12%; 2) an increase in the
service tax from 10% to 12%; and 3) moving from a positive list in service tax to a negative list.
We estimate that a 2 pp increase in excise duties could give 0.3 pp increase in tax revenues, while
the increase in service taxes and increasing its base can provide another 0.2 ppt increase in
revenues. Therefore, we expect the revenue side to drive the fiscal consolidation.
On the expenditure front, while we expect increases in food subsidies due to the implementation
of the Food Security Bill, we expect the budget to have growth in total expenditure lower than in
FY12. We think this will likely come from slower growth in non-subsidy current spending.
The government’s borrowing requirements will largely be similar to FY12. While we think
the fiscal deficit above the line may be similar to FY12, on a gross basis, due to larger repayments
than in FY13, the market borrowing may be a tad higher at Rs5.4 tn (US$114 bn). However, the
general government market borrowing may remain very similar to that in FY12, due to an
expected reduction in the above-the-line fiscal deficits of the states.
III. Impact of the budget on bond yields
We think the budget will likely be marginally positive for bond yields. Our calculations show
that the general government borrowing requirement in FY13 can be financed through growth in
bank deposits, insurance, mutual, and pension funds. We assume that the government may allow a
further US$5 bn of investment by foreign investors in government securities. We also assume that
the RBI may do OMOs of the order of Rs300 bn (US$6.3 bn), less than a third of the OMOs in
FY12. That said, current long-end bond yields are being artificially depressed due to the large
OMOs at the long-end that the RBI has conducted, and would have been higher otherwise.
Therefore, we think some fiscal consolidation, and monetary easing at the short end should lead to
a steepening of the yield curve. We forecast 10-year bond yields to be in the 7.75%-8.00% range
for FY13.
IV. We think the government may impart a negative fiscal impulse in FY13
Our fiscal impulse indicator1 suggests that the government may impart a positive impulse of
about 1.1 pp of GDP to aggregate demand in FY12 compared to the previous year. To put
this in perspective, this impulse is second only to that during the global financial crisis (GFC) in
FY09 over the past decade. The fiscal impulse indicator allows us to estimate the contribution to
demand from the fiscal side by stripping out the impact due to cyclical factors. Starting from the
change in the fiscal deficit, we make two adjustments—first, if revenues increase proportionately
with increases in nominal GDP then they are cyclically neutral (revenue stabilizer). Second, if
expenditures rise in proportion to increases in nominal potential GDP, then they are cyclically
neutral (expenditure stabilizer). These automatic stabilizers and their contributions to the change
in fiscal deficit are shown in Exhibit 6.
Our budget expectations suggest that the government may impart a negative impulse of 0.5
pp of GDP to aggregate demand in FY13. This is primarily due to the forecast reduction in the
budget deficit. In FY12, we estimate that the budget deficit component of fiscal impulse rose
sharply, while the revenue component of the automatic stabilizer fell due to the slower growth of
GDP. The expenditure component of the automatic stabilizer also fell in FY12 due to the
reduction in India’s potential GDP (see India’s growth potential—lower but still tiger-like, Asia
Economics Flash, September 14, 2011). In FY13, with our forecast of actual GDP and potential
very similar to those in FY12, we do not expect a sharp change in either of the automatic
stabilizers.
V. Cross-country comparisons suggests that fiscal consolidation is an
imperative
India’s general government fiscal deficit is one of the highest among growth markets (see
Exhibit 7). This is largely due to a low tax base, rather than too much spending. Hence, it is
imperative that the government increase the tax-to-GDP ratio, and there are low-hanging fruits in
increasing revenues. While we expect the FY13 budget to begin fiscal consolidation, we do not
envisage the tough, structural reforms that are necessary to lead to a sustainable increase in the
tax-to-GDP ratio. These would comprise broad-basing the tax regime, implementing the Goods
and Services Tax, and improving tax administration to reduce the extent of the underground
economy.
The high fiscal deficit raises several well-known macro concerns for India which are worth
reiterating:
Keeps bond yields higher than otherwise, and crowds out the private sector.
Keeps aggregate demand high and spills over into a current account deficit.
Reduces “insurance cover” to deal with future shocks and enact counter-cyclical policies.
Leads to an excessive reliance on monetary policy to fight against inflation.
To the extent that the current fiscal deficit creates grounds for future deficits, such as the
proliferation of entitlement programs, it raises structural concerns.
While the large fiscal deficit is a key macro concern, we do not think it is an immediate
vulnerability. The deficit is financed almost entirely domestically, primarily by banks, pension,
and insurance funds. Thus, there is a captive demand for government bonds, and little threat of
large-scale selling by foreigners, in our view. Government debt is high, but has been stable in
recent years, driven by high nominal GDP growth. High inflation over the past two years has had
the effect of keeping the debt/GDP ratio stable.
VI. Risks to our expectations
The risks to our expectations of fiscal consolidation come from higher oil prices impacting fuel
subsidies, higher phosphate and potash prices impacting fertilizer subsidies, and the economic
slowdown persisting into the majority of FY13. Further, an early implementation of the Food
Subsidy Bill could further expand the deficit.
The upside on fiscal consolidation comes from larger privatization receipts, including the reauctioning
of 2G licenses, greater buoyancy in tax revenues, and a quick pass-through to
consumers of higher oil prices—particularly in diesel and LPG. We assess the risks to our fiscal
deficit and market borrowing targets for FY13 to be balanced at this stage.
Sector Key expectations from budget Probability/Impact
(Analyst name)
Cement
(Pritesh Vinay)
Rationalization of excise duty from 10% to 6‐8% (to bring cement industry at par with other
infrastructure industries).
Low/Positive
Review of import duty on coal, pet coke, gypsum and other fuels. High/Positive
CENVAT credit may be allowed on Clean Energy Cess so as to mitigate impact on costs. High/Positive
3% duty on imports under EPCG scheme may be abolished to promote exports/investments. Low/Positive
Metals & Mining
(Pritesh Vinay)
Rise in import duty on Hot Rolled Coils (steel) from prevalent 5% to 10%. Low/Positive for domestic steel
producers
Expect no change in export duty of iron ore (currently at 30% for fines and lumps). High/Neutral for ore exporters
IT Exemption of MAT (as high as 20%) on developers of SEZ and/or units operating under them. High/Low
(Rishi Jhunjhunwala) Extension of the carry forward and set off of MAT credit entitlements (currently allowed for a period of
10 years).
Low/Low
Dual levy of VAT and Service tax on licensing of software . Low/Low
Telcos
(Sachin Salgaonkar)
Based on the judgment of the Supreme Court on license cancellations, the government may look to
auction c.480MHz of freed‐up 2G spectrum and raise between Rs224bn (1/3rd of 3G winning prices) and
Rs673bn (equal to 3G license winning prices). The TRAI is working on the pricing mechanism and
expected to come out with recommendations in the next 6‐12 weeks.
Medium/Positive for incumbents
We expect the government to generate recurring revenues of Rs146bn in FY13. High/Neutral
Consumer Goods
(Puneet Jain)
Mid double‐digit increase in cigarette excise taxes. Companies will resort to price increases affecting
volumes.
High/Negative
We could also see a 200bp increase in excise rates for consumer products, with a potential impact on
volume growth.
Real Estate
(Puneet Jain)
Incentives for affordable housing such as a) an increase in the limit for income tax deduction on interest
on home loans, which is currently Rs150,000 and/or b) an increase in the limit for income tax deduction
on interest on home loan principal payments, which is currently Rs100,000.
Medium/Positive
Utilities Reduction of customs duty on imported coal which is currently stands at 5%. High/Positive
(Durga Dath) Hike in customs duty on imported equipment. Moderate
Financial relief for SEBs in the form of new schemes in power distribution. Moderate
Continued Tax sops for setting up power projects based on renewable energy. Moderate
Assistance to raise low‐cost and long‐term resources to re‐finance power projects. Moderate
Fertilizers Inclusion of Urea in NBS Scheme, price decontrol. Increased subsidy budgets. Moderate
(Durga Dath)
Automobiles
(Sandeep Pandya)
Potential increase in excise duties for the sector, particularly for diesel powered vehicles, which will be
immediately passed on to consumers in our view.
Negative
We believe this could present challenges to demand growth and pricing power of companies going into
FY2013E.
Banks Increase in exemption limit for borrower on housing loans. Positive for the CRE segment
(Tabassum Inamdar) Withdrawal of tax benefit to housing companies. Negative for HFCs
Reduce tax arbitrage that exists between FMPs and deposits. Positive for banks
Capital Goods
(Ishan Sethi)
Levy of duty on imported power equipment ‐ supporting domestic manufacturing. Likely to be a
maximum of 19.5%
High/ Slightly positive
A potential increase in excise duty rate from current 10% Moderate/Negative
Infrastructure
(Ishan Sethi)
Incremental allocation to infrastructure sectors ‐ roads, rail etc ‐ especially focused on social spending
through schemes such as Bharat Nirman, JNNURM, RGGVY.
High/Positive
Facility to streamline debt market for infrastructure ‐ possibly through allowing higher investment in the
Infrastructure tax saving bond. Current limite being Rs 20,000 ‐ may be increased to Rs 50,000 or even
higher.
High/ Very Positive
A more streamlined definition for Infrastructure sector defining inclusions and exclusions from the
definition
High/ Positive
Possible announcement of an appropriate body to handle the infra sector holistically, new infra ministry
etc.
Moderate/ Positive
Logistics Clarity on the timeline and implementation of GST. High/ Positive
(Ishan Sethi) Concrete steps to expedite work on the Dedicated Freight corridors and Delhi Mumbai Industrial
Corridor.
Moderate/ Positive
Media
(Sachin Salgaonkar)
High/ Positive
Oil & gas Re‐introduction of excise duty on diesel with a concomitant increase in diesel price. Moderate/Negative
(Nilesh Banerjee) Extension of last date for eligibility for tax holiday for new refinery units constructed. Low/Positive
Govt. bears balance under‐recoveries post the upstream discounts. Moderate/Positive
As per the timeline for mandatory digitization of cable TV (Jul’2012 for metros and Mar’13 for Tier1
cities), the government may generate additional revenues of c. Rs800 mn as the under‐declaration of
cable TV revenues decrease and analog cable TV subscribers come under the addressable digital
medium.
Source: GS Global Investment Research estimates.
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