Report on UNION BUDGET 2012-13: Hopes and fears - Motilal Oswal

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��

UNION BUDGET 2012-13: Hopes and fears amidst stiff challenges

Expect fiscal deficit at 5.6% of GDP for FY12 and 5% for FY13

-      Expect major fiscal slippage for FY12 given both revenue slowdown and expenditure overrun; fiscal deficit likely to be 5.6% of GDP v/s 4.6% budget estimate.

-      Based on realistic assumptions, expect some fiscal consolidation in FY13 with fiscal deficit at 5% of GDP and net borrowing program at INR5t. There is also headroom for positive surprises (additional excise on diesel vehicles, telecom spectrum auction, etc), which could further lower fiscal deficit to 4.5% of GDP.

-      From the policy perspective, expect a relatively routine budget with major initiatives (DTC, GST, FDI in retail, etc) taken off the Budget session.

An assessment of FY12 - fiscal situation indicates severe stress

-      Huge miss in fiscal target: Government's fiscal estimates have been missed by a wide margin during FY12. With barely two months to go, the Central government's fiscal deficit at INR4.3t for Apr-Jan FY12 has already exceeded the budgeted amount of INR4.1t by 5%. Similarly, revenue deficit and primary deficit have exceeded the full year budget estimates by 9% and 59%, respectively. A look into longer period of data reveals that fiscal deficit has exceeded the budget amount by January only on one occasion in the last decade, viz, in FY01 while the revenue deficit has exceed full years' budget only on three occasions (viz., FY00, FY05 and FY10). The deficit has widened both because of revenue shortfall as well as expenditure overshooting.

-      Revenue shortfall, led by non-tax revenue: Total receipts during Apr-Jan FY12 stood only at 67% of the budgeted amount. This is the lowest revenue mobilization so far in the last decade barring the recession years of FY01 to FY03. However, the net tax collection at 69% of the total budgeted amount is surpassed meaningfully only by the boom years of FY07 and FY08 and the recovery year of FY11. This raises hope that the tax targets may be close to be met for FY12 after all. Indirect tax collection during Apr-Feb FY12 has increased by 9.6% while officials expressed their confidence to meet full year target. Similarly, Finance Ministry and the CBDT (Central Board of Direct Taxes) are making an all-out effort to meet the budgeted direct tax targets. However, there would be a severe shortfall in non-tax revenue e.g. disinvestment proceeds would be only INR146b v/s INR400b budgeted.

-      Expenditure high, led by non-Plan: Total expenditure during Apr-Jan FY12 at 80% remained at the higher end of the long-term trend. Of this, non-Plan expenditure at 87% of budget was the highest ever in a decade, while Plan expenditure stood at only 67% of FY12BE, the lowest in the last decade barring FY01 and FY05.

-      Expect FY12 fiscal deficit at 5.6% of GDP: Factoring in the above trends and also the revision in GDP estimates, we have placed the revised fiscal deficit at INR5.1t (5.6% of GDP) v/s the budget estimate of INR4.1t (4.6% of GDP).

Expect some fiscal consolidation in FY13; fiscal deficit at 5% of GDP; net borrowing at INR5t

-      Expect realistic assumptions: We believe the government has very little maneuverability to effect either a large scale fiscal correction or some stimulus to boost the slowing economy. However, the government is likely to base its budgetary calculations based on more realistic assumptions about growth and subsidies. We have thus factored in much lower growth in receipts, expenditure as well as nominal GDP growth for FY13.

-      Net tax revenue growth of 10%: In comparison with nearly 15% growth in net tax revenue in FY12, we factor in about 10% growth in FY13.

-      Subsidy held at 2.5% of GDP: In contrast we have assumed containing expenditure would be somewhat difficult and therefore provide for similar order of increase in various items of expenditure as seen in FY12. In particular, we have assumed the subsidy bill to rise in accordance with nominal GDP and would be held constant at 2.5% of GDP. This is taking into account some scope for rationalization including hike in petroleum prices and a move towards nutrient-based subsidy for urea.

-      Other heads in line with trend: We have kept most other heads (non-tax revenue, interest payments, States' revenue share, etc) in line with trends.

-      Fiscal deficit at 5% of GDP: Thus, fiscal deficit is expected to come down to 5.0% for FY13 from 5.6% expected for FY12.

-      Net borrowing of INR5t …: As a result, the government would need around INR5.9t of gross borrowing and around INR5t of net borrowing (after adjusting for repayments). The borrowing calendar may contain a figure of lower amount depending upon the extent of recourse to other forms of borrowing including treasury bills.

-      … unlikely to stress markets: We expect this level of market borrowing program to sail through without crowding out and putting pressure on market yields. This of course assumes that RBI would ensure money supply to the tune of 15%+ by a combination of CRR cuts, open market operations or new avenues of money creation including widening the list of eligible securities in its balance sheet. In this scenario, banking system would add around INR9.7t deposits; after providing for INR7.3t incremental credit, this would release INR2.4t for government securities, enough to absorb its share of around 40% of the borrowing program.

-      Positive for markets: If indeed the above crucial figures of fiscal deficit and market borrowing hold, it would be viewed positively by the market. In fact, we believe there is headroom for some positive surprises, as we have not explicitly factored in a few widely expected measures e.g. additional excise duty on diesel vehicles, increase in customs duty for gold & silver, telecom spectrum auction, rationalization of taxes for pharma, etc.