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Union Budget 2012-13 Preview
Pushed against the wall
The Union Budget this year is being watched closely, even as progressively, it has lost
significance for the markets in the past few years. Given the investment-led slowdown
in the economy, with a need for fiscal pump-priming on one hand, and steadily
deteriorating public finances on the other, the budget needs to be frugal, reformist and
pro-growth at the same time. Not an easy task, especially so given the (populist)
demands of the realpolitik.
We believe the government will do all it can to improve sentiment and redeem its
image, at least some of it credible. Besides the FY13 fisc (we estimate 5.2%, although
the Govt.’s initial estimate would be lower), the market is also looking for the market
borrowing figure (our est. Rs5trn), esp. for its impact on the RBI’s easing stance.
And for the market, recent outperformance and the headwind of high crude oil price
risk a negative reaction if the budget fails to deliver on expectations.
v Last reformist budget ahead of general elections in 2014: The 2012-13 Union
Budget is the last chance for the government for a course correction towards growthoriented
reforms, and prudent expenditure, two years being essential for tangible
change before General Elections in 2014. While monetary policy would get easier, a
turn in sentiment would require policy incentives as well. A broad-based macro
slowdown, led by stalled investment, stubborn inflation, and high cost of funds,
lately joined by resurgent commodity prices ought to make it the case serious
enough.
v Fiscal pump-priming difficult this time around: Let’s face it: Growth is down to
6.5% in FY12E, and little better in FY13E (We expect 7.1%). The last time that
happened was in FY09, with the fisc at 6% (except that FY10 saw 8.4% growth. i.e.,
no bounce this time around). Our FY12 assumption of 5.9% leaves little room for
fiscal manoeuvring, with subsidies and interest payments taking up more than 60%
of total tax receipts. Corporate investment in the economy has been flat for the last
three years, but the Govt. is no position to take over.
v Budget likely to look frugal, reformist and pro-investment: Clearly, expense
rationalization (subsidies) is as important as raising revenues (tax off-take, spectrum
sales, divestment). While it’s time to take hard decisions, the budget would do well
to lay down concrete roadmaps (e.g., fuel deregulations, GST), short of destabilizing
fragile economic growth. We believe this will translate into increase in select indirect
taxes, lower subsidies, incremental clarity on long-pending reform measures and a
push for investments/ infrastructure through better incentives. One might also see a
smattering of ‘forward’ reforms like direct cash transfers.
v However, expectations increase risks of a disappointment? Markets tumbled in
2011 on inflation and policy paralysis, the early rally has pushed valuations from
cycle-low multiples. Ample liquidity, improved risk appetite (and of course, rangebound
oil) may continue to re-rate the markets further. However, widely-held
expectations of a reformist budget, fiscal consolidation and reforms (amidst serious
need for it) have increased the risk of a disappointment if the budget fails to deliver.
Union Budget 2012-13
Pushed against the wall
Last reformist Budget ahead of general elections in 2014
The Union Budget 2012-13 is the last chance for the government for a course correction ahead
of next year’s likely populist election Budget. The lower revenue collection (on industrial
slowdown) and lower divestment proceeds (on weak markets) along with under-accounted
subsidies (fuel and fertilizer) have translated into messy math for public finances in FY12.
This has led to higher borrowing in FY12E, with a massive 5.9% fiscal deficit/GDP versus
Budget estimate of 4.6%. The FY14 Union Budget will likely be populist ahead of the general
elections in 2014 and this would mean that the government would likely create some space for
larger social spending in the FY14 budget. This would also mean that the chances of a prudent
and reformist budget in FY13 are very high.
The Union Budget has had progressively lower importance in the past as the last few budgets
have avoided big-ticket policy reform announcements, which in any case tended to come
throughout the year instead of end-Feb. However, this time is different as given the policy
paralysis and limited room for fiscal profligacy; it is in the Govt.’s interest to the opportunity
to redeem the Government’s image and kick-start reforms in a big way. The idea here is to
incentivise investments and at the same time keep a check on the deficit by reducing inefficient
expenditure, a task that is easier said than done.
Slowdown in the economy is investment-led and needs pro-cyclical measures:
The capital expenditure/total expenditure—a measure of capital spends by the government—
fell from ~18% in FY01-FY08 to ~13% in FY12E as the government spent less on the plan
and non-plan capital expenditure to counter ballooning non-plan revenue expenditure i.e.
subsidies. This has meant that while the borrowing by the government has increased
substantially at the expense of the private sector, the much needed capital expenditure has
taken a hit (aggregate plan and non-plan capital expenditure down 1.4% at Rs 1.6trn in
FY12BE over FY11).
While gross fixed capital formation as a percentage of GDP has been falling from 35% in
Q2FY10 to 30% in Q3FY12, what is worrisome is that the private share of the gross capital
formation has also fallen from a high of ~43% in FY08 to ~33% in FY12. The new project
announcements have fallen 44% for the first nine months of the current fiscal to Rs 7.3trn from
Rs 13.2trn a year ago. The share of private projects has also fallen to 47.2% from 65.4% a year
ago, highlighting the subdued sentiment in the private sector which has been the key driver of
investments during the past decade. This fall in the investments will likely affect India’s
potential growth over the next few years.
To turn the sentiment from such a severe slowdown in the investments, policy incentives are
required in addition to an easy monetary policy even as the scope for pro-cyclical expenditure
by the government is limited. Additionally, a boost to the already strong domestic consumption
through monetary and fiscal easing in the face of capacity constraints and already high
inflation would only intensify the inflation problem
Fiscal pump priming for investments difficult this time around...
Let’s face it: Growth is down to 6.5% in FY12E, and little better in FY13E (We expect 7.1%).
The last time that happened was in FY09, with the fisc at 6% (except that FY10 saw 8.4%
growth. i.e., no bounce this time around). Our FY12 assumption of 5.9% leaves little room for
fiscal manoeuvring, with subsidies and interest payments taking up more than 60% of total tax
receipts. Corporate investment in the economy has been flat for the last three years, but the
Govt. is no position to take over even as the government would like to make sure that the
growth does not fall further. The only tool that will not cost the bucks and still help improve
sentiments, attract investments into India and facilitate growth remains the much needed
“reforms”.
...given the messy state of public finances in FY12
The double whammy of lower tax/non-tax revenue collection (on lower growth and weak
markets) along with higher subsidy burden (on higher crude, fertiliser commodity prices) has
translated in the government raising its borrowing target for the year two times from Rs 4trn
earlier to Rs 5.1trn now.
The excise and the corporate taxes have lagged Budget estimates so far and the gross tax
collection is likely to miss the budgeted target of 18%YoY (12%YoY so far) despite strong
service tax collections (37%YoY so far versus the budgeted 18%).
While the revenue-collection is often back-ended, a clearly visible slowdown in the economy
(Q3FY12 GDP at 6.1%, lowest in 12 quarters) in the second half of FY12 on lower
investments driven by hawkish monetary policy is not likely to help matters either. With our
expectation of a gradual recovery in the macro indicators and growth through FY13, the FY13
picture does not look very encouraging either
The budgeted divestment target of Rs 400bn also looks distant given the divestment proceeds
of ~Rs 135bn so far (including the recent ONGC auction). While the markets have seen an
improvement in the sentiment in the past couple of months and levers exist in FY13 in the
form of 2G auction, divestment through the new auction methodology, PSU buy-backs, etc. we
take note that the divestment proceeds in the best of the times in FY11 have been ~Rs 220bn
versus the budgeted Rs 400bn. The uncertainty over the extent of spectrum to be auctioned and
likely participants in the probable 2G auctions make us conservative on the non-debt capital
receipts in FY13.
The subsidy expenditure as a share of total receipts of the government has increased from
~13% in FY01-FY08 to ~30% in FY12E. Higher crude oil prices, under-allocation of fuel
subsidies and higher costs for fertiliser inputs have all contributed to a high subsidy bill versus
expectations in FY12 (our estimate Rs 238bn versus budgeted Rs 144bn). Any further measure
that aims to push consumption (or income transfers to rural India) will cause inflation to
remain higher for longer, delay the easing of the rates and consequently delay the investment
cycle further.
Despite the expected fuel price hikes post the Uttar Pradesh (UP) elections and the proposed
reduction in the fertiliser subsidies, we think, the subsidy bill is going to be high if the
government implements the Food Security Bill and the crude oil prices continue to remain
upbeat on geo-political tensions
This would likely mean that the investment push in the Budget has to be given within the
constraints of a high fiscal deficit, not-so-buoyant revenue receipts and a high subsidy bill.
Budget is likely to be frugal, reformist, pro-investments
We think the street is looking up to the FM to put the house in order and boost market
sentiment further, which already seems upbeat since the start of the year on account of the start
of the easing monetary cycle and improved risk appetite across the globe. Cutting down on
populist/inefficient expenditure wherever possible is the need of the hour. While reforms have
been suggested in all the three main heads of the subsidies (food—targeted and a more
efficient PDS, fuel—fuel price de-regulation—Dr. Kirit Parikh Committee report, fertilizer—
Urea Policy), they have not been implemented so far. The earlier set target of fiscal
deficit/GDP of 3% in FY15 now looks unachievable (especially in the absence of some hard
decisions on subsidies and on social spending) and the markets will give a thumbs-up to a
budget with genuine intent to push through reforms and reduce subsidies through steps such
as:
v Improvement in revenue-receipts by rewinding sops extended during the crisis on
indirect taxes and realignment of Service tax with the GST along with introduction
of negative list.
v Roadmap for rationalisation of subsidies and ultimately, market-linked prices wherever
possible, so that demand adjusts to the global commodity prices. While global crude oil
prices is anybody’s call, internalising global commodity prices is the need of the hour as
the regulated and subsidised prices do not let the domestic demand adjust to parity prices,
which in-turn results in higher/inefficient consumption and larger subsidy bill. Given the
inflation dynamics and the market expectations, all the fuel prices may not be deregulated
immediately; however, there is a need for a comprehensive plan for the same in
the form of a roadmap with clearly defined timelines for eventual complete de-regulation.
v Improvement in the subsidy distribution mechanism to avoid leakages and ensure
targeted subsidy disbursal.
v Flat NREGS spend: In FY12, the NREGS allocation remained flat at Rs 400bn over
FY11. Concerns have been voiced over the impact of NREGS on the wage levels in rural
India, but FY12 saw NREGS allocation remaining flat at ~Rs 400bn over FY11. Given
the lower leakages in the disbursement of NREGS funds, the current fiscal has seen
disbursements of Rs 220bn versus an allocation of Rs 400bn in the budget. This makes a
case for flat NREGS allocation in FY13 as well.
v Clear divestment agenda and policy instead of the current ad-hoc one (especially after
the ONGC episode which indicated that there is no appetite for ad-hoc divestment and
prices for PSU paper).
v Push for reformist agenda and sacrosanct timelines on FDI in multi-brand
retail/GST/DTC, etc.
v Part roll-out of DTC/GST even as the actual/full-fledged implementation looks some time
away.
Fiscal consolidation will be positive for easing monetary stance as well
The Reserve Bank of India (RBI) has time and again voiced concerns over a loose fiscal policy
and consequently, limited room for the monetary policy to react to a slowdown in the context
of stubborn inflation. A fiscally responsible Budget may also mean a more comfortable RBI on
easing rates—likely positive for the investments and the markets.
The print may look good but the devil lies in details
Empirical evidence suggests that there has been a wide disconnect between the budgeted
numbers and the actual expenditure/receipts. The budget estimates are often rosy even as the
expenditure has seen additions through multiple supplementary grants and on account of
higher subsidy bill. Thus, while the print may suggest fiscal consolidation, we would like to
watch out for the following as history tells us that the devil lies in details:
v Accounted subsidies (if realistic) for fuel, fertilisers and food will provide some insight
into government position on fuel price de-regulation and the food security bill form and
timeline.
v Market borrowings of the government in FY13: High borrowings in FY12 have meant
lesser and expensive capital resources for the private sector.
v GDP growth assumption for FY13 (again, if realistic) will peep into the government’s
expectation on economic recovery.
v Social sector spending and NREGS allocation: While health and education spending
are essential, concerns have been raised over NREGS spending, which is often held
responsible for prohibiting labour migration and increasing labour costs
Key assumptions
v Implementation of Food Security Bill in the current fiscal is assumed and will cost
Rs 980bn in the first year of implementation.
v Roll back of excise to 12% and increase in the Service Tax by 2% to 12%.
v Increase in diesel, LPG and kerosene prices by Rs6/ltr, Rs50/Cyl. and Rs2/ltr through
FY13 and crude oil at US$105/bbl.
v Divestment proceeds of Rs 150bn.
High market expectations increase risks of a disappointment
While the markets tumbled in 2011 on concerns over inflation and policy paralysis, the rally
since the start of the year has pushed the valuations from the cycle low multiples.
Flowing liquidity taps from the central banks around the globe and consequently sloshing
liquidity, range-bound crude oil on higher supply and demand destruction at higher prices and
increased risk appetite may continue to re-rate the markets further. However, widely held
expectations of a reformist budget amidst serious need for investments, fiscal consolidation
and reforms have increased the risk of a disappointment if the budget fails to deliver.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Budget 2012-13 Preview
Pushed against the wall
The Union Budget this year is being watched closely, even as progressively, it has lost
significance for the markets in the past few years. Given the investment-led slowdown
in the economy, with a need for fiscal pump-priming on one hand, and steadily
deteriorating public finances on the other, the budget needs to be frugal, reformist and
pro-growth at the same time. Not an easy task, especially so given the (populist)
demands of the realpolitik.
We believe the government will do all it can to improve sentiment and redeem its
image, at least some of it credible. Besides the FY13 fisc (we estimate 5.2%, although
the Govt.’s initial estimate would be lower), the market is also looking for the market
borrowing figure (our est. Rs5trn), esp. for its impact on the RBI’s easing stance.
And for the market, recent outperformance and the headwind of high crude oil price
risk a negative reaction if the budget fails to deliver on expectations.
v Last reformist budget ahead of general elections in 2014: The 2012-13 Union
Budget is the last chance for the government for a course correction towards growthoriented
reforms, and prudent expenditure, two years being essential for tangible
change before General Elections in 2014. While monetary policy would get easier, a
turn in sentiment would require policy incentives as well. A broad-based macro
slowdown, led by stalled investment, stubborn inflation, and high cost of funds,
lately joined by resurgent commodity prices ought to make it the case serious
enough.
v Fiscal pump-priming difficult this time around: Let’s face it: Growth is down to
6.5% in FY12E, and little better in FY13E (We expect 7.1%). The last time that
happened was in FY09, with the fisc at 6% (except that FY10 saw 8.4% growth. i.e.,
no bounce this time around). Our FY12 assumption of 5.9% leaves little room for
fiscal manoeuvring, with subsidies and interest payments taking up more than 60%
of total tax receipts. Corporate investment in the economy has been flat for the last
three years, but the Govt. is no position to take over.
v Budget likely to look frugal, reformist and pro-investment: Clearly, expense
rationalization (subsidies) is as important as raising revenues (tax off-take, spectrum
sales, divestment). While it’s time to take hard decisions, the budget would do well
to lay down concrete roadmaps (e.g., fuel deregulations, GST), short of destabilizing
fragile economic growth. We believe this will translate into increase in select indirect
taxes, lower subsidies, incremental clarity on long-pending reform measures and a
push for investments/ infrastructure through better incentives. One might also see a
smattering of ‘forward’ reforms like direct cash transfers.
v However, expectations increase risks of a disappointment? Markets tumbled in
2011 on inflation and policy paralysis, the early rally has pushed valuations from
cycle-low multiples. Ample liquidity, improved risk appetite (and of course, rangebound
oil) may continue to re-rate the markets further. However, widely-held
expectations of a reformist budget, fiscal consolidation and reforms (amidst serious
need for it) have increased the risk of a disappointment if the budget fails to deliver.
Union Budget 2012-13
Pushed against the wall
Last reformist Budget ahead of general elections in 2014
The Union Budget 2012-13 is the last chance for the government for a course correction ahead
of next year’s likely populist election Budget. The lower revenue collection (on industrial
slowdown) and lower divestment proceeds (on weak markets) along with under-accounted
subsidies (fuel and fertilizer) have translated into messy math for public finances in FY12.
This has led to higher borrowing in FY12E, with a massive 5.9% fiscal deficit/GDP versus
Budget estimate of 4.6%. The FY14 Union Budget will likely be populist ahead of the general
elections in 2014 and this would mean that the government would likely create some space for
larger social spending in the FY14 budget. This would also mean that the chances of a prudent
and reformist budget in FY13 are very high.
The Union Budget has had progressively lower importance in the past as the last few budgets
have avoided big-ticket policy reform announcements, which in any case tended to come
throughout the year instead of end-Feb. However, this time is different as given the policy
paralysis and limited room for fiscal profligacy; it is in the Govt.’s interest to the opportunity
to redeem the Government’s image and kick-start reforms in a big way. The idea here is to
incentivise investments and at the same time keep a check on the deficit by reducing inefficient
expenditure, a task that is easier said than done.
Slowdown in the economy is investment-led and needs pro-cyclical measures:
The capital expenditure/total expenditure—a measure of capital spends by the government—
fell from ~18% in FY01-FY08 to ~13% in FY12E as the government spent less on the plan
and non-plan capital expenditure to counter ballooning non-plan revenue expenditure i.e.
subsidies. This has meant that while the borrowing by the government has increased
substantially at the expense of the private sector, the much needed capital expenditure has
taken a hit (aggregate plan and non-plan capital expenditure down 1.4% at Rs 1.6trn in
FY12BE over FY11).
While gross fixed capital formation as a percentage of GDP has been falling from 35% in
Q2FY10 to 30% in Q3FY12, what is worrisome is that the private share of the gross capital
formation has also fallen from a high of ~43% in FY08 to ~33% in FY12. The new project
announcements have fallen 44% for the first nine months of the current fiscal to Rs 7.3trn from
Rs 13.2trn a year ago. The share of private projects has also fallen to 47.2% from 65.4% a year
ago, highlighting the subdued sentiment in the private sector which has been the key driver of
investments during the past decade. This fall in the investments will likely affect India’s
potential growth over the next few years.
To turn the sentiment from such a severe slowdown in the investments, policy incentives are
required in addition to an easy monetary policy even as the scope for pro-cyclical expenditure
by the government is limited. Additionally, a boost to the already strong domestic consumption
through monetary and fiscal easing in the face of capacity constraints and already high
inflation would only intensify the inflation problem
Fiscal pump priming for investments difficult this time around...
Let’s face it: Growth is down to 6.5% in FY12E, and little better in FY13E (We expect 7.1%).
The last time that happened was in FY09, with the fisc at 6% (except that FY10 saw 8.4%
growth. i.e., no bounce this time around). Our FY12 assumption of 5.9% leaves little room for
fiscal manoeuvring, with subsidies and interest payments taking up more than 60% of total tax
receipts. Corporate investment in the economy has been flat for the last three years, but the
Govt. is no position to take over even as the government would like to make sure that the
growth does not fall further. The only tool that will not cost the bucks and still help improve
sentiments, attract investments into India and facilitate growth remains the much needed
“reforms”.
...given the messy state of public finances in FY12
The double whammy of lower tax/non-tax revenue collection (on lower growth and weak
markets) along with higher subsidy burden (on higher crude, fertiliser commodity prices) has
translated in the government raising its borrowing target for the year two times from Rs 4trn
earlier to Rs 5.1trn now.
The excise and the corporate taxes have lagged Budget estimates so far and the gross tax
collection is likely to miss the budgeted target of 18%YoY (12%YoY so far) despite strong
service tax collections (37%YoY so far versus the budgeted 18%).
While the revenue-collection is often back-ended, a clearly visible slowdown in the economy
(Q3FY12 GDP at 6.1%, lowest in 12 quarters) in the second half of FY12 on lower
investments driven by hawkish monetary policy is not likely to help matters either. With our
expectation of a gradual recovery in the macro indicators and growth through FY13, the FY13
picture does not look very encouraging either
The budgeted divestment target of Rs 400bn also looks distant given the divestment proceeds
of ~Rs 135bn so far (including the recent ONGC auction). While the markets have seen an
improvement in the sentiment in the past couple of months and levers exist in FY13 in the
form of 2G auction, divestment through the new auction methodology, PSU buy-backs, etc. we
take note that the divestment proceeds in the best of the times in FY11 have been ~Rs 220bn
versus the budgeted Rs 400bn. The uncertainty over the extent of spectrum to be auctioned and
likely participants in the probable 2G auctions make us conservative on the non-debt capital
receipts in FY13.
The subsidy expenditure as a share of total receipts of the government has increased from
~13% in FY01-FY08 to ~30% in FY12E. Higher crude oil prices, under-allocation of fuel
subsidies and higher costs for fertiliser inputs have all contributed to a high subsidy bill versus
expectations in FY12 (our estimate Rs 238bn versus budgeted Rs 144bn). Any further measure
that aims to push consumption (or income transfers to rural India) will cause inflation to
remain higher for longer, delay the easing of the rates and consequently delay the investment
cycle further.
Despite the expected fuel price hikes post the Uttar Pradesh (UP) elections and the proposed
reduction in the fertiliser subsidies, we think, the subsidy bill is going to be high if the
government implements the Food Security Bill and the crude oil prices continue to remain
upbeat on geo-political tensions
This would likely mean that the investment push in the Budget has to be given within the
constraints of a high fiscal deficit, not-so-buoyant revenue receipts and a high subsidy bill.
Budget is likely to be frugal, reformist, pro-investments
We think the street is looking up to the FM to put the house in order and boost market
sentiment further, which already seems upbeat since the start of the year on account of the start
of the easing monetary cycle and improved risk appetite across the globe. Cutting down on
populist/inefficient expenditure wherever possible is the need of the hour. While reforms have
been suggested in all the three main heads of the subsidies (food—targeted and a more
efficient PDS, fuel—fuel price de-regulation—Dr. Kirit Parikh Committee report, fertilizer—
Urea Policy), they have not been implemented so far. The earlier set target of fiscal
deficit/GDP of 3% in FY15 now looks unachievable (especially in the absence of some hard
decisions on subsidies and on social spending) and the markets will give a thumbs-up to a
budget with genuine intent to push through reforms and reduce subsidies through steps such
as:
v Improvement in revenue-receipts by rewinding sops extended during the crisis on
indirect taxes and realignment of Service tax with the GST along with introduction
of negative list.
v Roadmap for rationalisation of subsidies and ultimately, market-linked prices wherever
possible, so that demand adjusts to the global commodity prices. While global crude oil
prices is anybody’s call, internalising global commodity prices is the need of the hour as
the regulated and subsidised prices do not let the domestic demand adjust to parity prices,
which in-turn results in higher/inefficient consumption and larger subsidy bill. Given the
inflation dynamics and the market expectations, all the fuel prices may not be deregulated
immediately; however, there is a need for a comprehensive plan for the same in
the form of a roadmap with clearly defined timelines for eventual complete de-regulation.
v Improvement in the subsidy distribution mechanism to avoid leakages and ensure
targeted subsidy disbursal.
v Flat NREGS spend: In FY12, the NREGS allocation remained flat at Rs 400bn over
FY11. Concerns have been voiced over the impact of NREGS on the wage levels in rural
India, but FY12 saw NREGS allocation remaining flat at ~Rs 400bn over FY11. Given
the lower leakages in the disbursement of NREGS funds, the current fiscal has seen
disbursements of Rs 220bn versus an allocation of Rs 400bn in the budget. This makes a
case for flat NREGS allocation in FY13 as well.
v Clear divestment agenda and policy instead of the current ad-hoc one (especially after
the ONGC episode which indicated that there is no appetite for ad-hoc divestment and
prices for PSU paper).
v Push for reformist agenda and sacrosanct timelines on FDI in multi-brand
retail/GST/DTC, etc.
v Part roll-out of DTC/GST even as the actual/full-fledged implementation looks some time
away.
Fiscal consolidation will be positive for easing monetary stance as well
The Reserve Bank of India (RBI) has time and again voiced concerns over a loose fiscal policy
and consequently, limited room for the monetary policy to react to a slowdown in the context
of stubborn inflation. A fiscally responsible Budget may also mean a more comfortable RBI on
easing rates—likely positive for the investments and the markets.
The print may look good but the devil lies in details
Empirical evidence suggests that there has been a wide disconnect between the budgeted
numbers and the actual expenditure/receipts. The budget estimates are often rosy even as the
expenditure has seen additions through multiple supplementary grants and on account of
higher subsidy bill. Thus, while the print may suggest fiscal consolidation, we would like to
watch out for the following as history tells us that the devil lies in details:
v Accounted subsidies (if realistic) for fuel, fertilisers and food will provide some insight
into government position on fuel price de-regulation and the food security bill form and
timeline.
v Market borrowings of the government in FY13: High borrowings in FY12 have meant
lesser and expensive capital resources for the private sector.
v GDP growth assumption for FY13 (again, if realistic) will peep into the government’s
expectation on economic recovery.
v Social sector spending and NREGS allocation: While health and education spending
are essential, concerns have been raised over NREGS spending, which is often held
responsible for prohibiting labour migration and increasing labour costs
Key assumptions
v Implementation of Food Security Bill in the current fiscal is assumed and will cost
Rs 980bn in the first year of implementation.
v Roll back of excise to 12% and increase in the Service Tax by 2% to 12%.
v Increase in diesel, LPG and kerosene prices by Rs6/ltr, Rs50/Cyl. and Rs2/ltr through
FY13 and crude oil at US$105/bbl.
v Divestment proceeds of Rs 150bn.
High market expectations increase risks of a disappointment
While the markets tumbled in 2011 on concerns over inflation and policy paralysis, the rally
since the start of the year has pushed the valuations from the cycle low multiples.
Flowing liquidity taps from the central banks around the globe and consequently sloshing
liquidity, range-bound crude oil on higher supply and demand destruction at higher prices and
increased risk appetite may continue to re-rate the markets further. However, widely held
expectations of a reformist budget amidst serious need for investments, fiscal consolidation
and reforms have increased the risk of a disappointment if the budget fails to deliver.
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