Union Budget FY13 Expectatio​ns: IDFC Securities

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 “We didn't actually overspend our budget. The allocation simply fell short of our expenditure.”

Indian government is scheduled to present the Union budget on 16^th March 2012. With fiscal slippage expected to be ~1.2% of GDP (Fiscal deficit at 5.8% as against budgeted estimate of 4.6% in FY12) and GDP growth expected to be below 7% in FY12, the finance minister has to do a balancing act between fiscal consolidation and reviving economic growth. Our sense is that the finance minister has very little room for an expansionary budget and focus would be clearly on measures to reduce the non-plan expenditure (read subsidies). Further, with the RBI clearly signaling the need for concrete steps towards fiscal consolidation before embarking on the path of monetary easing, plausible measures from the central government in this regard would be keenly watched out for. While the finance minister has various options in his arsenal to achieve the desired end, measures taken to kick-start private investment growth and moderate non-plan expenditure would be critical in our view.

Given the current state of affairs, we highlight some of the options available to the finance minister to rein in fiscal deficit without any material impact on economic growth.

·         The finance minister could revive tax collections by increasing union excise duties and service tax rates to pre-crisis levels. Further, introduction of a ‘negative list’ of services instead of the currently followed ‘positive list’ would bring more services under the service tax net, thereby boosting service tax collections.

·         Concrete measures to reduce fuel and fertilizer subsidy burden in FY13, we believe, would be the main focus area in this year’s budget. While a full-fledged deregulation of tariffs could be still a while away, the finance minister could hike retail prices of fuel and fertilizers to reduce the under-recovery burden. Also, steps towards focused distribution of subsidies through direct cash transfers using UID would be a positive.

·         Clear thrust on reviving private investment spends with measures towards faster clearance of projects and resolving issues pertaining to fuel availability would be critical. Further, measures could be taken to improve availability of long term financing to infrastructure sector through focus on programs such as Infra Debt Fund, IIFCL’s Credit Enhancement Scheme, Takeout financing.

·         While non-tax revenue was muted in FY12 due to absence of any one-off income, the government could re-auction the spectrum obtained from cancellation of 2G licenses to mop-up ~Rs230bn in FY13.

·         Also, while weak capital markets impacted disinvestment mop-up in FY12 (at ~Rs100bn as against budgeted estimate of Rs400bn!), improving equity market sentiments and utilization of auction route for disinvestment could prop up revenues in FY13.