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The Union Budget FY13 makes an earnest attempt to depict a true picture of the economic scenario given the dichotomy of slowing growth v/s fiscal challenges. Although, the aim to bring down the fiscal deficit to 5.1% in FY13 from a revised estimate of 5.9% in FY12 looks credible, but the gross market borrowing program of 5.7 trillion in FY13 has been a major dampener for the markets. Despite a deviation from the thirteen finance commission roadmap in terms of fiscal deficit (5.1% for FY13 against a target of 4.2%), the debt to GDP ratio at 45.5% for FY13 remains well below the target of 50.5%. As some undesirable subsidies have been putting pressure on the government financials, the budget assures to keep central subsidies under 2% of GDP in FY13. In addition to that finance minister targets to bring it down to 1.75% in next 3 years. The absence of any mention of proceeds from the 4G and 2G auctions of the cancelled licenses could provide a positive surprise to overall fiscal deficit number.
As per the budget the fiscal health of the economy is likely to improve in FY13 through a slew of measures aimed at generating higher revenues. A proposal to widen the service tax net and introduce all items (except 17 items under the negative list) along with a proposal of raising service tax rate from 10% to 12% is estimated to yield additional revenue of Rs186.6 bn. The government has also proposed to raise excise duty from 10% to 12%, merit rate from 5% to 6% and lower merit rate from 1% to 2% (with few exceptions). Net gains from the tax proposals are estimated at Rs. 414.4 bn. Other sources of revenue include, the high target for divestments through the sale of PSU stakes proceeds pegged at Rs. 300 bn for FY13.
On the expenditure side, the government has decided to be more liberal. Total expenditure for FY13 is budgeted at Rs. 14909.25 bn, up by 18.5% from FY12 BE. The plan expenditure for FY13 at Rs. 5210.25 bn is also 18% higher than FY12 BE. The total non plan expenditure for FY13, pegged at Rs.9699 bn, 18.8% higher than the FY12 BE. The allocation towards core subsidies (oil, food and fertilizer) is also higher by 33% in the FY13 at Rs 1796 bn from Rs. 1342 bn. The allocation for the Food Security Bill is also to be fully provided for. However, we believe that the crude oil subsidy amount pegged at Rs. 436 bn is grossly underestimated given the scenario of steady rise in global crude oil prices, which has pushed the actual crude oil subsidy bill to Rs.685bn in FY12, up by a whopping 190% than the BE. This has built a strong case for the impending diesel and LPG price hike to be announced in the near term. However, government tries to partly offset the glitches in the subsidy system by bringing in greater transparency. Direct cash payment for LPG and diesel subsidy to be introduced is likely to lessen slippages in the system. The launch of LPG transparency portals by all three public sector oil marketing companies could help reduce leakages in the system. The endeavor to increase the number of individuals enrolled under the UID mission to Rs. 40 cr persons from Rs.20 cr will also act as a check on the misuse of PDS system.
Greater accessibility to Capital Markets
The finance ministry has endeavored to attract higher investments in the capital market through various initiatives like allowing income tax deduction of 50% to retail investors who invest upto Rs50, 000, through Rajiv Gandhi equity saving scheme having an income below 10 lakh (with a lock in period of three years ) Allowing Qualified Foreign Investors (QFIs) to access Indian Corporate Bond market; Simplifying the process of issuing Initial Public Offers (IPOs), lowering their costs and helping companies reach more retail investors in small towns. Permitting two-way fungibility in Indian Depository Receipts subject to a ceiling with the objective of encouraging greater foreign participation in Indian capital market.
Higher borrowing program may keep interest rate at elevated levels
The weighted average yield of borrowings from the market stood at 8.52% for FY12 (till Dec’11) and poses risk for the borrowing costs given the excess borrowings announced by the finance ministry. The elevated bond yields may require active intervention from the RBI to counter the surge in bond yields and the resultant impact on inflation may delay the process of reversal in rate cycle.
Interest payment (to service government debt) is expected to increase to Rs. 3.2 trn in FY13 from Rs. 2.8 trn in FY12. However, as a percentage of Net Tax Receipts it is expected to relatively go down to 41.5% from 42.9% in FY12 on expectations of higher tax revenues.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
The Union Budget FY13 makes an earnest attempt to depict a true picture of the economic scenario given the dichotomy of slowing growth v/s fiscal challenges. Although, the aim to bring down the fiscal deficit to 5.1% in FY13 from a revised estimate of 5.9% in FY12 looks credible, but the gross market borrowing program of 5.7 trillion in FY13 has been a major dampener for the markets. Despite a deviation from the thirteen finance commission roadmap in terms of fiscal deficit (5.1% for FY13 against a target of 4.2%), the debt to GDP ratio at 45.5% for FY13 remains well below the target of 50.5%. As some undesirable subsidies have been putting pressure on the government financials, the budget assures to keep central subsidies under 2% of GDP in FY13. In addition to that finance minister targets to bring it down to 1.75% in next 3 years. The absence of any mention of proceeds from the 4G and 2G auctions of the cancelled licenses could provide a positive surprise to overall fiscal deficit number.
As per the budget the fiscal health of the economy is likely to improve in FY13 through a slew of measures aimed at generating higher revenues. A proposal to widen the service tax net and introduce all items (except 17 items under the negative list) along with a proposal of raising service tax rate from 10% to 12% is estimated to yield additional revenue of Rs186.6 bn. The government has also proposed to raise excise duty from 10% to 12%, merit rate from 5% to 6% and lower merit rate from 1% to 2% (with few exceptions). Net gains from the tax proposals are estimated at Rs. 414.4 bn. Other sources of revenue include, the high target for divestments through the sale of PSU stakes proceeds pegged at Rs. 300 bn for FY13.
On the expenditure side, the government has decided to be more liberal. Total expenditure for FY13 is budgeted at Rs. 14909.25 bn, up by 18.5% from FY12 BE. The plan expenditure for FY13 at Rs. 5210.25 bn is also 18% higher than FY12 BE. The total non plan expenditure for FY13, pegged at Rs.9699 bn, 18.8% higher than the FY12 BE. The allocation towards core subsidies (oil, food and fertilizer) is also higher by 33% in the FY13 at Rs 1796 bn from Rs. 1342 bn. The allocation for the Food Security Bill is also to be fully provided for. However, we believe that the crude oil subsidy amount pegged at Rs. 436 bn is grossly underestimated given the scenario of steady rise in global crude oil prices, which has pushed the actual crude oil subsidy bill to Rs.685bn in FY12, up by a whopping 190% than the BE. This has built a strong case for the impending diesel and LPG price hike to be announced in the near term. However, government tries to partly offset the glitches in the subsidy system by bringing in greater transparency. Direct cash payment for LPG and diesel subsidy to be introduced is likely to lessen slippages in the system. The launch of LPG transparency portals by all three public sector oil marketing companies could help reduce leakages in the system. The endeavor to increase the number of individuals enrolled under the UID mission to Rs. 40 cr persons from Rs.20 cr will also act as a check on the misuse of PDS system.
Greater accessibility to Capital Markets
The finance ministry has endeavored to attract higher investments in the capital market through various initiatives like allowing income tax deduction of 50% to retail investors who invest upto Rs50, 000, through Rajiv Gandhi equity saving scheme having an income below 10 lakh (with a lock in period of three years ) Allowing Qualified Foreign Investors (QFIs) to access Indian Corporate Bond market; Simplifying the process of issuing Initial Public Offers (IPOs), lowering their costs and helping companies reach more retail investors in small towns. Permitting two-way fungibility in Indian Depository Receipts subject to a ceiling with the objective of encouraging greater foreign participation in Indian capital market.
Higher borrowing program may keep interest rate at elevated levels
The weighted average yield of borrowings from the market stood at 8.52% for FY12 (till Dec’11) and poses risk for the borrowing costs given the excess borrowings announced by the finance ministry. The elevated bond yields may require active intervention from the RBI to counter the surge in bond yields and the resultant impact on inflation may delay the process of reversal in rate cycle.
Interest payment (to service government debt) is expected to increase to Rs. 3.2 trn in FY13 from Rs. 2.8 trn in FY12. However, as a percentage of Net Tax Receipts it is expected to relatively go down to 41.5% from 42.9% in FY12 on expectations of higher tax revenues.
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