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Union Budget FY2013: Markets wait for spring cheer in a March
budget
The budget would be
tabled at a time when
growth has slowed down
and fiscal targets set in
the previous budget, that
had looked optimistic at
the outset, have been
breached
This would be one of the
few March budgets and
markets would hope that
the Finance Minister can
spread some cheer
Our concerns over
achieving the ambitious
budget deficit target of
4.6% in FY2012, have
been founded
On the revenue front,
there was a shortfall on
the back of lower
collections on corporate,
income tax and excise
duty due to economic
slowdown
On the expenditure front,
the targets were missed
due to lower budgeting of
subsidies coupled with
increase in under
recoveries and higher
import prices of fertilizers
In the run up to Union budget FY2013, the Indian economy continues to
present a mixed picture, in the wider context of a tepid global economy. The
budget would be tabled at a time when growth has slowed down, albeit with a
retreat in inflation. However, fiscal targets set in the previous budget, that had
looked optimistic at the outset, have been breached, with April-January FY2012
accounting for 105.4% of the budgeted fiscal deficit. As such, correctives are
called for on this front. Indeed, with General elections due in FY2014, there is a
small window of opportunity in the FY2013 Budget to take meaningful steps
towards fiscal consolidation, and more generally give a direction to policy.
This budget would be one of the few March budgets (to be presented on March
16th as against the usual norm of the last working day of February), which are
typically associated in years that had General Elections. The Government has
made this year an exception, as it would want to assess its political strength at
the Centre. Thus the state election results due on March 6th hold a special
significance for this year’s budget if the UPA were to muster enough support to
undertake some much-needed reforms.
FY2012: A year of fiscal slippages
In our post FY2012 budget analysis we had expressed our concerns over the
ambitious budget deficit target of 4.6% of GDP, given the very optimistic
revenue collection target and subsidy estimates, especially on petroleum
subsidy (for details refer to our report “Budget FY2012: A fine balancing act”
dated February 28, 2011). Moreover, we had also estimated that the
Government would have to increase its dependence on market borrowing as it
had set very ambitious targets of collections through small saving schemes.
What complicates any credible move towards fiscal consolidation is the muted
growth environment. With the third quarter GDP for FY2012 witnessing a steep
decline and printing 6.1% YoY, the Indian economy is on the brink of
registering one of the slowest episodes of growth since the Lehman crisis
struck in FY2009. On the revenue front, the Government had budgeted a tax
revenue growth of 17.8% and we expect the actual growth to be lower at
15.5%. This big shortfall is on the back of lower collections on corporate,
income tax and excise duty due to economic slowdown. The total tax collection
is also lower due to reduction in customs and excise duties on crude and
petroleum products in June 2011.
On the expenditure front, the targets were missed due to lower budgeting of
subsidies coupled with increase in under recoveries due to rise in oil prices and
weaker Rupee and higher import prices of fertilizers.
Some of the
Government’s revenue
losses would be offset by
increased dividend
payouts by PSUs
Assuming some roll over
of fuel subsidy along with
measures like buy back of
Government stake by
cash rich PSUs and
disinvestment proceeds,
the headline fiscal deficit
number is expected to be
around 5.7% of GDP
The crux of the Union
Budget FY2013 will be
fiscal consolidation, with
the mix of revenue and
expenditure measures
crucial in determining the
extent of consolidation
On the tax front, we
expect the Government to
introduce certain changes
in the indirect tax
structure that are in line
with the introduction of
GST, although it is
unlikely to be
implemented in totality in
FY2013
The Government would also most likely miss the INR 140 bn revenue, which it
had expected to raise via spectrum auctions. Some of these revenue losses
would be offset by dividends from state owned enterprises as the Government
has asked cash rich PSUs to increase the dividend payout ratio. Media reports
suggest that some companies have agreed to higher dividend payment, which
would result in an INR 60 bn inflow to the exchequer. Overall, we estimate the
additional revenue through dividend payments to be to the tune of INR 100 bn.
Assuming some roll over of fuel subsidy (postponement of oil subsidy payment
of around INR 300 bn and some on the fertilizer subsidy), as was done last year
along with some measures like buy back of Government stake by cash rich
PSUs and disinvestment proceeds (ONGC), the headline fiscal deficit number is
expected to be around 5.7% of GDP, as against 4.7% in FY2011.
The General Government fiscal (Center and State combined) is likely to rise to
8.7% of GDP in FY2012 from 7.3% in FY2011. The significant rise in the deficit
number is also due to absence of one off revenue like telecom auctions (which
contributed to around 1.3% of GDP) and disinvestments.
Perspectives for FY2013: A year of consolidation
The crux of the Union Budget FY2013 will be fiscal consolidation, keeping in
mind the need to support the faltering growth momentum. The mix of revenue
and expenditure measures would be crucial in determining the extent of fiscal
consolidation.
Revenue
Tax revenue
On the tax front, we expect the Government to introduce certain changes in the
indirect tax structure that are in line with the introduction of goods and service
tax (GST), although it is unlikely to be implemented in totality in FY2013. The
key revenue generating measures likely to be announced are roll back of tax
cuts to pre 2008 level and increasing the list of goods and services, which are
taxed.
• Increase in excise duties from 10% to 12%
• Increase in service tax from 10% to 12%
• Increasing the excise tax base by lowering the exemption limit
• There is a possibility that the Government comes out with a negative list on
service tax, wherein all services except those mentioned in the list are
taxed. The Empowered Committee of State Finance Ministers have recently
agreed to such a measure in order to enable broad based coverage
• These increases in taxes are likely to result in additional INR 300 – 400 bn
inflow to the exchequer
With regards to the implementation of the direct tax code (DTC), the
Government has yet again missed its deadline, which was April 2012 and this is
unlikely to be announced this year as it is still under consideration with the
Standing Finance Committee. However, we expect this year’s budget to give
further relief to the common man with regards to their disposable income as
the tax slabs are expected to be increased, in a move that takes us closer to
DTC. Under the proposed tax structure, an individual earning above INR 10 lakh
will save upto INR 22,000 annually.
Additionally, there could be announcements to curtail benefits through tax
havens or measures to bring back unaccounted money through the
announcement of one-off amnesty schemes (the introduction of such a
Voluntary Disclosure of Income Scheme in 1997 had resulted in INR 105 bn of
revenue for the exchequer) or mandatory declaration of overseas assets.
Some of the revenue lost due to increase in income tax slabs would be offset
by increases in indirect tax, as the proportion of the latter is much higher than
that of direct tax. Despite slowdown in exports, demand for tax incentives is
unlikely to be met, given the priority to bridge the fiscal gap. Reduction in
Securities Transaction Tax on equity trade is likely in order to boost the depth
of the capital market. Overall, we expect the tax revenue to GDP ratio to
increase to 7.6% of GDP from estimated 7.3% in FY2012 on the back of
improved growth prospects.
Non-tax revenue
The Government is likely to continue to rely on non-tax revenue to aid fiscal
consolidation. On the disinvestment front, the Government is likely to budget
INR 400 bn but would be able to garner only INR 250 -350 bn, contingent on
market conditions. In FY2013, apart from using the IPO route, the Government
is also likely to auction it’s stakes in PSUs to institutional investors only (similar
to the recently concluded ONGC stake sale), which is possible given the recent
regulatory changes. Also, the Government is in the process of finalizing the
creation of a special purpose vehicle (SPV), which would buy stakes in
Government owned companies. The Government holds stakes in ITC, Axis
Bank and L&T through Specified Undertaking of Unit Trust of India (SUUTI),
which it will sell to the SPV, which in turn will leverage it and take loans from
banks to participate in the disinvestment program. Additionally, auctioning of
new coal blocks could be another way of raising non-tax revenue.
Expenditure
It is imperative for the Government to increase the tax to GDP ratio to sustain
lower fiscal deficit, as most of our expenditure is sticky, thereby leaving the
Government with limited room to reduce that component. To put this in
perspective, if we look at the expenditure breakup of FY2012, around 50% of
the total expenditure was on interest payments, subsidies and defence, another
20% on salaries of public sector employees, thereby leaving only around 30%
to be the discretionary component.
On the expenditure front, the Government will have to slash the bloated
subsidy bill, especially fuel subsidy. The food security bill will add to pressures
on the fiscal. However, the impact of the bill is likely to be much lower than the
estimated INR 1 tn as the Government will still require a couple of more months
to get the requisite approval on food security bill. Additionally, the project will
be implemented on a pilot basis this year and therefore the cost to the
Government will be lower.
With regards to India’s heavy fuel subsidy bill, deregulation of petroleum prices
did bring relief to the oil companies last year but the OMCs continue to still
post huge losses due to under recoveries on account of diesel and LPG.
Recently, Deputy Chairman of Planning Commission, Montek Singh Ahluwalia
pointed out that unlike food and fertilizer subsidy, diesel subsidies are
uncapped.
With the current level of crude prices, under recoveries are likely to be high,
which would further weigh on the exchequer. Given the upward pressure on
crude prices, it will be important not to under budget crude prices in FY2013 as
was the case in FY2012, which tends to distort the fiscal calculations. We
expect Brent crude to be around USD 120-125 per barrel in FY2013 as against
USD 110-115 per barrel during FY2012, while the budgeted was USD 90/ barrel.
However, the Government has room to increase the retail prices of diesel, LPG
and Kerosene this year before it heads into a populist mode in the next budget
ahead of the General elections in FY2014. We expect around 10% increase in
diesel, LPG and kerosene price as early as July to take advantage of the high
base effect due to last year’s increase in diesel price. Further, easing
inflationary pressure gives additional scope to increase fuel prices. On the
fertilizer front, news report recently indicated that the Government is likely to
cut by a fifth the subsidy it gives to phosphate and potash-based fertilizers in
FY2013. Additionally, there are talks of decontrolling of Urea prices, even if that
happens to some extent, it would significantly lower the fertilizer subsidy bill.
There could be additional expenditures as the Central Government might need
to extend capital to state run banks for bank recapitalization and provide for
additional revenues to State Governments for debt restructuring of state
electricity boards (SEBs). According to media reports, the SEBs have already
accumulated bank debt of INR 1.8 tn (due to subsidised electricity distribution),
they are finding it to difficult to raise further debt and thus we expect the
Government to support them via an interest rate subsidy.
There could be some reclassification of what constitutes plan and non-plan
expenditure. Media reports suggest that the Government is contemplating
expanding the plan category by ten items in FY2013 after increasing four items
in the last budget. There could also be reduction in the number of centrally
sponsored schemes (to avoid overlap between different schemes), in line with
B K Chaturvedi Committee, which recommends reduction of such schemes to
59 from current 147.
While the wish list from the budget is rather long, some of the key issues that
need to be addressed in the upcoming budget are:
o Increase the share of capital expenditure, especially on infrastructure
projects as insufficient allocation for such projects acts as a drag on growth
o Roadmap for GST and DTC
o Announce the time line for multi-brand FDI to restore investor confidence
o Focus on removing supply side bottlenecks particularly in the power sector
and increase public investment in the same
o Extend further clarity on the UID project
o Announce roadmap for direct cash transfer for subsidies (an idea that was
proposed in the last budget), which will help in curbing systemic leakages
Fiscal deficit expected at 5.1% in FY2013
According to the Thirteenth Finance Commission Report, which aims at fiscal
consolidation, fiscal deficit was to be brought down to 4.2% of GDP by FY2013.
While this target is well beyond reach, the Government will try to narrow the
fiscal gap in its effort to attract foreign investors. Overall, we expect fiscal
deficit to GDP ratio to ease to 5.1% of GDP in FY2013 from 5.7% of GDP in
FY2012. However, there is a possibility that the Government presents a more
optimistic budget with fiscal deficit projection of under 5% of GDP. But that
might not be a reason to cheer as we could see a repeat of FY2012 when the
target was revised upward during the latter half of the year.
Under our base case scenario, we expect the fiscal deficit to be around 5.1% of
GDP in FY2013, which would result in net issuance of around INR 5.0 tn.
Additionally, state government borrowing is likely to be around INR 1.2 tn, thus
aggregate supply is estimated at INR 6.2 tn. We expect a slight pick up in other
sources of capital receipts like State Provident Fund following the recent
increase in provident fund interest rates.
The risks to our view emanate from surge in crude oil prices, which will weigh
on both fuel and fertilizer subsidy bill and uncertainty over food prices,
depending on the monsoon. However, higher than expected disinvestment
proceeds and an earlier than expected rise in retail prices of diesel and LPG
could surprise us on the positive side, thereby facilitating a lower fiscal deficit.
Lastly, on a medium to long-term perspective, the Government needs to focus
on the quality of fiscal consolidation. Our analysis shows that raising tax
revenues (as a share of total public revenues) increases the efficacy of
consolidation. This reflects the contribution of more stable revenue sources to
the budget. This is in contrast to non-tax revenue that constitutes only one off
accretion to receipts and dependence on this mode should be reduced ideally.
Along with this, reduced transfer payments substantially increases the
probability of debt reduction going ahead. Increase in public investment has
short-term consequences for deficit but over the long term it helps to stabilise
the system, as these measures are essentially pro-growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Budget FY2013: Markets wait for spring cheer in a March
budget
The budget would be
tabled at a time when
growth has slowed down
and fiscal targets set in
the previous budget, that
had looked optimistic at
the outset, have been
breached
This would be one of the
few March budgets and
markets would hope that
the Finance Minister can
spread some cheer
Our concerns over
achieving the ambitious
budget deficit target of
4.6% in FY2012, have
been founded
On the revenue front,
there was a shortfall on
the back of lower
collections on corporate,
income tax and excise
duty due to economic
slowdown
On the expenditure front,
the targets were missed
due to lower budgeting of
subsidies coupled with
increase in under
recoveries and higher
import prices of fertilizers
In the run up to Union budget FY2013, the Indian economy continues to
present a mixed picture, in the wider context of a tepid global economy. The
budget would be tabled at a time when growth has slowed down, albeit with a
retreat in inflation. However, fiscal targets set in the previous budget, that had
looked optimistic at the outset, have been breached, with April-January FY2012
accounting for 105.4% of the budgeted fiscal deficit. As such, correctives are
called for on this front. Indeed, with General elections due in FY2014, there is a
small window of opportunity in the FY2013 Budget to take meaningful steps
towards fiscal consolidation, and more generally give a direction to policy.
This budget would be one of the few March budgets (to be presented on March
16th as against the usual norm of the last working day of February), which are
typically associated in years that had General Elections. The Government has
made this year an exception, as it would want to assess its political strength at
the Centre. Thus the state election results due on March 6th hold a special
significance for this year’s budget if the UPA were to muster enough support to
undertake some much-needed reforms.
FY2012: A year of fiscal slippages
In our post FY2012 budget analysis we had expressed our concerns over the
ambitious budget deficit target of 4.6% of GDP, given the very optimistic
revenue collection target and subsidy estimates, especially on petroleum
subsidy (for details refer to our report “Budget FY2012: A fine balancing act”
dated February 28, 2011). Moreover, we had also estimated that the
Government would have to increase its dependence on market borrowing as it
had set very ambitious targets of collections through small saving schemes.
What complicates any credible move towards fiscal consolidation is the muted
growth environment. With the third quarter GDP for FY2012 witnessing a steep
decline and printing 6.1% YoY, the Indian economy is on the brink of
registering one of the slowest episodes of growth since the Lehman crisis
struck in FY2009. On the revenue front, the Government had budgeted a tax
revenue growth of 17.8% and we expect the actual growth to be lower at
15.5%. This big shortfall is on the back of lower collections on corporate,
income tax and excise duty due to economic slowdown. The total tax collection
is also lower due to reduction in customs and excise duties on crude and
petroleum products in June 2011.
On the expenditure front, the targets were missed due to lower budgeting of
subsidies coupled with increase in under recoveries due to rise in oil prices and
weaker Rupee and higher import prices of fertilizers.
Some of the
Government’s revenue
losses would be offset by
increased dividend
payouts by PSUs
Assuming some roll over
of fuel subsidy along with
measures like buy back of
Government stake by
cash rich PSUs and
disinvestment proceeds,
the headline fiscal deficit
number is expected to be
around 5.7% of GDP
The crux of the Union
Budget FY2013 will be
fiscal consolidation, with
the mix of revenue and
expenditure measures
crucial in determining the
extent of consolidation
On the tax front, we
expect the Government to
introduce certain changes
in the indirect tax
structure that are in line
with the introduction of
GST, although it is
unlikely to be
implemented in totality in
FY2013
The Government would also most likely miss the INR 140 bn revenue, which it
had expected to raise via spectrum auctions. Some of these revenue losses
would be offset by dividends from state owned enterprises as the Government
has asked cash rich PSUs to increase the dividend payout ratio. Media reports
suggest that some companies have agreed to higher dividend payment, which
would result in an INR 60 bn inflow to the exchequer. Overall, we estimate the
additional revenue through dividend payments to be to the tune of INR 100 bn.
Assuming some roll over of fuel subsidy (postponement of oil subsidy payment
of around INR 300 bn and some on the fertilizer subsidy), as was done last year
along with some measures like buy back of Government stake by cash rich
PSUs and disinvestment proceeds (ONGC), the headline fiscal deficit number is
expected to be around 5.7% of GDP, as against 4.7% in FY2011.
The General Government fiscal (Center and State combined) is likely to rise to
8.7% of GDP in FY2012 from 7.3% in FY2011. The significant rise in the deficit
number is also due to absence of one off revenue like telecom auctions (which
contributed to around 1.3% of GDP) and disinvestments.
Perspectives for FY2013: A year of consolidation
The crux of the Union Budget FY2013 will be fiscal consolidation, keeping in
mind the need to support the faltering growth momentum. The mix of revenue
and expenditure measures would be crucial in determining the extent of fiscal
consolidation.
Revenue
Tax revenue
On the tax front, we expect the Government to introduce certain changes in the
indirect tax structure that are in line with the introduction of goods and service
tax (GST), although it is unlikely to be implemented in totality in FY2013. The
key revenue generating measures likely to be announced are roll back of tax
cuts to pre 2008 level and increasing the list of goods and services, which are
taxed.
• Increase in excise duties from 10% to 12%
• Increase in service tax from 10% to 12%
• Increasing the excise tax base by lowering the exemption limit
• There is a possibility that the Government comes out with a negative list on
service tax, wherein all services except those mentioned in the list are
taxed. The Empowered Committee of State Finance Ministers have recently
agreed to such a measure in order to enable broad based coverage
• These increases in taxes are likely to result in additional INR 300 – 400 bn
inflow to the exchequer
With regards to the implementation of the direct tax code (DTC), the
Government has yet again missed its deadline, which was April 2012 and this is
unlikely to be announced this year as it is still under consideration with the
Standing Finance Committee. However, we expect this year’s budget to give
further relief to the common man with regards to their disposable income as
the tax slabs are expected to be increased, in a move that takes us closer to
DTC. Under the proposed tax structure, an individual earning above INR 10 lakh
will save upto INR 22,000 annually.
Additionally, there could be announcements to curtail benefits through tax
havens or measures to bring back unaccounted money through the
announcement of one-off amnesty schemes (the introduction of such a
Voluntary Disclosure of Income Scheme in 1997 had resulted in INR 105 bn of
revenue for the exchequer) or mandatory declaration of overseas assets.
Some of the revenue lost due to increase in income tax slabs would be offset
by increases in indirect tax, as the proportion of the latter is much higher than
that of direct tax. Despite slowdown in exports, demand for tax incentives is
unlikely to be met, given the priority to bridge the fiscal gap. Reduction in
Securities Transaction Tax on equity trade is likely in order to boost the depth
of the capital market. Overall, we expect the tax revenue to GDP ratio to
increase to 7.6% of GDP from estimated 7.3% in FY2012 on the back of
improved growth prospects.
Non-tax revenue
The Government is likely to continue to rely on non-tax revenue to aid fiscal
consolidation. On the disinvestment front, the Government is likely to budget
INR 400 bn but would be able to garner only INR 250 -350 bn, contingent on
market conditions. In FY2013, apart from using the IPO route, the Government
is also likely to auction it’s stakes in PSUs to institutional investors only (similar
to the recently concluded ONGC stake sale), which is possible given the recent
regulatory changes. Also, the Government is in the process of finalizing the
creation of a special purpose vehicle (SPV), which would buy stakes in
Government owned companies. The Government holds stakes in ITC, Axis
Bank and L&T through Specified Undertaking of Unit Trust of India (SUUTI),
which it will sell to the SPV, which in turn will leverage it and take loans from
banks to participate in the disinvestment program. Additionally, auctioning of
new coal blocks could be another way of raising non-tax revenue.
Expenditure
It is imperative for the Government to increase the tax to GDP ratio to sustain
lower fiscal deficit, as most of our expenditure is sticky, thereby leaving the
Government with limited room to reduce that component. To put this in
perspective, if we look at the expenditure breakup of FY2012, around 50% of
the total expenditure was on interest payments, subsidies and defence, another
20% on salaries of public sector employees, thereby leaving only around 30%
to be the discretionary component.
On the expenditure front, the Government will have to slash the bloated
subsidy bill, especially fuel subsidy. The food security bill will add to pressures
on the fiscal. However, the impact of the bill is likely to be much lower than the
estimated INR 1 tn as the Government will still require a couple of more months
to get the requisite approval on food security bill. Additionally, the project will
be implemented on a pilot basis this year and therefore the cost to the
Government will be lower.
With regards to India’s heavy fuel subsidy bill, deregulation of petroleum prices
did bring relief to the oil companies last year but the OMCs continue to still
post huge losses due to under recoveries on account of diesel and LPG.
Recently, Deputy Chairman of Planning Commission, Montek Singh Ahluwalia
pointed out that unlike food and fertilizer subsidy, diesel subsidies are
uncapped.
With the current level of crude prices, under recoveries are likely to be high,
which would further weigh on the exchequer. Given the upward pressure on
crude prices, it will be important not to under budget crude prices in FY2013 as
was the case in FY2012, which tends to distort the fiscal calculations. We
expect Brent crude to be around USD 120-125 per barrel in FY2013 as against
USD 110-115 per barrel during FY2012, while the budgeted was USD 90/ barrel.
However, the Government has room to increase the retail prices of diesel, LPG
and Kerosene this year before it heads into a populist mode in the next budget
ahead of the General elections in FY2014. We expect around 10% increase in
diesel, LPG and kerosene price as early as July to take advantage of the high
base effect due to last year’s increase in diesel price. Further, easing
inflationary pressure gives additional scope to increase fuel prices. On the
fertilizer front, news report recently indicated that the Government is likely to
cut by a fifth the subsidy it gives to phosphate and potash-based fertilizers in
FY2013. Additionally, there are talks of decontrolling of Urea prices, even if that
happens to some extent, it would significantly lower the fertilizer subsidy bill.
There could be additional expenditures as the Central Government might need
to extend capital to state run banks for bank recapitalization and provide for
additional revenues to State Governments for debt restructuring of state
electricity boards (SEBs). According to media reports, the SEBs have already
accumulated bank debt of INR 1.8 tn (due to subsidised electricity distribution),
they are finding it to difficult to raise further debt and thus we expect the
Government to support them via an interest rate subsidy.
There could be some reclassification of what constitutes plan and non-plan
expenditure. Media reports suggest that the Government is contemplating
expanding the plan category by ten items in FY2013 after increasing four items
in the last budget. There could also be reduction in the number of centrally
sponsored schemes (to avoid overlap between different schemes), in line with
B K Chaturvedi Committee, which recommends reduction of such schemes to
59 from current 147.
While the wish list from the budget is rather long, some of the key issues that
need to be addressed in the upcoming budget are:
o Increase the share of capital expenditure, especially on infrastructure
projects as insufficient allocation for such projects acts as a drag on growth
o Roadmap for GST and DTC
o Announce the time line for multi-brand FDI to restore investor confidence
o Focus on removing supply side bottlenecks particularly in the power sector
and increase public investment in the same
o Extend further clarity on the UID project
o Announce roadmap for direct cash transfer for subsidies (an idea that was
proposed in the last budget), which will help in curbing systemic leakages
Fiscal deficit expected at 5.1% in FY2013
According to the Thirteenth Finance Commission Report, which aims at fiscal
consolidation, fiscal deficit was to be brought down to 4.2% of GDP by FY2013.
While this target is well beyond reach, the Government will try to narrow the
fiscal gap in its effort to attract foreign investors. Overall, we expect fiscal
deficit to GDP ratio to ease to 5.1% of GDP in FY2013 from 5.7% of GDP in
FY2012. However, there is a possibility that the Government presents a more
optimistic budget with fiscal deficit projection of under 5% of GDP. But that
might not be a reason to cheer as we could see a repeat of FY2012 when the
target was revised upward during the latter half of the year.
Under our base case scenario, we expect the fiscal deficit to be around 5.1% of
GDP in FY2013, which would result in net issuance of around INR 5.0 tn.
Additionally, state government borrowing is likely to be around INR 1.2 tn, thus
aggregate supply is estimated at INR 6.2 tn. We expect a slight pick up in other
sources of capital receipts like State Provident Fund following the recent
increase in provident fund interest rates.
The risks to our view emanate from surge in crude oil prices, which will weigh
on both fuel and fertilizer subsidy bill and uncertainty over food prices,
depending on the monsoon. However, higher than expected disinvestment
proceeds and an earlier than expected rise in retail prices of diesel and LPG
could surprise us on the positive side, thereby facilitating a lower fiscal deficit.
Lastly, on a medium to long-term perspective, the Government needs to focus
on the quality of fiscal consolidation. Our analysis shows that raising tax
revenues (as a share of total public revenues) increases the efficacy of
consolidation. This reflects the contribution of more stable revenue sources to
the budget. This is in contrast to non-tax revenue that constitutes only one off
accretion to receipts and dependence on this mode should be reduced ideally.
Along with this, reduced transfer payments substantially increases the
probability of debt reduction going ahead. Increase in public investment has
short-term consequences for deficit but over the long term it helps to stabilise
the system, as these measures are essentially pro-growth.
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