Budget Review Report FY16-17 - Fiscal prudence to pay off in long term :: Centrum

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Union Budget, 2012-13: Credible roadmap for fiscal consolidation awaited :: ICRA

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The Union Budget for 2012-13 is to be presented on March 16, 2012 in the midst of deteriorating Government finances as well as a challenging domestic macroeconomic environment. While economic growth, investment spending and business confidence have weakened during 2011-12, interest rates remain high and concerns regarding inflationary pressures are yet to be eliminated. Recently, the Reserve Bank of India (RBI) indicated that it may be constrained from lowering the policy rate to respond to the slowing economic growth in the absence of credible fiscal consolidation. This has heightened the expectations from the Union Budget for 2012-13 to provide a realistic roadmap for fiscal correction, through a combination of augmenting tax revenues and restricting the growth of revenue expenditure (particularly subsidies). At the same time, it is expected that the Budget may increase outlays and announce policy measures to boost infrastructure spending, which would ease supply constraints and raise the potential growth rate of the Indian economy.
The Budget for 2011-12 set an ambitious target to rein in the fiscal deficit to 4.6% of GDP in 2011-12 from 4.8% of GDP in 2010-11 (according to Provisional Accounts), despite the expected decline in non-tax revenues following the one-time inflow of funds from the telecom auctions held in 2010-11. However, the fiscal situation of Government of India (GoI) has displayed considerable signs of stress in the current fiscal year, on account of factors such as a slower than anticipated economic growth, unfavourable equity market conditions and a widening of fuel subsidies.

Budget Preview 2012-13 Difficult to deliver the perfect balance of growth and fiscal rectitude ::Emkay

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Difficult to deliver the perfect balance of growth and
fiscal rectitude
§ Challenging backdrop: The backdrop for FY13 budget is challenging given the context of slowing growth, lack
of investment momentum and a difficult fiscal scenario of subdued tax and non-tax revenue generation even
while various subsidy burden are ballooning. Toping these is a much weaker Central government after recent
state elections debacle of Congress party, which weaken its ability to take critical reform measures
§ Multiple priorities amid rising structural imbalances: Fiscal imbalances and falling domestic savings pose
significant structural challenges. We will look for a credible commitment towards fiscal consolidation, ways to
raise tax revenue (200bp hike in excise duty or expanding the tax base by including more services), reduction in
subsidy burden by raising prices of public utilities and services, ways to address the recurring deficits across
multiple public sector undertaking and departments and most importantly providing the focus on capital
spending and infra sectors. While implementation of GST is most ideally suited in the current context we think it
is unlikely to happen in this budget. Broadly, there can be some progress towards meeting the recommendation
of direct tax code (DTC)
§ Enablers more important than budget itself: While we expect some progress, expecting lot of reforms from
the budget may be optimistic. Given that the government has failed to deliver on the promised fiscal
consolidation in FY12, measures taken out of the budget to enable budget promises will be more critical
§ Fiscal deficit unlikely to come below 5%: Overall, we expect total allocation to increased by 10% to Rs
14,661bn in FY13E translating into a fiscal deficit of Rs 5,423bn and net borrowings of around Rs 5,000bn (Rs
5,900 bn inclusive of redemptions). Hence, we expect FY13 fiscal deficit of around 5.4% of GDP. Gross tax
revenue is expected to growth by 13.7% in FY13E vs 10.8% in FY12. We incorporate an optimistic assumption
of higher capital spending (primarily Plan expenditure) growth at 27% or 17% of total spending

Budget 2012-13 (Automobile): More negatives than positives ::Business Line

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The key measure to watch out for the auto sector is on the excise duty front. First, the possibility of across-the-board excise duty hikes to pre-stimulus levels. That would mean a two percentage point increase from the current 10 per cent for small cars and two-wheelers and 22 per cent for sedans and utility vehicles (UVs).

The fact that government's finances are in bad shape strengthens the possibility of this hike. The odds against it is the moderation witnessed in the auto industry growth this year. If it does happen, auto makers are in for a challenge. Just when they are expecting a boost to sales from the waning of high interest rates, they may have to contend with a lull in sales from increased prices.

India Economics - What Do We Expect from Budget F2013? Morgan Stanley Research,

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India Economics
What Do We Expect from
Budget F2013?
Two important issues we are watching for in
Budget F2013: The government is scheduled to
present the annual budget F2013 on March 16.
Considering the current weak macro trend, investors are
building hope that the government will recognize the
need to relay its commitment to reviving the growth
outlook with budget measures. We would watch the
budget announcement in the context of two most
important issues:
• A credible plan to cut government expenditure
growth
• Policy measures to encourage private investment
Market implications: According to our India Strategist,
Ridham Desai, “history does not favor the market in the
following 3-4 weeks. The markets are usually flat in the
month ahead of the budget and, in two out of three years,
fall in the month following it. In the past 15 years, the
market has been positive in the following years: 1997,
1999, 2004, 2006, 2009, 2010 and 2011 – there does
not seem to be a great correlation between market
performance and a market-friendly budget. We continue
to be buyers of Indian equities from a 12- to 18-month
perspective, though seek protection from a correction in
the near term.”
Industry-specific expectations: Our analyst team
expects the budget to be a clear positive for
infrastructure and utilities. We do not see any policy
measures that hurt consumption, but we believe any
credible plan to reduce government revenue
expenditure growth or oil subsidies will hamper the top
lines of some consumer industries in the near term.

Realty's expectations from Budget ::Business Line

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We have approached the government to extend income tax benefits for developers in the affordable segment. HARSH VARDHAN PATODIA, PRESIDENT, BENGAL CHAPTER OF CREDAI

The Confederation of Real Estate Developers' Associations of India (CREDAI) is looking forward to the Centre as well as the State Budgets to help the sector address the needs of the home buyers. In an interview toBusiness Line, Mr Harsh Vardhan Patodia, the President of the Bengal chapter of CREDAI, representing more than 160 developers, talks of the industry in West Bengal, its budget expectations, the status of the sector in the State, the problems the sector faces, and the way forward for developers. Excerpts from the interview:

What are CREDAI's Budget expectations?

In case of the national budget, we are expecting benefits and incentives for the affordable housing segment. We have approached the government to exempt certain taxes and extend income tax benefits for developers who are into the affordable segment, and to consider reducing service tax for the segment.

Budget 2012-13 (Power Equipment): Import duty hike will provide limited respite ::Business Line

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A hike in import duty on power equipment to 19 per cent is on top of the Budget wish list of boiler turbine and generator (BTG) makers led by BHEL. This comes after at least five years of steadily increasing competition from Chinese and Korean players in India. Right now, the duty is 5 per cent for projects with less than 1,000 MW capacity and nil for projects over 1,000 MW.

Even as this levy is being debated, domestic equipment manufacturers may be up against challenges. Intense competition and lower profit margins are here to stay; the quantum of import duty notwithstanding. And here's why.

For one, it is not just the Chinese players but increasing local competition that has hurt domestic players, especially BHEL, the most. At least eight Indian players, through joint ventures with established overseas players, have entered the BTG space in the last 3-4 years. Others, such as Korean player Doosan, are setting up fully-owned units locally.

Hoping for a re-charge ::Business Line

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India's power sector is ending the current Five-Year Plan on a not so happy note. Power sector woes have exacerbated over the last few years due to fall in merchant power realisations, sharp jump in imported fuel costs, lower availability of domestic coal, inability to pass on the fuel hikes to the buyers and lower off-take and delayed payments by the troubled distribution sector.

As we enter the Twelfth Plan (2012-17), there are issues that need immediate attention. Some of these issues can be addressed in the current year's Union Budget. Restructuring of the distribution sector, a cut in import duty of coal, extension of tax holiday (80IA) for the upcoming power projects and encouraging higher investments in this sector by enhancing the limits of infrastructure bonds are the key expectations. Private sector players, however, may need to watch out for any import duty hike on power equipment and increase in minimum alternate tax.

Budget 2012-13 (Infrastructure): Better fund availability ::Business Line

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Infrastructure – or the lack of it — has taken a good deal of blame in stifling growth. This Budget, then, is likely to address allocations and better utilisation of these funds across segments.

That the coming fiscal will be the first year of the Twelfth Five-Year Plan is also another factor that can push infrastructure spending.

Measures to improve availability of finance for infrastructure projects also take prime position this Budget.

Budget 2012-13 (Fertiliser): Awaiting urea price hike, cash transfers ::Business Line

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Budget: Sectors in the spotlight

Fertiliser companies, even if they are completely off the radar of investors for the rest of the year, usually perk up around the annual Budget exercise. It may be no different this year due to the following reasons.

One, subsidy allocations for fertilisers announced in the Budget are usually a good indicator of realisations and profitability for producers in the year ahead. With about 50 per cent of the realised price for phosphatic fertiliser producers and 55 per cent for urea coming in through the government's subsidy reimbursement, it is subsidies that decide the volumes, profits and even product mix for fertiliser makers.

SUBSIDY EXPENSES

The government's expenses towards fertiliser subsidy have overshot the budget by about 27 per cent in 2011-12. With a new Food Security Bill also on the anvil, fertiliser subsidy allocations are unlikely to be generous this year.

In this backdrop, any signs that the government is now willing to push through direct cash transfers of subsidy to farmers, will spell great news for fertiliser companies.

Two, any initiative by the government to correct the imbalanced usage pattern, where farmers use too much urea and too little of phosphatic fertilisers, is also keenly awaited.

For 2012-13, the government has already trimmed the per tonne subsidy on phosphatic fertilisers by about a third. This leaves little room for reduction in DAP and complex fertiliser prices, which are at 2-3 times the selling prices of urea.

RESTORING BALANCE

The only option to restore some balance to the equation would be a steep hike in urea prices.

This move, if it comes about in the Budget, would save the government outlays towards subsidy. It will not alter realisations for urea producers such as Tata Chemicals, Chambal Fertilisers or Nagarjuna Fertilisers but may solve some of their working capital and cash flow problems.

The third significant policy move that is expected in the Budget is clearance to the new urea investment policy. Recently approved by the empowered group of Ministers, the new investment policy envisages reimbursing import parity prices to domestic fertiliser makers who set up new or expansion projects for urea. A similar policy in 2008 saw not much response.

If such a policy is announced now, firm commitments on gas allocations to urea and pass-through mechanisms for feedstock costs, will be the key details that investors must watch for.

The business of GST : Leader- Indirect Tax, BMR Advisors: in Business Line

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To ensure a smooth transition to GST, businesses would have to systematically revamp their current models.

As the introduction of the Goods and Service Tax (GST) gathers momentum, the businesses in India have started bracing themselves. GST, which is likely to subsume most of the current indirect tax levies, is expected to be the most efficient indirect tax system in India.

GST would be a single comprehensive indirect tax to be levied on goods and services. It would be levied at every production and distribution leg with the eligibility to claim set-off of most indirect taxes on procurement leg. Under the current regime, there is a fractured credit mechanism; businesses don't get credit for all the taxes they pay.

For instance, Central Sale Tax (CST) paid on inter-state procurements cannot be availed of as credit; a service provider cannot claim credit of input Value Added Tax (“VAT”); similarly, a trader is not eligible to claim credit of input excise duty or service tax. Under the GST regime, no distinction would be made between a manufacturer, trader and service provider; GST would apply uniformly to all. Further, a taxpayer would be eligible to claim credit of all the indirect taxes paid on the procurement leg — be it goods or services; be it intra-state or inter-state procurements.

SUPPLY-CHAIN STRUCTURE

Most of the businesses at present structure their supply chain to mitigate the overall tax burden, but many a times such supply chain result in enhanced logistics cost. For instance, to avoid the burden of CST, the businesses open distribution centres in all the States, which lead to additional logistics cost.

With the introduction of GST, the businesses may re-define their supply chain and structure the same in a most economic and efficient manner without worrying about the indirect taxes — for example, the businesses may not need to open distribution centres or warehouses in each and every State; they can operate from a place most convenient for their business from a commercial perspective. This would not only allow the businesses to save the inventory and warehousing cost but would also reduce the unwarranted compliance requirements under indirect tax laws in each and every state.

LOGISTICS COST

The reduction in the overall costing of the taxpayer and the free flow of credit across the supply chain may require the taxpayers to re-visit pricing of their goods and services to stay competitive vis-a-vis their rivals.

This would require every business to re-evaluate and compare the procurement cost under the current regime vis-a-vis under GST; effect of taxes on the overall costing; effect of taxes under the proposed GST regime and then decide the revised pricing strategies. From an overall tax cost perspective, the indirect tax cost on goods (which under the current regime is around 24 to 27 per cent cumulatively for excise and VAT) would reduce to 16-20 per cent; whereas, for services, the cost of tax would go up from 10 per cent currently to 16 per cent under GST. Besides the fact that GST is likely to have an impact on the pricing of goods and services, the cash flow of businesses may result in favourable swing.

Unlike the current regime, no input tax would become cost under GST and could be set-off against the output tax liability instead of cash payment.

REVAMP OF BUSINESSES

GST would not just require the businesses to re-define the supply chain but also to re-design their accounting and IT systems. The transformation would require the businesses to revise the formats of invoices, purchase/sales registers, stock registers, reporting declarations to factor the changes under the GST regime. The IT systems would have to be reconfigured accordingly.

Taken as a whole, GST would require a thorough and systematic revamp of the current business models, namely, re-designing the supply chain, defining new business strategies, revising pricing strategies, change in the documentation and accounting systems, reconfiguration of the IT/ ERP system, training of employees, and so on.

Most of the businesses have already started work to re-align their processes to ensure a smooth transition into GST, instead of struggling with the same at the eleventh hour.

It is now up to the Centre and the State Governments to rise above their vested political interests and fast-track the introduction of this much-needed (and now much delayed) indirect tax reform.

(The author is Leader- Indirect Tax, BMR Advisors. The views are personal.)

Index Outlook: Stocks in a flutter before budget ::Business Line

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Our hope of a sedate jog to the Union Budget appears unlikely given the violent jig in stock prices last week. Stocks first plummeted lower dragged by slowing economic growth rate in China and the Congress debacle in the Assembly election. Then prices whooshed higher on Friday, probably due to the effect of Holi's ‘rang'and ‘bhaang'.

Focus on Fiscal Consolidation Union Budget 2012-2013—A Preview ::MF Global

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2G auction and disinvestment to aid fiscal consolidation in FY13
•
The government will be presenting the Union Budget 2012-2013 on 16 March 2012. We expect the government to announce measures to garner higher tax revenue; expenditure will continue to grow—developmental along with non-developmental. FY13 and “The 2012-2013 Union Budget” will be the time when the government can announce reformist measures to marginally erase the poor performance of the previous few years. Yet, we would be positively surprised if the Finance Minister (FM) announces any strong reforms/steps in the forthcoming Budget. Higher revenue is expected to be generated from raising excise duty, import duty (some items), more services under the tax purview. Marginal contraction in fuel/fertilizer subsidy is likely by increasing prices. Focus is expected to remain on social and infrastructure spending. 2G auction and disinvestment will be the key bonus for the government to raise expenditure, yet show fiscal consolidation.
•
We expect FY12 fiscal deficit to come in at 6.1%, and FY13 at 5.3%. Fiscal deficit for FY12 can be lower than our estimate, if a portion of fuel/fertiliser subsidy is deferred to FY13. Fiscal deficit–GDP for FY13 can be higher if the economic growth is higher than our assumption of 15.6% nominal GDP growth. Net government borrowing (Centre+States) is estimated at Rs 5444bn. We do not see any stress on funding of the government borrowing. Thus, yields are expected to remain at the current level, along with a downward bias.
•
The Finance Minister has been showing strong consideration to the rising subsidy bill. Apart from raising fuel and fertiliser prices, we do not expect significant reforms to reduce the subsidy bill, ahead of the Union Elections in 2014. In addition, the implementation of the Food Security Act (FSA) will keep the food subsidy bill elevated to rising, depending on the domestic monsoon and foodgrain output.

India Union Budget preview: Expect some fiscal consolidation  Goldman Sachs

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India Union Budget preview: Expect some fiscal
consolidation
 The 2012 Union Budget will be presented on March 16 at a time when there has been
a significant deterioration in the government’s finances. We expect the central
government’s fiscal deficit to rise to 6% of GDP in FY12E from 4.7% in FY11.
 We estimate the general government deficit may rise to 9% of GDP in FY12E, largely
due to a fall in tax revenues driven by the economic slowdown, and a big increase in
fuel subsidies.
 Given the extent of the potential increase in the deficit, we expect the budget for FY13
to focus on fiscal consolidation. We think the central government may budget for the
deficit to go down to 5.3% of GDP from an expected 6%.
 Our expectations are that the fiscal consolidation will be driven largely by revenues—
we estimate an increase in excise and service taxes could reduce the deficit by 0.5
pp of GDP in FY13E.
 With a reduction in the above line fiscal deficit, we expect the net market borrowing
requirement of the government to be similar to that in FY12, which we think is
marginally positive for government bonds.
 Our fiscal impulse estimates suggest that adjusting for cyclical factors, the
government will impart a negative impulse of 0.5 pp of GDP to domestic demand for
FY13E.
 Our sector analysts expect the budget to be positive for infrastructure companies and
power developers, and negative for autos, consumer goods, and oil marketing
companies.
India’s 2012 Union Budget will be presented at a time when there has been a significant
deterioration in the government’s finances. We did not believe that the budget presented in
February 2011 would meet its targeted deficit of 4.6% of GDP (see India Union Budget—a fiscal
promise to keep and miles to go before it succeeds, Asia Economics Flash, March 1, 2011) due to
under-budgeting of subsidies and optimistic forecasts for revenue. As the economy slowed more
than expected, we estimated the deficit at 5.8% of GDP, which was significantly above consensus
(see India: A worsening of the fiscal-monetary policy mix, Asia Economics Analyst 11/18,

Budget expectations ::Bold economic budget after a long gap? :: Deutsche Bank

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Five strategic threads to weave the tapestry of FY13 budget
Budget FY13 to be woven around the following five strategic threads (1) fiscal
consolidation through subsidy rationalization – through raising diesel,
kerosene and LPG prices and partial decontrol of urea prices (these may be the
UPA government’s boldest economic decisions). Food subsidy however may be
raised as government introduces food security bill (2) withdrawal of fiscal
stimulus – through raising excise and service tax rates – across the board – by
200bps and widening service tax net (3) stimulating investments and
jumpstarting capital formation (4) accelerating retail investment in equity
markets – through lowering of short term capital gains tax on equities and
increasing tax allowances for retail investment in equity mutual funds allowing
channelization of personal savings from real assets to equities and (5)
socialization of personal tax structure – through raising maximum income tax
exemption limit and reintroducing personal tax surcharge on high tax bracket
assesses and doubling corporate tax surcharge. This may probably be the last
opportunity for Finance Minister to present an economic budget in the current
term of UPA, as FY14 union budget (being last full-fledged budget before General
Elections in 2014) will likely be guided by the imperatives of a popular democracy.
Priority shift - from excessive focus on Aam Admi (Common Man) to capital
formation… for now
We believe that allocations to welfarist programs like National Rural Employment
Guarantee Scheme (NREGS) are unlikely to rise from FY12 levels, allowing the
government to keep expenditure under control. However we expect to see
government increasing its focus on plan expenditure on projects aimed at reviving
capital formation (pertaining particularly to roads, railways and irrigation). With the
gross fixed capital formation showing compression in Jul-Sep qtr, we expect
several fiscal measures (through budgetary allocations, tax exemptions/benefits,
easier financing etc.) to kickstart the capex cycle. As per our infrastructure
analysts, the government may adopt following key measures: (i) Sun-set clause on
tax incentives for infra projects likely to be extended by one more year; (ii) We
expect government to announce fiscal incentives for new capex; (iii) Increased
focus on Accelerated Power Development and Reform Program (APDRP); (iv)
Setup of National Electricity Fund to provide interest subsidy to SEBs for
investments in T&D sector for reducing the losses.
Implications for portfolio construction
Higher taxes & reined in expenditure on populist schemes should result in
curtailing domestic consumption modestly. Terms of trade may shift from rural to
urban India, albeit temporarily. We cut exposure to both consumer discretionary
and staples in our model portfolio. Increased focus on capital formation through
incentivizing infrastructure investments will benefit infrastructure stocks. Our Top
Picks are: Axis Bank, ICICI Bank, SBI, Coal India, L&T, TCS, Bharti, DLF

Union Budget FY2013: Markets wait for spring cheer in a March budget:: ICICI Sec

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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.

Union Budget Preview 2012-13 :: SBI Cap

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The government on March 16, 2012 will table its Union Budget 2012-13 on the
backdrop of global uncertainties and a weak domestic macroeconomic environment.
Investors are hoping that the government would recognise the immediate need to
convey its commitment to revive growth outlook and fiscal consolidation. In India,
Budget is perceived to be determined more by political economy considerations than
purely economic ones. Therefore, the outcome of State elections may have a
significant bearing on this Union Budget. We expect the Union Budget 2012-13 to
focus on:
􀂙 Striking a balance between fiscal consolidation and public spending while
maintaining sustainable inclusive growth
􀂙 Increase investment in infrastructure sector
􀂙 Higher allocation on education and health
􀂙 Road map on implementation of GST and DTC
􀂙 Road map to reduce non-merit subsidy and leakage in social welfare schemes
spending using Aadhaar (unique identification number)
􀂙 To increase revenue collection – extending net for service tax, duty hike on
selected items such as cigarettes and increase in the rate of MAT.

Union Budget 2012-13 Preview Pushed against the wall ::Religare research,

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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.

India – Time for a bold budget  Standard Chartered Research,

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India – Time for a bold budget
 FY13 budget should attempt fiscal consolidation; the deficit should shrink to 5.3% of GDP from 5.8%
 Expenditure compression will be difficult to achieve; the proportion of capital spend should rise
 Indirect tax rates might be increased and the emphasis will be on non-tax revenue to reduce the deficit
 RBI OMOs will be required to relieve supply pressure as gross market borrowing is likely to be INR 5.4trn

India Economics -- Previewing the 2012/13 budget :: Credit Suisse

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● This note is a summary of a longer report analysing India’s fiscal
position and previewing the country’s 16 March budget.
● While India has the highest budget deficit of the Non-Japan Asian
economies we cover, it would be wrong to suggest that the
country is facing an unsustainable rise in government debt of the
sort plaguing many developed countries. The key difference is
that India’s money GDP is growing at a double-digit rate.
● Nevertheless, it would still be prudent for the government to
tighten the fiscal purse strings and indeed we expect the finance
minister to announce a few restrictive measures. These together
with an upbeat assumption about divestment proceeds and a
robust growth forecast is likely to lead to an official central
government budget deficit forecast of around 5%. Our own
projection is for a 5.8% outturn.
● We expect the budget to deliver just about enough to allow the
RBI to start cutting the repo rate at its 15 March meeting. In our
view, the repo rate will be reduced 175bps by January next year,
leading the 10 year bond yield to drop to 7.5% by end-2012.