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Union Budget 2011-2012 – Exercising restraint
In the Union Budget 2011-12, it was restraint that was required on the expenditure side.
And, by not having any major populist measures, the Finance Minister has managed to bring
down the targeted fiscal deficit to 4.6% – the key positive from the Budget. Even though on
some counts, such as subsidy estimates, the targets are likely to be overshot, but because of
the absence of any major populist measures and substantial restraint on most items of
expenditure, any overshooting of the fiscal deficit is likely to be contained to 20-40bp of
GDP, which is unlikely to exceed the FY2011 levels of 5.1%.
Fiscal target is largely credible
The FY2012 fiscal deficit target of 4.6% is expected to be aided by the buoyancy in tax
revenue, with an 18.5% yoy increase expected in gross tax revenue in FY2012. In amount
terms, the ~`1lakh-cr increase in the centre’s share of tax revenue is expected to completely
compensate for the absence of over `1lakh-cr received from 3G auctions in FY2011, further
aided by `20,000cr higher divestment proceeds targeted this year.
On the expenditure side, about `20,000cr is realistically expected to be lower in respect of
agri debt waiver and recapitalisation of PSU banks. The increase in non-plan expenditure is
mainly on account of defense, police, pension, grants to states and interest payments, where
the expenditure increase was essential. Other than that, substantial restraint has been
exhibited in respect of other non-plan expenditure items, showing an almost 22% decline
(about `20,000cr in amount terms) – any overshooting on this front could be a downside risk
to budget estimates, though any overshooting is unlikely to be comparable to the substantial
over-runs in FY2011. On the plan expenditure side, the Budget builds in a moderate 11.8%
increase.
The other major item of non-plan expenditure, which is projected at much lower levels than
in FY2011, is subsidy outgo. In FY2011, when average crude prices were about US $84 and
Mumbai petrol and diesel prices averaged about `57 and `41, respectively, fuel subsidy
amounted to `38,386cr. With crude prices currently at US $109 and petrol and diesel not
much above FY2011 levels, either crude prices need to come down significantly to even
below FY2011 average levels (unlikely) or the government would have to hike petrol and
diesel prices by a huge amount (limited ability, prices unlikely to be hiked more than 10-
15%). The more likely outcome would be a possible `15,000cr–20,000cr overshooting of
subsidy estimates, i.e. about 20bp of GDP.
Also, it may be difficult for the government to mobilise as much as `24,000cr from savings
schemes, which may put further burden on the projected market borrowing target of
`3,43,000cr. The manageable level of market borrowings is also aided by the fact that in
FY2011 the government raised `15,000cr excess funds, while this year it expects to draw
down `20,000cr. Overall, in our view, the government should be able to keep fiscal deficit
and market borrowings within manageable limits in FY2012.
Tapping different sources of funds to check rising interest rates
There has been a clear thrust in the last few budgets to increase the availability of funds to
the economy, especially to the infrastructure and priority sectors. Continuing this trend, in this
budget as well, key announcements included increase in FII investments in corporate bonds
from US $20bn to US $40bn (the entire increase will be towards bonds issued by the
infrastructure sector), reduction in withholding tax, increase in tax-free bond limits and
removing medium-term capital constraints for PSU banks (`6,000cr capital infusion this
year). Given the shortage of funds in the domestic banking sector, most measures aim to
increase fund availability from other sources. Importantly, by not having any major populist
measures, the Finance Minister has managed to bring down the targeted fiscal deficit to
4.6%, which should be achievable provided fuel prices are hiked. Together with the
impending awarding of new bank licenses and increased foreign bank participation (being
worked upon by the RBI currently), all this should help narrow the gap between savings and
investments, keeping interest rates also in check – a positive for banks, infrastructure and the
overall economy. On a positive note for the markets, the budget has also permitted foreign
investors to directly invest in Indian mutual funds.
Focus on relieving agriculture supply bottlenecks
Rightly focusing on pressing matters such as high inflation, there are several measures and
statements of intent in the budget to tackle high food inflation. These measures include
viability gap funding for cold storage chains, `2,000cr of RIDF funds for creating warehouses
and increased priority sector lending targets from `3.8lakh-cr to `4.8lakh-cr. In fact, removal
of production and distribution bottlenecks for items such as fruits and vegetables, milk, meat,
poultry and fish has been declared to be a major focus of attention this year, and towards
this, the allocation to Rashtriya Krishi Vikas Yojana (RKVY) has been increased from `6,755cr
in FY2011 to `7,860cr in FY2012. Moreover, put together, `2,200cr is being allocated to
increase production in various food crops. Approval is also proposed to be fast-tracked to 15
mega food parks, as against 15 being set up in the first four years of the Eleventh Five-Year
Plan. Capital investments in fertiliser production are also proposed to be classified as an
infrastructure sub-sector.
Absence of big-bang announcements – The key drawback; overall a moderately positive
budget
The main drawback in the Budget was the absence of any major policy reform
announcements, such as on FDI and infrastructure; while at the same time, GST
implementation from April 2012 was indicated as unlikely. As far as FDI is concerned, the
Finance Minister has only indicated that discussions are on for further liberalisation of the
FDI policy. On GST, the Finance Minister has indicated that it will take time to form a
consensus with the opposition as well as with the state governments. (The former is required
for the constitutional amendment, while the latter is needed for effective implementation.)
However, on a positive note, it has been indicated that DTC will be implemented from April
2012, which is why in this budget there was minimal tinkering with direct taxes. In case of
excise duty as well, it has been kept unchanged at 10%. Also, from a revenue mobilisation
standpoint, the divestment target has been kept at healthy `40,000cr, though outright
privatisation has been currently ruled out.
Overall, without over-stretching itself, this Budget includes a modest set of measures without
compromising on its fiscal deficit position, and, to that extent, its impact is expected to be
reasonably positive.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Union Budget 2011-2012 – Exercising restraint
In the Union Budget 2011-12, it was restraint that was required on the expenditure side.
And, by not having any major populist measures, the Finance Minister has managed to bring
down the targeted fiscal deficit to 4.6% – the key positive from the Budget. Even though on
some counts, such as subsidy estimates, the targets are likely to be overshot, but because of
the absence of any major populist measures and substantial restraint on most items of
expenditure, any overshooting of the fiscal deficit is likely to be contained to 20-40bp of
GDP, which is unlikely to exceed the FY2011 levels of 5.1%.
Fiscal target is largely credible
The FY2012 fiscal deficit target of 4.6% is expected to be aided by the buoyancy in tax
revenue, with an 18.5% yoy increase expected in gross tax revenue in FY2012. In amount
terms, the ~`1lakh-cr increase in the centre’s share of tax revenue is expected to completely
compensate for the absence of over `1lakh-cr received from 3G auctions in FY2011, further
aided by `20,000cr higher divestment proceeds targeted this year.
On the expenditure side, about `20,000cr is realistically expected to be lower in respect of
agri debt waiver and recapitalisation of PSU banks. The increase in non-plan expenditure is
mainly on account of defense, police, pension, grants to states and interest payments, where
the expenditure increase was essential. Other than that, substantial restraint has been
exhibited in respect of other non-plan expenditure items, showing an almost 22% decline
(about `20,000cr in amount terms) – any overshooting on this front could be a downside risk
to budget estimates, though any overshooting is unlikely to be comparable to the substantial
over-runs in FY2011. On the plan expenditure side, the Budget builds in a moderate 11.8%
increase.
The other major item of non-plan expenditure, which is projected at much lower levels than
in FY2011, is subsidy outgo. In FY2011, when average crude prices were about US $84 and
Mumbai petrol and diesel prices averaged about `57 and `41, respectively, fuel subsidy
amounted to `38,386cr. With crude prices currently at US $109 and petrol and diesel not
much above FY2011 levels, either crude prices need to come down significantly to even
below FY2011 average levels (unlikely) or the government would have to hike petrol and
diesel prices by a huge amount (limited ability, prices unlikely to be hiked more than 10-
15%). The more likely outcome would be a possible `15,000cr–20,000cr overshooting of
subsidy estimates, i.e. about 20bp of GDP.
Also, it may be difficult for the government to mobilise as much as `24,000cr from savings
schemes, which may put further burden on the projected market borrowing target of
`3,43,000cr. The manageable level of market borrowings is also aided by the fact that in
FY2011 the government raised `15,000cr excess funds, while this year it expects to draw
down `20,000cr. Overall, in our view, the government should be able to keep fiscal deficit
and market borrowings within manageable limits in FY2012.
Tapping different sources of funds to check rising interest rates
There has been a clear thrust in the last few budgets to increase the availability of funds to
the economy, especially to the infrastructure and priority sectors. Continuing this trend, in this
budget as well, key announcements included increase in FII investments in corporate bonds
from US $20bn to US $40bn (the entire increase will be towards bonds issued by the
infrastructure sector), reduction in withholding tax, increase in tax-free bond limits and
removing medium-term capital constraints for PSU banks (`6,000cr capital infusion this
year). Given the shortage of funds in the domestic banking sector, most measures aim to
increase fund availability from other sources. Importantly, by not having any major populist
measures, the Finance Minister has managed to bring down the targeted fiscal deficit to
4.6%, which should be achievable provided fuel prices are hiked. Together with the
impending awarding of new bank licenses and increased foreign bank participation (being
worked upon by the RBI currently), all this should help narrow the gap between savings and
investments, keeping interest rates also in check – a positive for banks, infrastructure and the
overall economy. On a positive note for the markets, the budget has also permitted foreign
investors to directly invest in Indian mutual funds.
Focus on relieving agriculture supply bottlenecks
Rightly focusing on pressing matters such as high inflation, there are several measures and
statements of intent in the budget to tackle high food inflation. These measures include
viability gap funding for cold storage chains, `2,000cr of RIDF funds for creating warehouses
and increased priority sector lending targets from `3.8lakh-cr to `4.8lakh-cr. In fact, removal
of production and distribution bottlenecks for items such as fruits and vegetables, milk, meat,
poultry and fish has been declared to be a major focus of attention this year, and towards
this, the allocation to Rashtriya Krishi Vikas Yojana (RKVY) has been increased from `6,755cr
in FY2011 to `7,860cr in FY2012. Moreover, put together, `2,200cr is being allocated to
increase production in various food crops. Approval is also proposed to be fast-tracked to 15
mega food parks, as against 15 being set up in the first four years of the Eleventh Five-Year
Plan. Capital investments in fertiliser production are also proposed to be classified as an
infrastructure sub-sector.
Absence of big-bang announcements – The key drawback; overall a moderately positive
budget
The main drawback in the Budget was the absence of any major policy reform
announcements, such as on FDI and infrastructure; while at the same time, GST
implementation from April 2012 was indicated as unlikely. As far as FDI is concerned, the
Finance Minister has only indicated that discussions are on for further liberalisation of the
FDI policy. On GST, the Finance Minister has indicated that it will take time to form a
consensus with the opposition as well as with the state governments. (The former is required
for the constitutional amendment, while the latter is needed for effective implementation.)
However, on a positive note, it has been indicated that DTC will be implemented from April
2012, which is why in this budget there was minimal tinkering with direct taxes. In case of
excise duty as well, it has been kept unchanged at 10%. Also, from a revenue mobilisation
standpoint, the divestment target has been kept at healthy `40,000cr, though outright
privatisation has been currently ruled out.
Overall, without over-stretching itself, this Budget includes a modest set of measures without
compromising on its fiscal deficit position, and, to that extent, its impact is expected to be
reasonably positive.
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