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India Union Budget—a fiscal promise to keep
and miles to go before it succeeds
In the Union Budget for FY12, the government announced a reduction in the fiscal
deficit to 4.6% of GDP from an estimated 5.1% in FY11, ahead of market expectations.
The deficit reduction is based on revenue buoyancy and keeping expenditures
essentially flat in nominal terms, which leads to a lower net market borrowing of Rs3.4
trillion, lower than market expectations.
We think, however, it will be difficult for the deficit targets to be met as expenditures
have been under-budgeted and revenues have been over-budgeted. There are no
new taxes or increases in tax rates. The expenditure targets are ambitious, especially
on subsidies. Oil subsidies in FY12 are 40% lower than the oil subsidies in FY11.
On the reform front, the budget was more positive especially on opening up the
capital account and on firm road maps for the implementation of the direct tax code
and direct cash transfers of subsidies.
All in all, we think the budget is an incremental positive for the INR due to the capital
account easing measures, and neutral for bonds and equities given that there is
sufficient uncertainty on the government meeting its fiscal targets.
Our sector analysts have provided detailed takeaways on the budget’s impact for
their respective sectors. We think the budget is positive for cement, infrastructure,
autos, and mildly positive for financials; and negative for iron ore exporters, oilmarketing and IT companies.
The Union Budget for FY12 correctly emphasizes fiscal consolidation. We, however, think that
the fiscal targets could be difficult to achieve. Without any new taxes or reforms in the subsidy
regime, we find it difficult to see how the government will stick to its revenue and expenditure
targets.
The budget assumes a tax revenue increase of 18% without any new taxes or big increases in the
tax base (see Exhibit 3 for the main measures in the budget). The government expects the removal
of some exemptions on excise duties and increasing the service tax base to nullify increased
income tax exemptions and reductions in corporate tax surcharge rates. We think these projections
are at risk, especially if nominal GDP growth surprises on the downside.
On expenditures, the budget has reduced capital spending while current spending is expected to
grow at a mere 4.1%. Subsidies are expected to decline 13%, with oil and fertilizer subsidies
declining and food subsidies remaining unchanged. With rising oil prices, and a food security bill
potentially to be introduced later in 2011, to us, these subsidy numbers look ambitious at best.
Impact on growth
Our estimation of the fiscal impulse remains negative in FY12, but less so than in FY11.
According to the budget estimates, the fiscal deficit is expected to decline to 4.6% of GDP in
FY12 from 5.1% of GDP in FY11. Total expenditures are budgeted to fall to 14% of GDP from
15.4% of GDP, which will be the chief driver of the removal in stimulus. Therefore, the
government will be a net drag on GDP growth in FY12, although that drag could be lower if the
deficit targets are exceeded as we expect.
Exhibit 3: The budget proposals at a glance
Tax proposals Exemption limit for the individual taxpayers enhanced from Rs1,60,000 to Rs1,80,000
Current surcharge of 7.5% on domestic companies proposed to be reduced to 5%
Minimum Alternate Tax (MAT) raised from 18% to 18.5%
Tax incentives extended to attract foreign funds for financing of infrastructure
Additional deduction of Rs20,000 for investments in long‐term infrastructure bonds proposed to be extended
No change in Central Excise Duty, maintained at 10%
Service tax remained at 10%
Foreign Dividend Tax to be cut to 15% for Indian companies
SEZs to come under MAT
Agriculture Provision of cash subsidy in fertilizers and kerosene
Direct credit to farmers increased from 3 lakhs 75 thousand crore to 4 lakhs 75 thousand crores
3% interest subsidy on farm loans to farmers
Mulling nutrient‐based subsidy policy for Urea
Infrastructure Allocation of Rs2.1 trillion for infrastructure in 2011‐2012
Tax free bonds of Rs300 billion proposed to be issued by government undertakings during FY12
In FY12, IIFCL disbursements target up to Rs250 billion
Fertilizer sector will get an infrastructure status
Rural infra fund to be raised from Rs160 billion to Rs180 billion
Modern cold storage now recognised as infrastructure sector
FII cap for infra bonds with 5 year residual maturity
Environment Proposal to set up national mission for hybrid and electric vehicle
Inclusive growth National Food Security Bill (NFSB) to be introduced in Parliament during this year
Allocation for social sector in 2011‐2012 increased by 17% to Rs1609 billion over FY11
Allocation for education increased by 24 per cent over current year
Rs210 billion for literacy mission
Educational sector allocated Rs521 billion in FY12
Social sector expenditure has increased by 17% to Rs1.7 trillion
Others Goods and Services Tax Constitutional Amendment bill in current session
FIIs allowed to invest in domestic Mutual Fund schemes
FII investment in corporate bond market hiked by additional US$20 billion to US$40 billion
PSU banks capitalization of Rs 60 billion during 2011‐2012 to enable them to maintain minimum of Tier I CAR of
Rs1 billion equity fund for microfinance companies.
Increased priority home loan limit from Rs20 lakhs to Rs25 lakhs
1% interest subvention on home loans upto Rs15 lakhs
Source: Ministry of Finance, CEIC, GS Global ECS Research.
Impact on bond yields
The government announced a lower-than-expected market borrowing of Rs3.4 trillion (US$75
billion). However, we think that given the uncertainties about the government’s ability to meet its
deficit targets, the market borrowing could be higher. Therefore, we do not think the budget will
be positive for government bonds.
Impact on the INR
The impact on the INR may be incrementally positive due to the measures taken to ease capital
inflows. In particular, the increase in foreign investment limits in corporate bonds, and allowing
foreign investors to invest in domestic mutual funds are both welcome easing of the capital
account.
Impact on the equity market
We think the impact on the equity market is largely neutral as there is sufficient uncertainty on the
fiscal deficit numbers to put them into question. Some of the reform measures—a strict timeline
on the direct tax code, the introduction of a direct cash transfer scheme for subsidies, and the
awarding of fresh back licenses are all incrementally positive, but other key reforms such as FDI
in retail and land acquisition reforms are still pending.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Union Budget—a fiscal promise to keep
and miles to go before it succeeds
In the Union Budget for FY12, the government announced a reduction in the fiscal
deficit to 4.6% of GDP from an estimated 5.1% in FY11, ahead of market expectations.
The deficit reduction is based on revenue buoyancy and keeping expenditures
essentially flat in nominal terms, which leads to a lower net market borrowing of Rs3.4
trillion, lower than market expectations.
We think, however, it will be difficult for the deficit targets to be met as expenditures
have been under-budgeted and revenues have been over-budgeted. There are no
new taxes or increases in tax rates. The expenditure targets are ambitious, especially
on subsidies. Oil subsidies in FY12 are 40% lower than the oil subsidies in FY11.
On the reform front, the budget was more positive especially on opening up the
capital account and on firm road maps for the implementation of the direct tax code
and direct cash transfers of subsidies.
All in all, we think the budget is an incremental positive for the INR due to the capital
account easing measures, and neutral for bonds and equities given that there is
sufficient uncertainty on the government meeting its fiscal targets.
Our sector analysts have provided detailed takeaways on the budget’s impact for
their respective sectors. We think the budget is positive for cement, infrastructure,
autos, and mildly positive for financials; and negative for iron ore exporters, oilmarketing and IT companies.
The Union Budget for FY12 correctly emphasizes fiscal consolidation. We, however, think that
the fiscal targets could be difficult to achieve. Without any new taxes or reforms in the subsidy
regime, we find it difficult to see how the government will stick to its revenue and expenditure
targets.
The budget assumes a tax revenue increase of 18% without any new taxes or big increases in the
tax base (see Exhibit 3 for the main measures in the budget). The government expects the removal
of some exemptions on excise duties and increasing the service tax base to nullify increased
income tax exemptions and reductions in corporate tax surcharge rates. We think these projections
are at risk, especially if nominal GDP growth surprises on the downside.
On expenditures, the budget has reduced capital spending while current spending is expected to
grow at a mere 4.1%. Subsidies are expected to decline 13%, with oil and fertilizer subsidies
declining and food subsidies remaining unchanged. With rising oil prices, and a food security bill
potentially to be introduced later in 2011, to us, these subsidy numbers look ambitious at best.
Impact on growth
Our estimation of the fiscal impulse remains negative in FY12, but less so than in FY11.
According to the budget estimates, the fiscal deficit is expected to decline to 4.6% of GDP in
FY12 from 5.1% of GDP in FY11. Total expenditures are budgeted to fall to 14% of GDP from
15.4% of GDP, which will be the chief driver of the removal in stimulus. Therefore, the
government will be a net drag on GDP growth in FY12, although that drag could be lower if the
deficit targets are exceeded as we expect.
Exhibit 3: The budget proposals at a glance
Tax proposals Exemption limit for the individual taxpayers enhanced from Rs1,60,000 to Rs1,80,000
Current surcharge of 7.5% on domestic companies proposed to be reduced to 5%
Minimum Alternate Tax (MAT) raised from 18% to 18.5%
Tax incentives extended to attract foreign funds for financing of infrastructure
Additional deduction of Rs20,000 for investments in long‐term infrastructure bonds proposed to be extended
No change in Central Excise Duty, maintained at 10%
Service tax remained at 10%
Foreign Dividend Tax to be cut to 15% for Indian companies
SEZs to come under MAT
Agriculture Provision of cash subsidy in fertilizers and kerosene
Direct credit to farmers increased from 3 lakhs 75 thousand crore to 4 lakhs 75 thousand crores
3% interest subsidy on farm loans to farmers
Mulling nutrient‐based subsidy policy for Urea
Infrastructure Allocation of Rs2.1 trillion for infrastructure in 2011‐2012
Tax free bonds of Rs300 billion proposed to be issued by government undertakings during FY12
In FY12, IIFCL disbursements target up to Rs250 billion
Fertilizer sector will get an infrastructure status
Rural infra fund to be raised from Rs160 billion to Rs180 billion
Modern cold storage now recognised as infrastructure sector
FII cap for infra bonds with 5 year residual maturity
Environment Proposal to set up national mission for hybrid and electric vehicle
Inclusive growth National Food Security Bill (NFSB) to be introduced in Parliament during this year
Allocation for social sector in 2011‐2012 increased by 17% to Rs1609 billion over FY11
Allocation for education increased by 24 per cent over current year
Rs210 billion for literacy mission
Educational sector allocated Rs521 billion in FY12
Social sector expenditure has increased by 17% to Rs1.7 trillion
Others Goods and Services Tax Constitutional Amendment bill in current session
FIIs allowed to invest in domestic Mutual Fund schemes
FII investment in corporate bond market hiked by additional US$20 billion to US$40 billion
PSU banks capitalization of Rs 60 billion during 2011‐2012 to enable them to maintain minimum of Tier I CAR of
Rs1 billion equity fund for microfinance companies.
Increased priority home loan limit from Rs20 lakhs to Rs25 lakhs
1% interest subvention on home loans upto Rs15 lakhs
Source: Ministry of Finance, CEIC, GS Global ECS Research.
Impact on bond yields
The government announced a lower-than-expected market borrowing of Rs3.4 trillion (US$75
billion). However, we think that given the uncertainties about the government’s ability to meet its
deficit targets, the market borrowing could be higher. Therefore, we do not think the budget will
be positive for government bonds.
Impact on the INR
The impact on the INR may be incrementally positive due to the measures taken to ease capital
inflows. In particular, the increase in foreign investment limits in corporate bonds, and allowing
foreign investors to invest in domestic mutual funds are both welcome easing of the capital
account.
Impact on the equity market
We think the impact on the equity market is largely neutral as there is sufficient uncertainty on the
fiscal deficit numbers to put them into question. Some of the reform measures—a strict timeline
on the direct tax code, the introduction of a direct cash transfer scheme for subsidies, and the
awarding of fresh back licenses are all incrementally positive, but other key reforms such as FDI
in retail and land acquisition reforms are still pending.
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