'Budget disappoints on the numbers front'

Set against a backdrop of low expectations, the budget has surprised positively on most counts, but disappointed on the arithmetic, feels Rohini Malkani, Economist, Citi India

Key Takeaways

Fiscal Deficit: The 4.6% deficit fiscal target could see an overshoot of 30-50bps (basis points) due to higher expenditures

Reforms: Some progress has been made with the announcement of the direct cash subsidy transfer, and the announcement of the timelines towards introducing the Direct Tax Code, Goods and Services Tax

Infrastructure Funding: Additional tax breaks for infrastructure bonds, FII limit for infrastructure corporate bonds raised

Also See: The Finance Minister has failed the common man

Areas where we were hoping for more include (a) measures on the FDI (Foreign Direct Investment) front and (b) Reforms pertaining to the APMC (Agricultural Produce Market Committee) Act.

Budget Arithmetic

Realistic on Revenues: The budget arithmetic is based on nominal GDP growth of 14%, gross tax revenues rising 18.5%, and expenditure rising 3.4%.

The budget projects net tax revenues to rise 17.9%, which we think is realistic.

With reports indicating that the upstream oil company disinvestment has been pushed forward to FY12, the divestment target of Rs 400 billion also appears achievable.

(Overly) Optimistic on Expenditures: While the revenue and growth assumptions appear realistic, the expenditure numbers appear optimistic.

Overall expenditures are expected to rise by just 3.4%.

The key item which stands out is subsidies, where the budget projects a 12.5% YoY (Year-on-Year) contraction.

We believe this is unrealistic for two reasons: (i) Fuel subsidy is pegged at Rs 200 billion. We currently estimate oil underrecoveries at Rs 1000 billion which implies that the govt's share would be closer Rs 500 billion;

(ii) Food subsidy is pegged at Rs 606 billion - similar to last year. However, even as per conservative estimates, the likely introduction of the food subsidy bill will result in an additional outgo of Rs 200 billion. Depending on the implementation of the food subsidy bill, we expect an expenditure overshoot of Rs300-500 billion, which would take the headline deficit number to 4.9%-5.1%.

Full Coverage: Budget 2011

Implications:

Borrowing Programme, Rates and Foreign Exchange

The FY12 deficit of Rs 4128 billion or 4.6% of GDP is lower than our and consensus estimates of 4.8%.

Consequently, the gross and net market borrowing programme of the government stands at Rs 4.1 trillion and Rs 3.4 trillion v/s expectations of Rs 4.6 trillion (gross) and Rs 3.9 trillion (net).

However, despite expecting an expenditure overshoot, the possibility of the govt ending with a positive cash balance in FY11 will likely result in yields remaining in the 8%-8.25% range.

On the Foreign Exchange side, while the increase in FII investment in corporate bonds issued by the infrastructure sector from US$5billion to US$25billion is positive for the Rupee, higher oil prices could once again be a party spoiler.

Rohini Malkani joined Citi in 2001 and has been responsible for the India macroeconomic analysis and financial market research. She did her MSc in Economics from the London School of Economics and is an MBA in Finance and BA in Economics from the University of Bombay. She is based in Mumbai.