Budget played it safe economically and politically

Last Updated: Mon, Mar 19, 2012 05:22 hrs

The FY13 budget played it safe economically as well as politically.

Consequently, it had none of the reform thrust that the markets was hoping for.

Apart from a few expected measures on the tax front (introducing a negative service tax list, raising excise/service tax rates) there were no big-bang steps to accelerate growth.

The budget arithmetic is based on nominal growth of 14 %, revenues of +22.7% and expenditure of +13.1%.

While growth assumptions are realistic, we could see slippage on revenues and expenditures.

The revenue numbers are dependent on growth sustaining and the markets holding up.

On the expenditure front, the slippage could stem from fuel subsidies.

Bottom-line: We expect to see the FY13 deficit being missed by -40bps (0.4%), to 5.5% of GDP v/s budget estimates of 5.1%.

Key Points

FY13 Budget: Playing safe, economically and politically - Set against a weak political backdrop, the FY13 budget posted no major surprises.

While this was always going to be a difficult budget, given fiscal and political constraints, the Finance Minister chose to play it safe.

In this context, the thrust areas in this budget are: (1) Growth – Maintaining it through some investment and funding incentives, rather than accelerating it. (2) Fiscal – Attempts to widen the tax base and cap the subsidy bill to 2% of GDP. (3) Governance – Gradual recourse to more usage of UID-Aaadhar.

However, there is not enough of the aggression on the bigger picture reform than the market was hoping for; given that it would be the last opportunity ahead of the 2014 general elections.

Budget Arithmetic: More realistic, but not entirely - While the greater-than-100-bps (1%) slippage in the FY12 deficit to 5.9% v/s estimates of 4.6% was no surprise, the key is that numbers (i) do not fully account for fuel subsidy; (ii) includes disputed telecom-related capital gains.

The FY13 numbers are more credible, but not entirely and we expect a slippage of -40bps (0.4%) to 5.5%.

The arithmetic is based on nominal growth of 14% (GDP of 7.6% and inflation of 6.5%), revenues +22.7% and expenditure +13.1%.

While growth assumptions are realistic, we could see slippage on revenues and expenditures.

Revenues: Targets dependent on Growth Sustaining and Markets holding up - The budget has estimated a 19.5% increase in gross tax collections (excise 29.1%, customs 22%, services 30.5%, corporate 13.9%, and income 13.9%).

Taking into account the increase in excise and services tax rates from 10% to 12%, coupled with widening the service tax net, these are achievable provided growth holds up.

Key to meeting estimates would be (1) 32% growth in non-tax revenues to Rs 1646 billion (of this telecom revenues are estimated at Rs 400 billion); and (2) The Rs 300 billion divestment target, which is dependent on market conditions.

Expenditures: Capping the subsidy bill is positive, but who bears the cost? - The budget has estimated a 13.5% rise in expenditures led by a 22.1% rise in plan expenditure and an 8.7% rise in non-plan expenditure. However, key to note is that similar to last year, the budget has once again factored a 12.2% contraction in the subsidy bill. Looking at the details, while the numbers for food and fertiliser seem realistic, estimates for fuel are conservative.

A caveat to this could be the budget proposal to restrict subsidies to 2% of GDP in FY13 where-in it has said it would fully provide for food subsidies while the others would be funded to the extent that they can be borne by the economy without any adverse implications.

Bottom Line - The FY13 fiscal deficit of Rs 5136 billion or 5.1% of GDP while slightly higher than market expectations could overshoot targets by 0.4% to 5.5% of GDP.

The budget has pegged gross borrowing at Rs 5696 billion and net borrowings at Rs 4790 billion.

March 16's non-eventful budget, read in conjunction with the previous day's rather hawkish monetary policy has resulted in yields edging slightly higher.

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