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  • 1. February 11, 2013 In Focus Kamalika Das Treasury Research Group Kanika Pasricha For private circulation only Surbhi OgraUnion Budget FY2014: Expected to be more ‘responsible’ than ‘populist’ The budget statement for FY2014 due later this month is extremely crucial for a multitude of reasons. This budget will be the litmus test of the Government’s Union Budget FY2014 intent to consolidate on the fiscal front so as to ensure that the country’s needs to be balanced investment grade rating is not called into question. carefully to achieve However, achieving the fiscal mandate requires considerable amount of fiscal consolidation and expenditure rationalization, which will also entail steadfast commitment to yet support aggregate recently introduced policy measures especially on the fuel pricing front. The demand in a slowing budget also has to take into cognizance the fact that our position in the business Indian economy cycle is as yet fragile and any growth recovery at the moment is nascent at best. This means that the revenue and expenditure flows have to be balanced carefully otherwise aggregate demand will be affected adversely. Fiscal parameters till date: Revenue: In the current fiscal till If we look at our current fiscal parameters for April-December 2012 tax revenue date, revenue growth growth is around 15% YoY as compared to the 22% YoY, which was budgeted has been weaker than last year. budgeted along with a Even on the non-tax revenue front, the collection has not been in line with shortfall in non-tax budgeted projections. There has been a major shortfall on spectrum auctions to revenue collections the tune of almost INR 300 bn and it is unlikely that the deficit will be made up this year. On the disinvestment front, the Government has so far collected around INR 220 bn as against the budgeted target of INR 300 bn. However, the prospects for this There has been progress avenue look more encouraging and we expect the target to be broadly met.on disinvestment and the The Finance Ministry is also likely to boost revenues through increased PSU budgeted INR 300 bn dividends and possibly through use of SUUTI stake sales in rest of FY2013. target is likely to be achieved Expenditure: The Government has consolidated sharply on its spending towards the end of 2012, in a bid to attain its committed level of 5.3% of GDP fiscal deficit. Total spending April-December 2012 grew at 11% YoY as against 15% YoY budgeted. Expenditure growth However, we must note that within total expenditure, plan spending has grown FYTD has been lower by 7% YoY FYTD as against 26% YoY target for the year. If we take out interestthan budgeted given the payments and subsidies from the overall spending, then the residual has shown cutbacks in plan negative growth of 4.3% YoY FYTD. expenditure to achieve In contrast, non-plan expenditure has grown by 12% YoY FYTD as against 10% the fiscal deficit YoY budgeted. This is to be expected as non-plan spending includes subsidies, commitment defence, interest payments, wages and salaries etc., which are inelastic in nature and would be difficult for the Government to rationalize. FY2014 fiscal deficit projection: The Finance Minister is Our evaluation of next year’s fiscal deficit projection is ~5.2% of GDP, though we likely to budget FY2014 believe that the Finance Minister will announce fiscal deficit of 4.8% of GDP in the fiscal deficit at 4.8% of Union Budget, as per the fiscal consolidation roadmap. We believe that the only GDP, though we expect fiscal space that the Government can create is on the subsidy front, where some slippage and attempts have already been made by partially deregulating diesel prices.project it at 5.2% of GDP 1
  • 2. In Focus Expenditure estimates: Non-plan expenditure (subsidies): On subsidies, we believe that the Government will try its utmost to keep the total The subsidy bill is likely subsidy bill at or lower than the 2% of GDP levels continuing with FY2013’s trend. to be budgeted at 1.8% This of course does not consider the final quantum of the subsidy bill of GDP, same as last incorporating slippages, which may result in the figure being much above 2% of year GDP. For example, our estimation shows that this year’s revised subsidy bill may work out to around 2.4% of GDP as against the budgeted 1.8%. The details of our estimates of FY2014’s subsidy bill is as follows: Fuel subsidy: The Government has recently announced a partial de regulation in prices whereby OMCs can raise diesel prices on a monthly basis by up to INR 0.5/ltr for Calibrated diesel price retail consumers. The price for bulk consumers has been linked to the market. hikes coupled with increase in subsidized If we assume that the OMCs will be allowed to reset their prices every month by LPG cylinder cap would half a Rupee then the saving on the retail front for total under recoveries will be tolead to net saving of INR the tune of around INR 340 bn annually, assuming current level of international 220 bn on fuel subsidy crude prices. bill assuming current Along with this the annual saving for bulk purchases is around INR 130 bn. level of crude prices However, this will be mostly offset by the increase in LPG cap from 6 to 9 cylinders, which is expected to account for around INR 100 bn. In total, the saving on under recovery would be around INR 370 bn. If we now assume that the Government usually bears around 60% of the total losses, then the Central Government’s savings would be around INR 220 bn annually. Since this measure has been undertaken only in January, it is unlikely to have aFinance Minister is likely substantial impact on this year’s fiscal. However, it will provide some respite forto budget fuel subsidy at next year’s subsidy calculations. INR 500 bn for FY2014 Our estimates suggest that the Government is unlikely to deviate sharply from and continue with trend what it had budgeted for fuel in FY2013. Taking into consideration the fact that it of under budgeting on will continue to roll over some of its dues, we believe it will budget around INR fuel front 500 bn for next year’s fuel subsidy bill and continue with its trend of under budgeting on the fuel front. We must however, note that the Government has only paid INR 300 bn for this year’s requirement, which entails a slippage of more than INR 500 bn. Fertiliser subsidy bill is Fertiliser subsidy: likely to be reduced by ~INR 100 bn on recent In view of the fact that the Government has now undertaken some price rationalization comprehensive steps to rationalize fertilizer pricing especially for urea, we believe measures that the subsidy component may reduce somewhat. Hence we estimate it at around INR 550 bn for FY2014 as against INR 650 bn budgeted in FY2013. Food subsidy: This component is a very substantial portion of the total subsidy bill as it includes Reduction in fuel and subsidies provided for the Public Distribution System and dues paid to FCI forfertilizer subsidy bills to storage related expenditure. create space for Given that FY2014 has around 10 state elections and this is the last major budgetintroduction of populist before general elections in 2014, the Government may be inclined to push measures like Food through some of the provisions of the Food Security Bill. Security Bill 2
  • 3. In Focus As of now, the Parliament Standing Committee has cleared the Bill but it still needs to go through the Cabinet and then through a Parliamentary approval process. As this is a political booster, it is likely that it may add to the food subsidy bill and absorb any space created by a reduction in fuel and fertilizer We expect the Finance subsidies. Minister to budget the There is also a case for revising the Central Issue Price in line with the Minimumfood subsidy bill at ~INR Support Price for food grains, which will help to reduce subsidy pay out to the 1 trn Food Corporation of India. We estimate that the food subsidy will be budgeted at around INR 1 trn as compared to INR 750 bn budgeted in FY2013. Taking the above into account, the total subsidy bill is likely to be in the vicinity of INR 2.1 trn, which is approximately 1.8% of GDP. Apart from the above, we also expect the Government to provide a clear roadmap for the Aadhar program so as to effectively extend the direct cash transfer scheme to subsidy payment as well, which will automatically reduce leakages from the system Plan expenditure Plan expenditure: cutbacks are likely to continue in the next We believe that the cutbacks in plan expenditure are expected to continue in the fiscal, though it is not next fiscal, amidst relatively weak tax revenue growth in order to achieve the favourable from growth fiscal deficit target. This is not a desirable course of action given the fact that the perspective country needs substantial capital spending both on physical and social overheads. The consequence of this is even more stark in view of the fact that the advance estimate for FY2013 GDP came in at a decadal low of 5% YoY. Centrally sponsoredschemes are likely to be We also note here that the Government had set up a panel to evaluate the status reduced from 147 of Centrally Sponsored Schemes, which recommended that the focus ofcurrently to 59, as per a expenditure should be more on the nine flagship programs and the others could panel recommendation be merged or rationalized. There are a very large number of CSS operating at this time. In 2011-12, these numbered 147 and there is a strong case for this number to be brought down significantly. Revenue estimates: In order to boost In light of the fact that tax revenue growth has slipped to around 15% YoY revenues, the Finance currently as against 22% YoY budgeted, there is a strong need to boost the tax Minister is likely to revenue base in the country. Anecdotal evidence suggests that a mere 3.2 crores impose higher taxes on of people pay personal income tax in the country. Of this number, only a fewthe rich, levy inheritance lakhs comprise the upper income bracket. tax, raise indirect tax There is a possibility that the Finance Ministry may impose higher taxes on the rates or at least trim the rich section of income classification and also additionally levy an inheritance tax. exemption list. The possibility of a rise in indirect tax rates is relatively lower but at least a trimming of the exemption list is on the cards. There is also a case that the Finance Minister would impose minimum alternate tax (MAT) on gross assets as against on net profit, though given that it is not an investor friendly measure, the possibility of it being implemented is low. Given the delay in implementation of GST, In a more radical approach, the Finance Ministry earlier this fiscal, has proposed the Central Sales tax is an extensive framework for tapping the unaccounted money in the economy. likely to be reduced There is a possibility that more stringent tax compliance and accountability rules further to 1% may be introduced to reduce leakage. On the tax front, the over arching requirement at the current juncture is a revamp of the existing indirect tax collection structure, which leads to inefficient pricing and multiple tax incidence. The need of the hour is clearly the quick introduction of the Goods and Services tax, which is expected to have considerable growth 3
  • 4. In Focus benefits as well. However, as the situation stands now, it is unlikely that the framework will be Government needs to introduced this fiscal although the Finance Minister has committed to table it in provide state-level Parliament later this year. compensation before In the process of rationalizing tax rates in the run up to GST, Central Sales taximplementation of GST, rates have been reduced for some time now. The current rate of 2% may be a comprehensive brought down further to around 1%, which will help reduce input costs for measure to boost businesses, however it also brings up the issue of revenue foregone by State revenue growth Governments and the associated compensation that the Central Government needs to provide in lieu of it. So far, for the three years since 2010, Government is expected to provide compensation to the tune of INR 340 bn. Hence this is a very nuanced decision and will have to be weighed carefully before implementing. On a broader level, India’s tax to GDP ratio has been on the lower side, for quite some time and needs to be supported by enhancing the tax base by bringing Disinvestment target is more people under the taxable category. likely to be again set at INR 300 bn for FY2014 Non-tax revenues: and spectrum auctioncollection target is also Given the fact that India’s dependence on non tax revenue sources has increasedexpected to be set near over the past few years, we think it is likely that the disinvestment target will beFY2013 budgeted levels budgeted at around INR 300 bn again for next fiscal and the telecom Ministry has also said that further spectrum is available for auctioning next fiscal as well. Hence the target from these two fronts is likely to continue to be budgeted at FY2013 levels at the least. The summary of our estimations is as follows: Budget calculation FY2014 ICICI Bank Growth FY2013 ICICI Bank (in ` bn) estimate rate (% (BE) estimates FY2014 YoY) Revenue Receipts 9357 8604 9908 15.2 Tax Revenue (net to centre) 7711 7258 8347 15.0 Non-Tax Revenue 1646 1346 1561 16.0 Capital Receipts 417 417 420 0.8 Recoveries of Loans 117 117 120 3.0 Other Receipts 300 300 300 0.0 Total Receipts 9773 9021 10328 14.5 Non-Plan Expenditure 9699 9849 10735 9.0 Plan Expenditure 5210 4846 5621 16.0 Total Expenditure 14909 14695 16356 11.3 Fiscal Deficit (% of GDP) -5.1 -5.6 -5.2 GDP FY2013 assumed to be ~INR 100 tn and nominal growth for FY2014 is estimated to be 14% 4
  • 5. In Focus Market expectations from FY2014 budget: Expectations on the industrial front:Given the fragile state of As we embark on the 12th Five Year Plan, of the three-pronged approach that hasIndian growth trajectory, been suggested as the strategy for this plan period, infrastructure is one of the the Budget is expected most pressing need. Even at a broader level, the country needs to focus onto introduce measures to building capacity, which will help boost our manufacturing sector and also boost infrastructure enhance our exports. Of particular concern is the fact that our current account investments, boost deficit has now reached unsustainable levels and our export item composition domestic savings and needs to be upgraded from primary to secondary sectors. reduce the record high current account deficit In this context, we believe that the Finance minister may announce measures such as the following: • Exempt infrastructure and Special Economic Zones (SEZ) companies from levy of minimum alternate tax (MAT) to incentivize new investments. • It can re introduce tax-free bonds to channelise household savings into infrastructure. o To ensure a wider reach, the Government might allow banks to Tax incentives for float tax-free bonds. infrastructure sector • Continuation of tax benefit (till the end of the 12th Five Year Plan) for coupled with expansion power sector under section 80IA sunset clause, which entitles a company of export-promotion for tax benefits only if it starts generating power by the end of current measures is expected fiscal year • Announce a package for Micro, Small and Medium Enterprises (MSMEs) to boost growth potential of the sector. • The Government is also likely to continue and expand the recent measures that it has announced for the export sectors such as continuation of the interest subvention scheme, provision of incentives for key focus markets and focus products such as engineering goods. This will also have the benefit of correcting our current account deficit to some extent. Measures to boost domestic investible surplus in the economy: Broadening of RGESS, reduction in lock-in Recent data shows that India’s gross domestic savings rate has dropped to 30.8% period for savings of GDP in FY2012 and is likely to decline even further. The saving investment gap deposits and initiatives is also widening, which does not bode well for our current account deficit.towards monetisation of Another worrying trend is that financial savings of household is at a two decade gold are expected in low. order to promote Hence we believe that some measures may be announced to boost household domestic savings financial savings and gross savings in general. • Broadening of the Rajiv Gandhi Equity Savings Scheme (RGESS) • Tax incentives for retirement plans launched by mutual funds • The lock-in period for tax saving deposits can be brought down to three years from five years to channelise more funds into the banking sector. • Actively promote the recent recommendations given by the RBI to make some headway in monetizing the gold holdings in the economy by introducing innovative products such as gold certificates, gold deposit schemes etc. 5
  • 6. In Focus AnnexureFYTD fiscal accounts FYTD 2013 fiscal accounts(in INR bn) FY2013 (BE) April - November April - DecemberRevenue Receipts 9357 4458 5705 Tax Revenue (net to centre) 7711 3696 4842 Non-Tax Revenue 1646 762 864Capital Receipts 417 89 159 Recoveries of Loans 117 67 77 Other Receipts 300 22 82Total Receipts 9773 4547 5864Non-Plan Expenditure 9699 6243 6952Plan Expenditure 5210 2434 2959Total Expenditure 14909 8677 9911Fiscal Deficit 5136 4129 4047 FYTD 2013 fiscal accounts (% YoY)(in INR bn) FY2013 (BE) April - November April - DecemberRevenue Receipts 24 13 14 Tax Revenue (net to centre) 22 15 15 Non-Tax Revenue 32 5 11Capital Receipts 28 -39 -6 Recoveries of Loans -31 -43 -45 Other Receipts 92 -19 193Total Receipts 24 12 14Non-Plan Expenditure 10 16 12Plan Expenditure 26 10 7Total Expenditure 15 14 11Source: CGA, ICICI Bank Research 6
  • 7. In FocusReceipts lag the rise in spending, with subsidies bill on a rising trend Capital receipts (INR bn) Difference of total expenditure and tax revenues Subsidies(RHS) (INR bn) 8000 2400 1900 6000 1400 4000 900 2000 400 0 -100 1970-71 1973-74 1976-77 1979-80 1982-83 1985-86 1988-89 1991-92 1994-95 1997-98 2000-01 2003-04 2006-07 2009-10 2012-13Source: RBI, ICICI Bank ResearchInterest payments remain huge while tax revenues fail to pick up Interest payments as % of fiscal deficit Tax revenues as % of GDP (%) (%) 160 10 140 9 120 8 100 80 7 60 6 40 5 20 0 4 1980-81 1982-83 1984-85 1986-87 1988-89 1990-91 1992-93 1994-95 1996-97 1998-99 2000-01 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13 Source: RBI, ICICI Bank ResearchGovernment needs to improve its fiscal mix to support consolidation Variable Coefficient Probability Tax revenues as % of total -0.21 0.005 Revenue expenditure as % of total 0.12 0.001 Capital expenditure as % of total 0.08 0.034Source: RBI, ICICI Bank Research 7
  • 8. In FocusEconomic growth slowdown affecting outlook for debt sustainability Difference between nominal interest rate and GDP growth rate (ppt) 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 1981-82 1983-84 1985-86 1987-88 1989-90 1991-92 1993-94 1995-96 1997-98 1999-00 2001-02 2003-04 2005-06 2007-08 2009-10 2011-12Source: RBI, ICICI Bank ResearchFiscal consolidation targets seem difficult to achieve, unless revenue growth provided aboost Revenue deficit as % of GDP (%) Actuals ICICI Bank estimate Government projection 6 5 4 3 2 1 0 2013-14 2014-15 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13Source: RBI, ICICI Bank Research 8
  • 9. ICICI Bank: ICICI Bank Towers, Bandra Kurla Complex, Mumbai- 400 051. Phone: (+91-22) 2653-1414 Treasury Research Group Economics Research Sunandan Chaudhuri Senior Economist (+91-22) 2653-7525 sunandan.chaudhuri@icicibank.com Surbhi Ogra Economist (+91-22) 2653-7243 surbhi.ogra@icicibank.com Kamalika Das Economist (+91-22) 2653-1414 (ext 6280) kamalika.das@icicibank.com Kanika Pasricha Economist (+91-22) 2653-1414 (ext 2260) kanika.pasricha@icicibank.com Samir Tripathi Economist (+91-22) 2653-7233 samir.tripathi@icicibank.com Tadit Kundu Economist (+91-22) 2653-1414 (ext 2087) tadit.kundu@icicibank.com Rupali Sarkar Economist (+91-22) 2653-1414 (ext 2023) rupali.sarkar@icicibank.com Pooja Sriram Economist (+91-22) 2653-1414 (ext 2023) pooja.sriram@icicibank.com Treasury Desks Treasury Sales (+91-22) 2653-1076-80 Currency Desk (+91-22) 2652-3228-33 Gsec Desk (+91-22) 2653-1001-05 FX Derivatives (+91-22) 2653-8941/43 Interest Rate Derivatives (+91-22) 2653-1011-15 Commodities Desk (+91-22) 2653-1037-42 Corporate Bonds (+91-22) 2653-7242 Disclaimer Any information in this email should not be construed as an offer, invitation, solicitation, solution or advice of any kind to buy or sell any financial products or services offered by ICICI Bank, unless specifically stated so. 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