Budget Expecation

7/29/2019 Budget Expecation

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Focus on fiscal consolidation; subsidies burden concern ahead

FY11 deficit likely to be at 4.72% of GDP One off gains to cushion FY11 deficit as government spending gathers pace in

March

Government net borrowing for FY12 likely to be INR 3854bn compared to 3350bnfor FY11. Borrowing program likely to be front loaded with 65% of the borrowing

to be completed in H1FY12

Government to announce a fiscal deficit close to the medium term target of 4.80%of GDP for FY12, however the under provision for the fuel subsidies may lead to a

slippage pushing the ratio to 5.10% - 5.20% of GDP

Our expectation of the fiscal deficit to be INR 4280bn in FY12 in absolute termsand 4.69% of GDP

Service tax net expansion and reduction in CST exemptions could continue tosupport the tax buoyancy

Non tax revenue to shrink while disinvestment related receipts could be close toFY11 levels

Non plan expenditure likely to remain a drag on account of the high subsidy bill.Food security bill and rising commodity prices could push the subsidy outflow to as

high as INR 2000bn in FY12 compared to INR 1700bn in FY11.

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India Fixed Income Research Budget

PRE BUDGET EXPECTATION 2011-12

Key expectations from Budget FY12 February 23, 2011

Edelweiss Fixed Income research is also available on Bloomber EDEL , Thomson First Call, Reuters and Fact set Edelweiss Securities Limited

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Focus on fiscal consolidation; subsidies biggest concern ahead

Tax revenue collection to remain buoyant, one off advantage fades off

We expect total revenue receipt to grow at 6.50% only in FY12 due to the significant lower non tax revenues in FY12versus FY11. Non tax revenues contributed about 28% of the total revenues in FY11 mainly on account of the one off

gain of INR 1.06trn from the 3G/BWA license fees. Since these gains will not recur in FY12 the total revenue receipt is

expected to grow at a meager pace.

We expect the corporate tax collection to grow at 17.50% (slightly higher than the expected growth in profits for theIndian Corporate) while we have projected the growth in the income tax to be in line with the nominal GDP growth

rate of 15%.

We expect the government to make attempts to widen the service tax net. However, we note that most of the largeservice sectors that can be easily taxed have already been brought under the purview of the service tax. The service

sector largely operates on cash and it is imperative for the government to introduce GST or tap into unaccounted

money if it has to tax the biggest portion of Indias GDP. The share of service tax in total taxes still remains minuscule

We assume an increase in the median rate of excise duty to 12% from the current rate of 10%. Industry lobbies haveargued for a stable rate at a time of slowdown in the economy. However, we are not sure how the government will

generate additional revenues to meet higher expenditure on social welfare and likely very high subsidies. The

government may also have to cut excise duties on gasoline and diesel to curb subsidy losses (although the net impact

is the same given foregone revenues)

Disinvestment related receipts likely to be close to FY11 levels

We target a disinvestment mop-up of INR 400bn although this remains contingent on the state of the domesticfinancial market. If local equity markets continue to remain volatile, the slippage to our FY12 fiscal deficit could be

high. At least 8-9 PSUs have been identified for disinvestment in FY12 including IOC, MMTC and PFC. While there is

some indication that the INR 130bn ONGC FPO could go through this fiscal, delay in the subsidy payout by the

government could dampen valuations and push the offer to the next fiscal

Expenditure to see moderation, non planned expenditure continues drag

We note that the government has very little control on expenditure items such as interest payment (already at 30%of revenue receipts based on FY2011E data), defense and salaries. It has already cut capital expenditure significantly

over the years. Due to political compulsions, it is unlikely to cut expenditure on subsidiesthe only area where the

government can make cuts if it has the political nerve to do so. However, we do not expect this to be the case in the

current political system

Social welfare expenditure. We do not expect allocations under the MGNREGA to increase dramatically despite thelikely indexation of wages to CPI-AL and an increase in the minimum hours worked. This is because there are

adequate indications that the full amounts allotted to this program under this scheme of FY2011 may not have been

utilized

Fiscal deficit target for FY11 successful; inflation distorts the number

Upward revision of the GDP base (GDP for FY11 is likely to be INR 78,604bn against INR 69,347bn assumed in thebudget) should help fiscal ratios is likely to push the fiscal deficit for FY11 to 4.72% of GDP against a budget target of

5.50%.

Although the denominator effect will continue to help in FY12, the absolute level of deficit is actually likely to behigher than the initial projections. Since there is no one-off revenue gains such as the 3G and broadband auction in

FY11 (1.3% of GDP), the absolute level of deficit in FY12 could be much higher. Non tax revenue contributed 28.50%

of the total revenue receipt in FY11,

We have projected a deficit number of INR 4280bn in FY12 compared to INR 3714bn in FY11. However underprovision for fuel subsidies may lead to slippage pushing the ratio to 5.10% - 5.20% of GDP


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INR Bn FY09A FY10RE FY11BE FY11E FY12E

1. Receipt (2d + 3) 5,402 5,773 6,822 7,838 7,874

2. Gross tax revenue (a+b) 6,053 6,331 7,467 7,841 9,369

2a. Direct Tax 3,359 3,887 4,317 4,471 5,242

i . Income tax 1,206 1,250 1,206 1,373 1,579

ii . Corporate tax 2,134 2,551 3,013 3,002 3,541i i i . Other tax 19 86 98 96 122

2b. Indirect Tax 2,694 2,445 3,150 3,370 4,127

i . Custom duties 999 845 1,150 1,322 1,520

i i . Exci se duties 1,086 1,020 1,320 1,355 1,789

ii i. Service tax 609 580 680 693 818

2c. (States' share in tax revenue) 1,620 1,680 2,126 2,235 2,623

2d. Net tax revenue 4,433 4,651 5,341 5,606 6,746

3. Non-tax revenue 969 1,122 1,481 2,232 1,129

4. Capital Receipts (net) 68 245 456 446 462

4a. (of which) Dis investment 6 260 400 346 400

Total Receipts (1+4) 5,470 6,018 7,279 8,284 8,336

6. Non-plan expenditure (a+b) 6,088 7,063 7,358 8,018 8,139

6a. Revenue expenditure 5,591 6,419 6,437 6,931 7,172

i . Interest payments 1,922 2,195 2,487 2,487 2,686

i i . Expendi ture on defence 733 884 873 873 917

i i i . Subsidies outgo 1,298 1,310 1,163 1,717 1,560

Fuel 94 220 107 427 120

Fertil i sers 766 530 500 650 700

Food Securi ty Bi ll 438 560 556 640 740

iv. Other non-plan revenue expenditure 1,638 2,030 1,914 1,854 2,009

6b. Non-plan capital expendi ture 497 644 921 1,087 967

7. Plan expenditure 2,752 3,152 3,731 3,980 4,477

8. Total Expenditure (6+7) 8,840 10,215 11,089 11,998 12,616

Other Borrowing & Liabilities 1,033 211 360 364 426

Net market borrowings 2,336 3,984 3,450 3,350 3,854

Gross market borrowings 2,730 4,510 4,571 4,471 4,589

Repayment of domestic market borrowings 394 526 1,121 1,121 735

Fiscal Debt Financing 3,370 4,197 3,810 3,714 4,280

Primary defici t 1,448 2,002 1,323 1,227 1,594

GDP 55,826 65,503 78,604 78,604 91,181

YoY Growth GDP 17.51% 20.00% 20.00% 16.00%

Fiscal Defici t as % of GDP 6.04% 6.41% 4.85% 4.72% 4.69%

RE denotes revised es timates, BE denotes budget esti mates


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