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February 11, 2013
Treasury Research Group
For private circulation only
Union 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:
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
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
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 interest
than 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
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:
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 to
lead 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
Since this measure has been undertaken only in January, it is unlikely to have a
Finance Minister is likely
substantial impact on this year’s fiscal. However, it will provide some respite for
to 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
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.
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 for
fertilizer subsidy bills to storage related expenditure.
create space for Given that FY2014 has around 10 state elections and this is the last major budget
introduction 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.
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 Minimum
food 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
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.
schemes 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 of
currently 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.
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 few
the 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
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 tax
implementation 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 auction
collection target is also Given the fact that India’s dependence on non tax revenue sources has increased
expected to be set near over the past few years, we think it is likely that the disinvestment target will be
FY2013 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 (%
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
9773 9021 10328 14.5
9699 9849 10735 9.0
5210 4846 5621 16.0
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%
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 has
Indian 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 on
to 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
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
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
FYTD fiscal accounts
FYTD 2013 fiscal accounts
(in INR bn) FY2013 (BE) April - November April - December
Revenue Receipts 9357 4458 5705
(net to centre)
7711 3696 4842
Revenue 1646 762 864
Capital Receipts 417 89 159
Loans 117 67 77
300 22 82
Total Receipts 9773 4547 5864
Non-Plan Expenditure 9699 6243 6952
Plan Expenditure 5210 2434 2959
Total Expenditure 14909 8677 9911
Fiscal Deficit 5136 4129 4047
FYTD 2013 fiscal accounts (% YoY)
(in INR bn) FY2013 (BE) April - November April - December
Revenue Receipts 24 13 14
(net to centre)
22 15 15
Revenue 32 5 11
Capital Receipts 28 -39 -6
Loans -31 -43 -45
92 -19 193
Total Receipts 24 12 14
Non-Plan Expenditure 10 16 12
Plan Expenditure 26 10 7
Total Expenditure 15 14 11
Source: CGA, ICICI Bank Research
Receipts lag the rise in spending, with subsidies bill on a rising trend
(INR bn) Difference of total expenditure and tax revenues
Subsidies(RHS) (INR bn)
Source: RBI, ICICI Bank Research
Interest payments remain huge while tax revenues fail to pick up
Interest payments as % of fiscal deficit Tax revenues as % of GDP
Source: RBI, ICICI Bank Research
Government needs to improve its fiscal mix to support consolidation
Variable Coefficient Probability
Tax revenues as
% of total -0.21 0.005
% of total 0.12 0.001
% of total 0.08 0.034
Source: RBI, ICICI Bank Research
Economic growth slowdown affecting outlook for debt sustainability
Difference between nominal interest rate and GDP growth rate
Source: RBI, ICICI Bank Research
Fiscal consolidation targets seem difficult to achieve, unless revenue growth provided a
Revenue deficit as % of GDP
(%) Actuals ICICI Bank estimate Government projection
Source: RBI, ICICI Bank Research
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