Thursday, February 18, 2010

Union Budget 2010-11 Expectations

Teen Patti (Fiscal, Growth, and Inflation): Im-Possible trinity

While presenting the last budget Mr. Pranab Mukherjee had a dilemma to gamble or to not and he choose to gamble i.e. to keep FRBM (read fiscal prudence) on book shelf and re-ignite the growth engine. However, this time around he is facing triplets (against twin edged sword as last time around) – a) fiscal deficit b) inflation and c) growth.

In the wake of worsening fiscal situation across the globe and growing investor concerns over the debt sustainability, in our view the biggest challenge for FY11 budget would be managing fiscal deficit, which shall indirectly help in containing inflationary pressures.

Fiscal Deficit: ALL IS WELL (at least as deficit/GDP ratio)

Recently CSO changed the base year for India’s national accounts from 1999-2000 to 2004-05. As a result, the level of nominal GDP is on average 4.4% higher each year in FY05-FY09 compared to the old base. Advance GDP estimates release by CSO pegs nominal GDP for FY10 at Rs.61,642 bn increase of 5.25% against GDP estimate used in the budget of Rs.58,566 bn (directly reducing 30 bps from fiscal deficit to GDP ratio from 6.8% to 6.5%).

In my view, the austerity measures introduced late last year shall help in subduing expenditure also we expect higher direct tax collections, as corporate profits are.

Going forward in next fiscal, government is likely to continue vehemence on austerity and revenue enhancing measures. Revenue from disinvestments and telecom auctions are expected to be about Rs. 450 bn in FY11. Reversal of 2% cut in service tax rate shall add Rs 150bn in tax kitty. Similarly reversal of 2% cut in general CENVAT rate of 10% (slab accounting for over 90% of excise revenues) would add Rs.300bn in tax revenue. Though we are not expecting across the board reversals in this budget and FM may wait for GST for complete withdrawal of tax cuts. Our rough calculations suggest if GST is introduced at 8% rate that would be revenue-neutral at existing tax- rate, however a launch with a 12-16% rate would be useful for enhancing revenues for fiscal consolidation.

I believe there may be some roll back of incentives provided in form of accelerated depreciation among others, which shall result in enhanced revenue by Rs. 200 bn in FY11.

Government subsidy bill rose to Rs. 1,300 bn in FY09, and is expected to be over Rs. 1,100 bn in FY10. There are major contentions about subsidy rationalizations; we believe that complete withdrawal of subsidies is not politically feasible. In view of the above we expect subsidy bill in FY11 could come about Rs. 1,000 bn. Please note that petroleum companies get majority of their subsidies from upstream companies and government pays its part mostly in oil bonds and hence the subsidy burden due to fuel products doesn’t get reflected fully in the budget figures.

I believe that the budget would mostly be in line with the street expectations: lower fiscal deficit, focus on investments (infrastructure, agriculture) and supporting economic growth through continuation of some fiscal stimulus until second half of the year. In my opinion, the fiscal deficit /GDP ratio should be about 5.5%, gross tax/GDP at 11% and total expenditure/GDP ratio at 16.6% in budget estimate FY11.

(Rs. Bn)

FY2009BE

FY2009RE

FY2010BE(I)

FY2010BE(F)

FY2010E

FY2011E

Revenue receipts

6,037

5,597

6,076

6,147

5,843

6,870

Gross tax revenue

6,863

6,264

6,697

6,411

6,004

7,365

Direct taxes

3,650

3,450

3,800

3,716

3,579

4,215

Corporation tax

2,264

2,220

2,442

2,567

2,500

2,800

Income tax

1,383

1,226

1,354

1,129

1,075

1,400

Other taxes

3

4

4

20

4

15

Indirect taxes

3,213

2,814

2,897

2,695

2,425

3,150

Customs duty

1,189

1,080

1,102

980

850

1,150

Excise duty

1,379

1,084

1,106

1,065

950

1,250

Service tax

645

650

689

650

625

750

Transfers to States and UTs

1,784

1,629

1,741

1,667

1,561

1,915

Net tax revenue

5,079

4,635

4,956

4,744

4,443

5,450

Non-tax revenue

958

962

1,120

1,403

1,400

1,420

Capital receipts

1,480

3,388

3,436

4,063

4,395

4,175

Recovery of loans

45

97

97

42

45

50

Other receipts (Disinvestments)

102

26

11

11

250

450

Borrowings and other liabilities

1,333

3,265

3,328

4,010

4,100

3,675

Net market borrowing

1,006

2,620

3,087

3,980

3,980

3,491

Total receipts

7,517

8,985

9,512

10,210

10,238

11,045

Non-plan expenditure

5,075

6,180

6,681

6,957

6,935

7,346

Non-plan revenue expenditure

4,484

5,618

5,997

6,188

6,150

6,446

Interest payments

1,908

1,927

2,255

2,255

2,250

2,450

Subsidies

714

1,293

1,010

1,113

1,100

1,000

Food

327

436

425

525

600

520

Fertilizer

201

759

500

500

400

425

Others

186

98

85

88

100

55

Grants to States and UTs

433

384

466

486

500

496

Others

1,428

2,014

2,267

2,335

2,300

2,500

Non-plan capital exp.

591

562

684

769

785

900

Plan expenditure

2,434

2,830

2,852

3,252

3,300

3,700

Plan revenue expenditure

2,098

2,417

2,484

2,784

2,800

3,000

Plan capital expenditure

336

413

368

468

500

700

Total expenditure

7,509

9,010

9,533

10,209

10,235

11,046

Revenue expenditure

6,582

8,035

8,481

8,972

8,950

9,446

Capital expenditure

927

975

1,052

1,237

1,285

1,600

Revenue Deficit

545

2,438

2,405

2,825

3,107

2,576

Fiscal Deficit

1,325

3,290

3,349

4,009

4,097

3,676

Primary Deficit

-583

1,363

1,094

1,754

1,847

1,226

PD/GDP (%)

-1.1

2.6

1.8

3.0

3.0

1.8

RD/GDP (%)

1.0

4.6

4.0

4.8

5.0

3.9

FD/GDP (%)

2.5

6.2

5.6

6.8

6.6

5.5

Gross tax/GDP (%)

12.9

11.8

11.1

10.9

9.7

11.1

Total expenditure/GDP (%)

14.2

16.9

15.8

17.4

16.6

16.6