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 |
