The Budget Glass – Half Full… After the weak performance of the Congress Party in the State elections, Populism was expected. But the Finance Minister has not succumbed to the temptation. He has attempted to address the twin priorities of fiscal consolidation and reviving the investment cycle.
• The FY13 Budget targets a fiscal deficit of 5.1 % of GDP, down from the 5.9% expected to print in FY12. Aiding the initiative, are a fair bit of resolve , speaking of a few… in curbing non-plan expenditure growth to 8%, an increase in indirect taxes by 200 bps and widening of the service tax net. Estimates pertaining to nominal GDP growth, tax collections and the fertilizer subsidy appear credible.
• A 22% increase in Plan expenditure is positive for the investment cycle. Similar are soft measures announced including removal of the dividend cascading tax, easier norms for ECBs, enhanced limits for infrastructure bonds, additional depreciation allowance, etc
…but Half Empty Fuel subsidies appear to be sharply under budgeted, unless there is a sharp increase in retail prices. Consequently most of the fiscal consolidation targeted is premised on asset sales –Rs. 300 bn from divestments and Rs.580 bn from the telecom sector.
While all of this is possible, it does make the fiscal consolidation process hostage to capital markets and business sentiment. All said and done, we expect the fiscal deficit to drop to 5.5% of GDP, still a better performance than last year. Appending to the same, despite the measures announced, a revival in the investment cycle will remain contingent on effective follow up to address the real issues plaguing the sector viz. land acquisition, environmental clearances, etc.
No impetus for equity markets. Investors approached the Budget with a fair bit of caution. That said, “the Budget does not provide any meaningful impetus or direction”. Markets would await follow up action on fuel price hike and revival of investment cycle. YTD, India is amongst the best performing equity markets delivering returns of 15% in local currency and 21% in USD. Going forward, we believe gains of another 10% are likely. But the gains are likely to come at a more measured pace and investors will have to contend with considerable volatility.
But, In line with our expectations, Budget FY13 has turned out to be a non-event. Isn’t it ….?