Indian Union Budget 2013

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Indian Union Budget 2013-14 review and analysis

March 1, 2013, Friday, 05:28 GMT | 00:28 EST | 10:58 IST | 13:28 SGT

Contributed byAngel Broking

Prudence over populism

The Finance Minister has delivered on one of the most important aspects in this Budget - fiscal

consolidation. The budgeted fiscal deficit for FY2014 at 4.8% of GDP is in line with our and

market expectations. In terms of the fiscal deficit for FY2013, the Finance Minister has exceeded

expectations and reined it at 5.2% and it is slightly lower than the governments own estimate of

5.3% of GDP. In addition, the actual FY2012 headline deficit has also narrowed to 5.7% of GDP

from 5.9% of GDP

Overall, we believe that the FY2014 Budget is responsible and more credible since it seeks to

narrow the fiscal deficit by increasing revenues as well as reprioritizing expenditure. Although the

Finance Minister has refrained from announcing any big bang reformist measures (as expected

by the market) in the Budget, he has also abstained from Rs.playing to the galleries. and

resorting to major populist policies ahead of the election year and we view that as a positive.

Balancing revenues and expenditure

We believe that the Finance Minister has calibrated fiscal policy towards a good growth mix. Non

plan expenditure is expected to moderate to 9.8% of GDP in FY2014BE from the revised

estimate of 10.0% of GDP in FY2013RE. Plan expenditure, on the other hand is expected to inch

upwards to 4.9% of GDP in FY2014BE as compared to 4.3% of GDP in FY2013RE.

On the expenditure front, the government has clearly bitten the bullet. The total expenditure in

FY2013RE is 4.0% lower than the FY2013BE and this has been achieved by squeezing plan

expenditure during the period by 17.6%. However, for FY2014BE the Finance Minister has

increased the allocation to plan expenditure by 29.4% (to Rs.5.55lakh cr) over FY2013RE.

On the revenue side, we believe that overall the budgeted estimates look optimistic particularly

since buoyancy in revenues is linked to revival of economic activity. The Budget estimates a

21.2% rise in revenue receipts to Rs.10.5lakh cr over the revised estimates of FY2013 with a

35.8% rise in service tax in FY2014BE over FY2013RE as it has limited the services exempt from

taxes. The Budget also estimates a steep 74.6% rise in non debt capital receipts to Rs.66,468crover the revised estimates of FY2013. This can be mainly attributed to upping of the

disinvestment target to Rs.40,000cr in FY2014BE from Rs.30,000cr BE and Rs.24,000cr RE in

the previous fiscal year. In addition, the Budget also seeks to divest governments stake in non-

PSUs to garner Rs.14,000cr.

Overall, despite the over-estimation in receipts we believe that the fiscal deficit number looks

credible. We believe that the government would stick to its fiscal deficit target of 4.8% of GDP in
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FY2014 and akin to the previous fiscal year, any shortfall in revenues is likely to be offset by

similar compression on the plan expenditure side. We believe that it spells positively for the

economy to avert a sovereign ratings downgrade by credit ratings agencies. The narrowing of the

fiscal deficit is also a positive for the interest rate environment in the economy as monetary policy

is expected to adopt a more accommodative stance to support growth in the wake of fiscal

consolidation by the government.


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The budgeted subsidy burden for FY2014 is expected to decelerate to 2% of GDP as compared

to FY2013RE of 2.6% of GDP and suggests a decline of 10.3% yoy. Food subsidy, a majorcomponent of the total subsidy, is estimated to rise by 5.9% in FY2014BE as against FY2013RE.

The Finance Minister has set aside a moderate quantum of the subsidy ( Rs.10,000cr) for

implementing the National Food Security Bill in the run-up to the elections. The rise in food

subsidy bill is expected to be offset by holding a tight leash over fuel and petroleum subsidies.

The 32.9% decline estimated in the petroleum subsidy for FY2014 over FY2013RE is not

unrealistic since the government had set in place the momentum for reducing the petroleum

subsidy since September 2012.

Market borrowings in line with expectations


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As far as market borrowings are concerned, the government lower gross market borrowing of

Rs.5.58lakh cr as against the has successfully kept gross as well as net market borrowings in

budgeted estimated of Rs.5.69lakh cr. Even the FY2014 budgeted check for FY2013. The revised

estimates for FY2013 indicate estimate for market borrowings is in line with expectations and we

expect it to be positive for bond yields.

Tax proposals

The Finance Minister did not give any noteworthy relief to the tax payer except a nominal tax

credit of Rs.2,000 to persons with total income up to Rs.5 lakh and additional deduction of

Rs.1lakh on home loans below Rs.25lakhs. On the contrary, the surcharge on corporate tax,

taking the effective tax rate to 34%, is expected to be negative for earnings estimates of

companies. The increase in surcharge (from 5% to 10%) on dividend distribution tax taking it

effectively to 17% from 16.25% is also a negative for the corporate sector. In addition, the

surcharge of 10% on persons whose taxable income exceeds Rs.1cr per year is also

sentimentally negative. The Finance Minister also proposed to increase the rate of tax ontechnical services to non-residents from 10% to 25%. While the reduction in STT is positive for

the markets, the levy of CTT on non-agricultural commodities futures contracts is a dampener.

The Finance Minister expressed hope on bringing the DTC Bill in the parliament before end of the

Budget session but there is clarity on the roadmap for its implementation. As regards the GST

Rs.9,000cr has been allocated for shortfall in Central Service Tax compensation for the States,

indicating that the government is closer to attaining a consensus on the bill which is expected to

broaden the tax base and add to GDP growth.

One of the major reasons for the negative reaction in the markets after the budget was on

account of the amendment to the requirements for claiming the benefit of DTAA (double taxationavoidance agreement). Furnishing of TRC (tax residency certificate) was made a necessary but

not sufficient condition to qualify for the benefits. Moreover, this was made applicable

retrospectively from FY2013. The finance minister post budget explained that the substance of

the amendment was that not only residency but also beneficial ownership was necessary to claim

the benefit under DTAA, which unnerved the market regarding transactions routed through tax

haven Mauritius. However, the government in our view has done everything to attract dollars into

the country in order to plug the precarious current account gap. So, it needs to be seen whether

in the coming days, sooner rather than later, there may be clarifications to calm the investorsRs.

nerves on this issue.

And now, the misses...

Exports: In addition to the rise in imports, weak export performance is also leading to a surge in

the trade deficit of the

economy and it widened to 10.8% of GDP during the first half of FY2013. In light of this, we were

expecting a boost for the export-oriented sectors in the Budget. However in this regard, the


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Finance Minister refrained from providing sops to export related sectors and merely expressed

optimism in the foreign trade policy to be announced next month.

Incentivizing investment: To encourage investments, the Budget has proposed a 15%

investment allowance for new high value investments (Rs.100cr or more) in plant and machinery

and the Finance Minister also laid stress on Rs.improving communication policyRs. to ensurecertainty to investors. While these measures are sentimentally positive for the corporate sector,

we believe that they are considerably lacking to revival of the capex cycle in the economy as the

gross fixed capital formation rate has decelerated to 2.4% in FY2013 from 16.2% in FY2008.

Savings: The savings rate in the economy plummeted to 30.8% of GDP in FY2012 from its peak

of 36.8% in FY2008. The Budget increased the income eligibility limit for RGESS to Rs.12lakh

from Rs.10 lakh, and provided an additional deduction of Rs.1lakh on home loans below

Rs.25lakh. Further, it suggested introduction of inflation-indexed bonds to augment the savings

rate and attract householdsRs. savings in financial assets as against nonproductive assets like

physical gold. We however believe that no big bang measures have been announced to increase

savings.

Conclusion

We believe that the Finance Minister has delivered a budget that suggests economic stability

supersedes political considerations. We regard it as a prudent but non-reformist budget. Despite

the many misses, delivering on the fiscal deficit target is a key positive. We believe that it is

crucial for averting a sovereign rating downgrade and thereby ensuring stability of capital flows to

finance the current account deficit. Credibly lower fiscal deficit target for FY2014 is also expected

to provide monetary policy with more headroom to ease policy rates and crowd in private sector

investment.

Going forward, we believe that maintaining the momentum on reforms beyond the Budget is

pertinent to tackle structural supply side constraints in the economy, particularly in the mining and

power sector, for revival of growth in the economy.

Sectoral Impact


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1) Budget Fine-print: Treatment of NPA deductions

Earlier, the interpretation of Section 36(1)(viia) and 36(1)(vii), taken together was as follows:

Taking a hypothetical example, if a bank had Rs.1,000 worth of rural advances, it would get a

deduction for provision made u/s 36(1)(viia) at 10% of advances or 7.5% of gross total income,

whichever is lower (assuming an amount of Rs.100 is allowable under that section). Further, if it

had made actual write-offs of Rs.120 (divided into Rs.60 each for urban and rural advances), then

the total amount of deduction for the bank would be Rs.100 u/s 36(1)(viia) and Rs.20 u/s 36(1)

(vii) ie the benefit u/s 36(1)(vii) was restricted to the amount of total write-offs including towards

rural and urban advances, to the extent they exceeded the benefit u/s 36(1)(viia) availed by the

bank.

However, in a judgment announced in case of Catholic Syrian Bank, the Supreme Court

adjudged that Rs.60 write-offs for urban advances will be allowed apart from the Rs.100

deduction for provision made for rural advances; and in case of Rs.60 write-offs for rural

advances, since it is lower than the provision made, it was disallowed. Thus a total of Rs.160 wasallowed on account of this judgment. Taking advantage of this provision and as well as due to

other reasons, many mid-PSU banks like Syndicate Bank, Oriental Bank of Commerce, Uco Bank

and Corporation Bank reported significantly lower effective tax rates during 9MFY2013.

Now, the finance bill introduced today has reverted back to earlier understanding of tax

authorities and clarified that only Rs.120 would be allowed as deduction for tax purpose and not

Rs.160, as adjudged by SC. The clarification is prospective in nature and would take effect from


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FY2014. So, at the very least, effective tax rates for these banks in FY2014 are likely to be

higher. Further, clarity would be needed to see if the benefit taken inFY2013 would also have to

be reversed, though at this point it appears that the clarification is only prospective.

2) Further, there was a wide expectation going into the budget, that some measures to encourage

savings into financial instruments would be introduced, but the budget disappointed on thesefronts with no announcements. From the fiscal deficit point of view, despite being a pre-election

budget, the government refrained from having any significant populist measures and the market

borrowings number came largely on the expected lines and would be a sigh of relief for the

banking sector.


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To ease access of credit for infrastructure projects, India Infrastructure Finance Company Ltd

(IIFCL), in partnership with the Asian Development Bank, has been put in place a structure for

credit enhancement and takeout f inance. All these measures are positive for infrastructure

development; however, the implementation remains the key as infrastructure companies continue

to face persistent headwinds such as slower-than-anticipated revival in industrial capex, high

interest rate environment clearances and land acquisition issues.


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Union Budget 2013-14 was broadly a non-event for the Metals and Mining sector. The

announcement to allow PPP to boost coal production is positive for Coal India as it will help it to

raise production at a faster pace. Also, faster clearances for stuck-up projects (via CCI) is

expected to expedite environmental and forest clearances for various mining projects which have

faced significant delays.


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The Budget is positive for the Oil & Gas sector. Three things have been announced for the Oil &

Gas sector, all of which are positive for the companies in the sector a) The government aims to

provide clarity on natural gas pricing which intends to align domestic natural gas prices with

international prices. b) A move to a revenue sharing model for gas projects is aimed by the

government which could potentially speed up new exploration projects. c) The government plans

to issue a policy on shale gas exploration and production. All these measures are positive for oilexplorers and producers such as RIL, ONGC, Cairn India and Oil India over the medium to long

term.

The Budget pegged the government's share of petroleum subsidy at Rs.96,880cr (in line with our

expectations) for FY2013, although overshooting its target by Rs.28,396cr. For FY2014, the

governmentRs.s share of petroleum subsidy is budgeted at Rs.65,000cr. We expect the

government to raise diesel prices by at least Rs.0.40-0.50/litre per month over the coming year in

order to avoid overshooting of its petroleum subsidy over Rs.65,000cr for FY2014.


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In other announcements, Government will provide low interest bearing funds from the National

Clean Energy Fund (NCEF) to IREDA to lend to viable renewable energy projects. The scheme

will have a life span of five years. The objective of the scheme is to provide cheaper funds to

encourage investments in renewable energy.


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Documents

Indian Union Budget 2013