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Union Budget FY2014: Expected to be more ‘responsible’ than ‘populist’
Union Budget FY2014 needs to be balanced
carefully to achieve fiscal consolidation and
yet support aggregate demand in a slowing
Indian economy
In the current fiscal till date, revenue growth has been weaker than budgeted along with a
shortfall in non-tax revenue collections
There has been progress on disinvestment and the
budgeted INR 300 bn target is likely to be
achieved
Expenditure growth FYTD has been lower
than budgeted given the cutbacks in plan
expenditure to achieve the fiscal deficit
commitment
The Finance Minister is likely to budget FY2014 fiscal deficit at 4.8% of GDP, though we expect
some slippage and project it at 5.2% of GDP
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 intent to consolidate on the fiscal front so as to ensure that the country’s investment grade rating is not called into question. However, achieving the fiscal mandate requires considerable amount of expenditure rationalization, which will also entail steadfast commitment to recently introduced policy measures especially on the fuel pricing front. The budget also has to take into cognizance the fact that our position in the business 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: Revenue: If we look at our current fiscal parameters for April-December 2012 tax revenue growth is around 15% YoY as compared to the 22% YoY, which was budgeted last year. Even on the non-tax revenue front, the collection has not been in line with budgeted projections. There has been a major shortfall on spectrum auctions to the tune of almost INR 300 bn and it is unlikely that the deficit will be made up this year. 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 avenue look more encouraging and we expect the target to be broadly met. The Finance Ministry is also likely to boost revenues through increased PSU dividends and possibly through use of SUUTI stake sales in rest of FY2013. Expenditure: 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. However, we must note that within total expenditure, plan spending has grown by 7% YoY FYTD as against 26% YoY target for the year. If we take out interest payments and subsidies from the overall spending, then the residual has shown negative growth of 4.3% YoY FYTD. In contrast, non-plan expenditure has grown by 12% YoY FYTD as against 10% YoY budgeted. This is to be expected as non-plan spending includes subsidies, 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: Our evaluation of next year’s fiscal deficit projection is ~5.2% of GDP, though we believe that the Finance Minister will announce fiscal deficit of 4.8% of GDP in the Union Budget, as per the fiscal consolidation roadmap. We believe that the only fiscal space that the Government can create is on the subsidy front, where attempts have already been made by partially deregulating diesel prices.
In Focus Treasury Research Group
For private circulation only
February 11, 2013 Kamalika Das
Kanika PasrichaSurbhi Ogra
2
In Focus
The subsidy bill is likely to be budgeted at 1.8%
of GDP, same as last year
Calibrated diesel price hikes coupled with
increase in subsidized LPG cylinder cap would
lead to net saving of INR 220 bn on fuel subsidy
bill assuming current level of crude prices
Finance Minister is likely to budget fuel subsidy at
INR 500 bn for FY2014 and continue with trend
of under budgeting on fuel front
Fertiliser subsidy bill is likely to be reduced by ~INR 100 bn on recent
price rationalization measures
Reduction in fuel and fertilizer subsidy bills to
create space for introduction of populist
measures like Food Security Bill
Expenditure estimates: Non-plan expenditure (subsidies): On subsidies, we believe that the Government will try its utmost to keep the total subsidy bill at or lower than the 2% of GDP levels continuing with FY2013’s trend. This of course does not consider the final quantum of the subsidy bill incorporating slippages, which may result in the figure being much above 2% of 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: Fuel subsidy: 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 retail consumers. The price for bulk consumers has been linked to the market. If we assume that the OMCs will be allowed to reset their prices every month by half a Rupee then the saving on the retail front for total under recoveries will be to the tune of around INR 340 bn annually, assuming current level of international crude prices. Along with this the annual saving for bulk purchases is around INR 130 bn. 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 annually. Since this measure has been undertaken only in January, it is unlikely to have a substantial impact on this year’s fiscal. However, it will provide some respite for next year’s subsidy calculations. Our estimates suggest that the Government is unlikely to deviate sharply from what it had budgeted for fuel in FY2013. Taking into consideration the fact that it 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: In view of the fact that the Government has now undertaken some comprehensive steps to rationalize fertilizer pricing especially for urea, we believe 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. Food subsidy: This component is a very substantial portion of the total subsidy bill as it includes subsidies provided for the Public Distribution System and dues paid to FCI for storage related expenditure. Given that FY2014 has around 10 state elections and this is the last major budget before general elections in 2014, the Government may be inclined to push through some of the provisions of the Food Security Bill.
3
In Focus
We expect the Finance Minister to budget the
food subsidy bill at ~INR 1 trn
Plan expenditure
cutbacks are likely to continue in the next
fiscal, though it is not favourable from growth
perspective
Centrally sponsored schemes are likely to be
reduced from 147 currently to 59, as per a panel recommendation
In order to boost revenues, the Finance
Minister is likely to impose higher taxes on
the rich, levy inheritance tax, raise indirect tax
rates or at least trim the exemption list.
Given the delay in implementation of GST, the Central Sales tax is
likely to be reduced further to 1%
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 subsidies. There is also a case for revising the Central Issue Price in line with the Minimum Support Price for food grains, which will help to reduce subsidy pay out to the 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:
We believe that the cutbacks in plan expenditure are expected to continue in the next fiscal, amidst relatively weak tax revenue growth in order to achieve the 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.
We also note here that the Government had set up a panel to evaluate the status of Centrally Sponsored Schemes, which recommended that the focus of expenditure should be more on the nine flagship programs and the others could 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. Revenue estimates: In light of the fact that tax revenue growth has slipped to around 15% YoY currently as against 22% YoY budgeted, there is a strong need to boost the tax revenue base in the country. Anecdotal evidence suggests that a mere 3.2 crores of people pay personal income tax in the country. Of this number, only a few lakhs comprise the upper income bracket. There is a possibility that the Finance Ministry may impose higher taxes on the rich section of income classification and also additionally levy an inheritance tax. 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. In a more radical approach, the Finance Ministry earlier this fiscal, has proposed an extensive framework for tapping the unaccounted money in the economy. There is a possibility that more stringent tax compliance and accountability rules 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
4
In Focus
Government needs to provide state-level
compensation before implementation of GST,
a comprehensive measure to boost
revenue growth
Disinvestment target is likely to be again set at INR 300 bn for FY2014 and spectrum auction
collection target is also expected to be set near FY2013 budgeted levels
benefits as well. However, as the situation stands now, it is unlikely that the framework will be introduced this fiscal although the Finance Minister has committed to table it in Parliament later this year. In the process of rationalizing tax rates in the run up to GST, Central Sales tax rates have been reduced for some time now. The current rate of 2% may be brought down further to around 1%, which will help reduce input costs for businesses, however it also brings up the issue of revenue foregone by State 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 more people under the taxable category. Non-tax revenues: Given the fact that India’s dependence on non tax revenue sources has increased over the past few years, we think it is likely that the disinvestment target will be 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:
FY2013 (BE)
ICICI Bank estimates
ICICI Bankestimate FY2014
Growth rate (%
YoY)
9357 8604 9908 15.2Tax Revenue (net to centre)
7711 7258 8347 15.0Non-Tax Revenue 1646 1346 1561 16.0
417 417 420 0.8Recoveries of Loans 117 117 120 3.0Other 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
-5.1 -5.6 -5.2
(in ` bn)
Fiscal Deficit (% of GDP)
Total Receipts
Plan Expenditure
GDP FY2013 assumed to be ~INR 100 tn and nominal growth forFY2014 is estimated to be 14%
Revenue Receipts
Capital Receipts
Total Expenditure
Budget calculation FY2014
Non-Plan Expenditure
5
In Focus
Given the fragile state of Indian growth trajectory,
the Budget is expected to introduce measures to
boost infrastructure investments, boost
domestic savings and reduce the record high current account deficit
Tax incentives for infrastructure sector
coupled with expansion of export-promotion
measures is expected
Broadening of RGESS, reduction in lock-in
period for savings deposits and initiatives
towards monetisation of gold are expected in
order to promote domestic savings
Market expectations from FY2014 budget: Expectations on the industrial front: As we embark on the 12th Five Year Plan, of the three-pronged approach that has been suggested as the strategy for this plan period, infrastructure is one of the most pressing need. Even at a broader level, the country needs to focus on building capacity, which will help boost our manufacturing sector and also enhance our exports. Of particular concern is the fact that our current account deficit has now reached unsustainable levels and our export item composition needs to be upgraded from primary to secondary sectors. 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 infrastructure.
o To ensure a wider reach, the Government might allow banks to float tax-free bonds.
• Continuation of tax benefit (till the end of the 12th Five Year Plan) for power sector under section 80IA sunset clause, which entitles a company for tax benefits only if it starts generating power by the end of current 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 some extent.
Measures to boost domestic investible surplus in the economy: Recent data shows that India’s gross domestic savings rate has dropped to 30.8% of GDP in FY2012 and is likely to decline even further. The saving investment gap is also widening, which does not bode well for our current account deficit. Another worrying trend is that financial savings of household is at a two decade low. Hence we believe that some measures may be announced to boost household 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 schemes etc.
6
In Focus
Annexure
FYTD fiscal accounts
9357 4458 5705Tax Revenue (net to centre)
7711 3696 4842Non-Tax Revenue 1646 762 864
417 89 159Recoveries of Loans 117 67 77Other Receipts
300 22 829773 4547 58649699 6243 69525210 2434 2959
14909 8677 99115136 4129 4047
24 13 14Tax Revenue (net to centre)
22 15 15Non-Tax Revenue 32 5 11
28 -39 -6Recoveries of Loans -31 -43 -45Other Receipts
92 -19 19324 12 1410 16 1226 10 715 14 11
FYTD 2013 fiscal accounts
April - December
Capital Receipts
Total Receipts
(in INR bn) FY2013 (BE)
Revenue Receipts
Plan ExpenditureTotal ExpenditureFiscal Deficit
April - November
Non-Plan Expenditure
FYTD 2013 fiscal accounts (% YoY)
(in INR bn)
Revenue Receipts
April - December
Total Expenditure
FY2013 (BE) April - November
Capital Receipts
Total ReceiptsNon-Plan ExpenditurePlan Expenditure
Source: CGA, ICICI Bank Research
7
In Focus
Receipts lag the rise in spending, with subsidies bill on a rising trend
Source: RBI, ICICI Bank Research
Interest payments remain huge while tax revenues fail to pick up
Source: RBI, ICICI Bank Research
Government needs to improve its fiscal mix to support consolidation
Source: RBI, ICICI Bank Research
Variable Coefficient ProbabilityTax revenues as % of total -0.21 0.005Revenue expenditure as % of total 0.12 0.001Capital expenditure as % of total 0.08 0.034
0
2000
4000
6000
8000
1970
-71
1973
-74
1976
-77
1979
-80
1982
-83
1985
-86
1988
-89
1991
-92
1994
-95
1997
-98
2000
-01
2003
-04
2006
-07
2009
-10
2012
-13
-100
400
900
1400
1900
2400
Capital receiptsDifference of total expenditure and tax revenuesSubsidies(RHS)
(INR bn) (INR bn)
0
20
40
60
80
100
120
140
160
1980
-81
1982
-83
1984
-85
1986
-87
1988
-89
1990
-91
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-93
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-95
1996
-97
1998
-99
2000
-01
2002
-03
2004
-05
2006
-07
2008
-09
2010
-11
2012
-13
4
5
6
7
8
9
10
Interest payments as % of fiscal deficit Tax revenues as % of GDP (%) (%)
8
In Focus
Economic growth slowdown affecting outlook for debt sustainability
Source: RBI, ICICI Bank Research
Fiscal consolidation targets seem difficult to achieve, unless revenue growth provided a boost
Source: RBI, ICICI Bank Research
0
1
2
3
4
5
6
2000
-01
2001
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2002
-03
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-04
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-05
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-08
2008
-09
2009
-10
2010
-11
2011
-12
2012
-13
2013
-14
2014
-15
Actuals ICICI Bank estimate Government projection(%)Revenue deficit as % of GDP
-12.0
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
1981
-82
1983
-84
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-86
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-88
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-90
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-92
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-94
1995
-96
1997
-98
1999
-00
2001
-02
2003
-04
2005
-06
2007
-08
2009
-10
2011
-12
Difference between nominal interest rate and GDP growth rate(ppt)
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