Union Budget:

Transcription

1 Page 2: Key Factors Significance & Observations Strategy for Investment in Debt Mutual Fund Schemes Union Budget: BUDGET ANALYSIS AND IT S IMPACT ON EQUITY MUTUAL FUNDS AND DEBT MUTUAL FUNDS Page 3: Where the additional resource comes from? Page 4: Where the additional budgetary expenditure goes to? Page 5: Credibility of Budget Estimates. Page 6: Whether Budget can achieve Net Tax Collection Growth rate? Page 7: Can the government contain Subsidy? Page 8: Government Borrowing program & its impact on private investment Page 9: Government Borrowings & fiscal Deficit Page 10: High Level of Government Borrowings for fiscal deficit 1

2 Budget Analysis & Its Impact on Equity Mutual Funds & Debt Funds Key Factor Significance Our Observations Almost 86.5% of the Fiscal Deficit is financed by Govt Borrowings. Gross Govt Negative. borrowings are at Rs. 5, 97,000 cr and Net Govt borrowings of Rs.4, 57,321 cr. Higher Fiscal deficit and Non plan expenditure will continue to Interest Rate Budgeted Fiscal deficit of 4.1% will overshoot and will put enormous pressure on put pressure on inflation and Interest Rate. interest rate and crowd out private sector investment. Inflation Forex Higher fiscal deficit is highly inflationary. The quality of fiscal adjustment, based largely on cuts in plan expenditure, can be growth-restrictive and raises inflation. Continuous cut in plan expenditure and uncontrolled subsidies affect the supply side and productivity of the economy. Current account deficit (CAD) for is expected to be below 2.5 per cent of GDP as compared with 4.8 per cent in The recent resumption of portfolio flows, both equity and debt, alongside the pick-up in FDI and external commercial borrowings should continue to comfort CAD. Negative. Though WPI & CPI shows some moderation during last few months, higher fiscal deficit is always inflationary. Expecting sustainable level of lower inflation with such high fiscal deficit may not be realistic. Neutral. CAD is in comfort zone on account of lower trade deficit facilitated by lower gold import and higher US $ inflow in the form of portfolio flows, FDI flows and huge inflow under FCNR (B) Deposits. Any reversal of gold import restriction and declining trend of inflation and adverse impact of Fed s tapering are key risk factors for INR. Strategy for investment in Debt Mutual Funds High Fiscal Deficit, Government Borrowings and High inflation may continue to put pressure on interest rate. Unless the next government set on fiscal consolidation, reduces borrowings, reduce subsidies and bring down inflation, interest rate is going to be under tremendous pressure. We recommend defensive strategy for debt portfolio. Stubborn inflation and hardening interest rate can erode the capital and give lower return in long term income funds. We suggest building a portfolio of short term income funds only. Any existing investment in long term income funds and dynamic bond funds should be switched to Short Term Income Funds. Note: Few of the Economists do not take these interim budget estimates seriously because of the upcoming election and presentation of final budget after that. However, we have made our analysis for understanding the impact of this on the investments. 2

3 Where the additional Resource comes from? Particulars Revised Estimates in Rs. Cr Budget Estimate in Rs Cr Excess / Reduction in Rs. Cr Increase / Decrease Total Receipts % Tax Revenue % Corporation Tax % Taxes on Income % Customs Duty % Union Excise Duty % Service Tax % Non Tax Revenue % Recoveries of Loans % Other Receipts % Borrowings and other Liabilities % Of which Govt Borrowings % Remark Budget assumes unrealistic growth in revenue given the high fiscal deficit and lower economic growth. For , budgeted growth was 19.12% and actual was 12.65%. This trend is expected to repeat this year as well. For FY , budgeted growth was 16.9% and actual growth was only 9.69%. For FY , budgeted growth was 20.16% and actual growth was 17.27%. For FY , budgeted growth was 14.86% and actual growth was only 4.38%. For FY , budgeted growth was 35.75% and actual was 24.2% Dividend received from PSUs for was Rs cr against the budgeted figure of Rs cr. For , the budgeted figure is Rs cr For , budgeted disinvestment proceeds were Rs. 40,000 cr and actual was Rs. 16,027 cr. For the budgeted amount is Rs. 36,925 cr Net Govt borrowings of Rs cr is budgeted to be raised. 3

4 Where the additional budgetary expenditure goes to? Excess/ Particulars Revised Estimates Budget Estimate Reduction In % age Non plan expenditure % Interest Payments % Defence % Subsidies * % Fertilizer Subsidy Food Subsidy Oil Subsidy Other Revenue Non plan Expenditure % Capital Non plan expenditure % Plan Expenditure ** % Total % Total subsidy for FY 14 has risen to 2.3% of GDP. An amount of Rs. 65, 000 of fertilizer and oil subsidy has been rolled over for FY 14. With increasing subsidies over and above the budgeted figures and roll over from previous year, Subsidies and interest payment are becoming major drag on the economy. Plan expenditure is being cut every year to accommodate the ballooning subsidies and interest component... During , plan expenditure was cut by Rs.79, 790 crores to stick to Fiscal Deficit. This is expected to repeat this year unless we see different political formation. 4

5 Credibility of Budget Estimates ( ) under deficit!.year on Year Budget Estimates Revised Estimates ( ) Variation Tax Revenue (Net to Centre) ( ) Revenue collection is a major challenge for the Government Other Receipts Net Govt Borrowings Plan Expenditure Drastic cut in plan expenditure helps to achieve Total Subsidies An amount of Rs. 65,000 crores of oil and Fertilizer Subsidy fertilizer subsidies has been rolled over to next year. Food Subsidy Petroleum Subsidy

6 Key factors in successful implementation of the budget are: 1) Achieving a net tax collection growth of 18%. For , budgeted growth was 19.12% and actual was 12.65%. This trend is expected to repeat this year as well. The budgeted growth in tax revenue is 18%. With the expected GDP growth less than 5%, this may be unrealistic. 6

7 2) Containing Food & Oil subsidy: Food subsidy is becoming a major component of the total subsidy. With the introduction of the Food Security Bill, the actual amount may be much higher than the budgeted figures. An amount of Rs. 65,000 crores of oil and fertilizer subsidies has been rolled over to next year. 7

8 3) Very High Probability of Govt Borrowing program crowding out Private Sector investment: The budgeted net government borrowing is at Rs. 4, 57,321 cr for against the revised estimate of Rs. 4, 68,902 cr for the year Since major portion of the fiscal deficit is accounted by Government borrowings, any slippage in revenue and increase in subsidy may either lead to higher govt borrowings or cut in plan expenditure. This is going to crowd out private investment. 8

9 Govt borrowings as % age of Fiscal Deficit Almost 86.5% of the Fiscal Deficit is accounted by Govt Borrowings for the year , almost the same in %age term for the previous years. Year Net Market Borrowings in Rs. Cr Fiscal Deficit in Rs. Cr % age on Fiscal Deficit financed by Govt Borrowings ,931 1,18, ,724 1,40, ,588 1,45, ,860 1,23, ,031 1,25, ,374 1,46, ,10,446 1,42, ,31,768 1,26, ,33,630 3,36, ,98,424 4,18, ,25,414 3,73, ,36,414 5,21, ,67,384 5,20, ,68,902 5,24, ,57,321 5,28,

10 High level of Government Borrowings to fund the Fiscal Deficit 10