STCI Primary Dealer Ltd

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Bertina Davidson
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1 Macroeconomic Update : Revision in GDP estimates India s GDP growth rate for FY13 has been revised downwards from 5.0% to 4.5%. All the sectors incorporating agriculture & allied activities, industry and services witnessed downward revision. This can be partly attributed to the upward revision in growth numbers of FY12 that has led to unfavorable base for FY13. Further, growth numbers for FY11 reflects third revised estimates. Revisions for FY11 and FY12 incorporate the ASI data which is released with a lag of 2 year, latest data on agricultural production and actual analysis of government budgets and other public sector enterprises. The continued divergence between ASI data and IIP numbers has led to sharp revision in industry GDP data. Such wide revision among all the sectors is a cause of concern because it questions the reliability of data released. Revised estimates Previous estimates FY11 FY12 FY13 FY11 FY12 FY13 Agriculture GDP 8.6% 5.0% 1.4% 7.9% 3.6% 1.9% Mining & quarrying 6.5% 0.1% -2.2% 4.9% -0.6% -0.4% Manufacturing 8.9% 7.4% 1.1% 9.7% 2.7% 1.0% Electricity, gas & water supply 5.3% 8.4% 2.3% 5.2% 6.5% 4.2% Construction 5.7% 10.8% 1.1% 10.2% 5.6% 4.4% Industry GDP 7.6% 7.8% 1.0% 9.2% 3.5% 2.1% Trade,hotels,transport and communication 12.2% 4.3% 5.1% 12.3% 7.0% 6.4% Financing, insurance,real estate and business 10.0% 11.3% 10.9% 10.1% 11.7% 8.6% services Community, social & personal services 4.2% 4.9% 5.3% 4.3% 6.0% 6.6% Services GDP 10.5% 5.8% 6.4% 9.8% 8.2% 7.1% GDP at FC 8.9% 6.7% 4.5% 9.3% 6.2% 5.0% Bansi Madhavani bansi@stcipd.com Priyanka Sachdeva priyanka@stcipd.com Gross domestic savings rate for FY13 constitutes 30.1% of GDP at market prices as compared to 31.3% in FY12. With GDP growth rate at low of 4.5%, savings rate of both private corporate sector and household sector mainly in physical assets declined. Gross fixed capital formation also declined as proportion of GDP and stood at 34.8% of GDP in FY13 as compared to 35.5% seen in the previous year. Thus, both savings rate and investment rate has declined amidst weak growth scenario. This gap is likely to be lower for FY14 since household savings in physical assets has decline sharply for this year with various restrictions on gold imports. However, there is a need to channelize more of the savings in financial sector so as to provide sustainable boost to growth. The rate of increase in per capita income (real terms) is lower at 2.1% for FY13 as compared to 5.1% in FY12. This decline in real per capita income is largely due to lower increase in nominal income at 9.7% since the inflation rate for FY13 was lower compared to previous year. This downward revision of growth rate for FY13 will provide favorable base for numbers of FY14. On the basis of this revised data, we expect growth rate of GDP for FY14 to be somewhere close to 5.0% as compared to our previous estimate of sub-5.0% 1

2 Fiscal Update : December 2013 Headline Fiscal Deficit stands at over 95% of full year s Budget Estimate Revenue Deficit narrowed from last month; at 97.7% of BE. While December 12 saw the fiscal consolidation begin for FY13, this year s accounts are yet to show signs of signs of strengthening government accounts. Government's Fiscal Position Update (Amount in Rs. Cr) FY 2014 (BE) Apr-Dec FY 2014 % of BE I. Total Receipts (A+B ) 11,22,799 6,47, % (A) Revenue Receipts 10,56,331 6,33, % i) Tax Revenue (Net) 8,84,078 5,17, % ii) Non-tax Revenue 1,72,252 1,16, % (B) Non Debt Capital Receipts 66,468 13, % II. Total Expenditure (A+B) 16,65,297 11,63, % (A) Non plan Expenditure 11,09,975 8,12, % (B) Plan Expenditure 5,55,322 3,51, % Fiscal Deficit 5,42,498 5,16, % Revenue Deficit 3,79,837 3,71, % Primary Deficit 1,71,814 2,67, % Source: CGA, PD Research I. Receipts Side Total receipts collection stood at 57.7% of full year s BE, exhibiting a slower pace than previous year s collection of 60%. Both Revenue receipts and Non-debt capital receipts are growing at a slower pace. The below potential growth has been the major reason for the revenue collection lagging, while unfavourable market conditions and some legislative hurdles have capped the realization under non-debt capital receipts. Net tax revenue collection for the nine month period stood at 58.6% of the BE. While the monthly December collection clocked Rs 1,46,660 Cr on account of advance tax, it represents a mere 7% growth over the previous year s collection. Notable strain ensued on account of negative annual growth in collection of union excise duties and negligible growth under customs duties and corporation tax. Growth under income tax and services tax has stayed robust, though the absolute collection number has failed to buoy the overall net tax collection. Slowing growth, higher inflationary expectations have capped the corporates power to add strength to their bottom lines. This has translated into weak collections under most tax heads, as against the budget provisions. Non-tax revenue has notably stayed at healthy level, led by collections on account of dividend and profits. The center has already realized 80% of its BE of Rs 73,866 Cr estimate of Dividends and Profits. This number is expected to witness over-performance largely owing to the fact that collections under disinvestment are expected to be re-channelised to collections under dividends and profits. Proceeds of dividend from Coal India Ltd, (expected to earn ~Rs 16,000-Rs 19,000 Cr for the central government), would get reflected in data up to Jan 14. Under the head Economic 2

3 Services, collection from the telecom spectrum auction has been budgeted at Rs 40,000 Cr. With the auction for 900 MHz and 1800 MHz spectrum kick-starting today, successful bidding is expected to earn the exchequer an upfront payment in the range of Rs 11,000- Rs 14,000 Cr. Non-debt capital receipts, under which disinvestment is budgeted at Rs 40,000 Cr, has stayed under considerable strain. Disinvestments have earned a meager Rs 5,430 Cr (14% of BE). The remaining three months would be a challenging proposition if the central government aims to finish the year closer to BE. II. Expenditure Side Total expenditure has stayed at elevated level of ~70% of BE, higher than previous year s 66.5%. The Finance Ministry has indicated that the Plan expenditure incurred for the year could be lower largely because several ministries have been allocated higher amounts than they can expend. While not terming it as expenditure cut, the Finance Minister has asserted that savings to the tune of Rs 1,00,000 Cr to Rs 1,10,000 Cr on the Plan expenditure front is likely to occur owing to this. Total expenditure under Plan category has crossed 63% of BE. That translates into spending room of only ~Rs 1,00,000 Cr for three months if the center has to adhere to spending limits. Non plan expenditure continued being the source of concern for the fiscal deficit target. With the total expenditure under this head over 73% in nine months, overshooting the BE appears to be a likely possibility. The upside risks emanate from the worries that there might have been marked under-budgeting of subsidies, while the sticky components like defence expenditure may be difficult to curb. The center has the disposition to roll-over some component of the expenditure to next year in order to adhere to its redline on fiscal deficit target. It would fall on the subsequent government to burden this ballooning expenditure. This, therefore, has raised concerns over the quality of consolidation. III. Conclusion While the deterioration on the fiscal front seems to have been capped firmly, on monthly basis, meaningful consolidation is yet to manifest. In the previous year, fiscal deficit was brought down from 80.4% in Nov 12 to 78.8% in Dec 12. It has become increasingly challenging for a similar trend to emerge in FY14. For this year, tax mop-up is estimated to have a shortfall of ~ Rs 80,000 Cr, while the total of non-tax revenue and non-debt capital receipts should hover close to BE. On the expenditure front, a combination of limiting Plan expenditure and rolling over components of Nonplan expenditure would absolutely crucial to avoid any slippage from the fiscal deficit target of 4.8% of GDP. Another concern stems from the estimation of nominal GDP growth. The budget estimated the nominal GDP growth at 13.4% for FY14. This was based on a real GDP growth of 6%. However, given the weak dynamics of growth, average growth has stayed below 5%. As a result, even if the government manages to adhere to absolute target of fiscal deficit at Rs 5,42,498 Cr, 4.8% fiscal deficit as proportion of GDP would decisively test the government s ability to rein in their finances. 3

4 Eight Core Industries- December 2013 The eight core industries logged in an annual growth of 2.1% for Dec 13, as against 1.7% in the previous month and 7.5% a year earlier. This implies a strong monthly pickup of 7.8% for the month, strongest since Mar 13. The eight industries form 37.9% of Index of Industrial Production, a proxy for nation s manufacturing activities. Over the last year, this indicator has failed to show any signs of revival in the country s manufacturing sector, with the growth average only 2.5% for Apr-Dec 13 period. A summary of performance of the core industries is as under: Annual Growth Rates (%) For For the period Dec-13 April-Dec FY14 Overall Growth rate Coal Crude Oil Natural Gas Petroleum Refinery Products Fertilizers Steel Cement Electricity Source: Office of Economic Adviser, PD Research Out of eight industries, three industries- Coal, Natural gas and Petroleum refinery products witnessed contraction. Amongst these sectors, Natural Gas continued as its 37 th month of negative growth. Amongst the sectors in green, while Electricity logged a healthy growth of 6.7% annually, the monthly pace of Coal production zoomed to this year s high of 13%. Steel and Cement, too, have shown signs of recovery; though a trend is father down the horizon. Overall for FY14 trend in industrial growth is likely to stay muted at best, since revival of business cycle would occur only after clarity emerges about election outcome and overall industrial policy. 4

5 . A/B1-801, A Wing, 8th floor, Marathon Innova, Marathon Next Gen Compound, Off. Ganpatrao Kadam Marg, Lower Parel (w), Mumbai Dealing Room: (022) Settlements: (022) , Fax (022) Delhi Office: (011) Bangalore Office: (080) Please mail your feedback to stcipd@stcipd.com Website: THIS COMMUNICATION IS FOR PRIVATE CIRCULATION ONLY. IT IS BASED UPON THE INFORMATION GENERALLY AVAILABLE TO PUBLIC AND CONSIDERED RELIABLE. THIS REPORT DOES NOT CONSTITUTE AN INVITATION OR OFFER TO SUBSCRIBE FOR OR PURCHASE OR SALE OF ANY SECURITY AND NEITHER THIS DOCUMENT NOR ANYTHING CONTAINED HEREIN SHALL FORM THE BASIS OF ANY CONTRACT OR COMMITMENT WHATSOEVER WITH PRIMARY DEALER 5

STCI Primary Dealer Ltd

STCI Primary Dealer Ltd Macroeconomic Update: GDP Q3 FY14, Fiscal Balance & Core Sector Highlights: GDP for Q3 FY14 came in at 4.7% compared to downwardly revised 4.4% in Q3 FY13. Agriculture GDP grew less than anticipated at