Disinvestment is the key next trigger; The $10bn Question Continued fall in crude oil prices below $80/bbl could be a hindrance rather than help achieving India s fiscal deficit target of 4.1% for FY15 unless the Govt. garners Rs. 600bn from disinvestment proceeds. The other option is a cut in expenditure, which has more of a negative impact on growth and tax revenues than positive. We think the importance of disinvestment proceeds have increased and our view is that investors/markets could get disappointed if the first round of share sale starting next month turns out to be a damp squib. Tax revenues have grown merely 5.1% yoy during 1HFY15 against the budget target of 16.9% for FY15. The falling crude oil prices are actually resulting in higher fiscal deficit in FY15 due to the loss of tax revenue and no material benefit on oil subsidy this year as the government has to pay ~Rs. 400bn as oil subsidy for FY14 irrespective of crude oil prices. We think the benefits of lower crude oil prices are largely in the bag; incremental benefits are negligible. Tax collections are lagging the budget estimates by a huge margin: i. Revenues from corporate taxes, which account for ~35% of the total tax revenue, rose just 5.6% during 1HFY15, far lower than annual target of 14.6%. ii. Collections on excise duty contracted by 2.2% yoy during 1HFY15 versus the budget target of 15.4% for the full year FY15. While the recent excise duty hike on petrol and diesel should lead to higher excise collections, it is unlikely to meet the budget target of 15.4% increase over FY14 due to ~24% fall in crude oil prices. iii. Collections under other heads custom duties (5.3% vs. 15.3% BE), service tax (14.2% vs. 31% BE) and personal income tax (11.9% vs. 17.8% BE) are also considerably behind budget target. If the tax revenues do not catch up and government misses its divestment target of Rs. 600bn, it would lead to 5-10% cut in plan expenditure to meet the fiscal deficit target. We present three scenario analysis of the fiscal situation in FY15: Case 1: Divestment @ Rs. 600bn If the government (i) meets its divestment target of Rs 600bn (ii) saves Rs.150bn on food subsidy due to delay in pan India rollout of Food Security Act and saves Rs 80bn on fuel subsidy, the FY15 fiscal target if 4.1% would be achieved. This, however, is the best case scenario. Case 2: Divestment @ Rs. 400bn If the government (i) divests Rs 400bn (ii) saves Rs.150bn on food subsidy and saves Rs.40bn on fuel subsidy, it will have to cut either plan expenditure by 5% or non-plan expenditure by 2.5% to meet the 4.1% target or fiscal deficit would be 4.4% of the GDP. Case 3: Divestment @ Rs. 200bn If the government (i) garners only Rs 200bn in disinvestment (ii) saves Rs.150bn on food subsidy and pays the fuel subsidy as budgeted, it will have to cut either plan expenditure by 10% or non-plan expenditure by 5% to meet the fiscal target or fiscal deficit would be 4.6% of the GDP. Date November 19, 2014 Market data BSE Sensex 28163 NSE Nifty 8426 Growth, %, yoy Expenditure Non-tax revenue 6.6 12.9 15.1 10.0 5.1 16.9 0 5 10 15 20 Apr-Sep FY15 FY15BE Performance (%) 1m 3m 12m Sensex 8% 7% 36% BSE 200 10% 9% 42% Ganeshram Jayaraman ganeshram@sparkcapital.in +91 44 4344 0031 Gautam Singh gautam@sparkcapital.in +91 22 4228 8152 Vishnu Kumar A S vishnu@sparkcapital.in +91 44 4344 0069 1
-2.2 (Growth, %, yoy) 5.6 5.3 11.9 14.6 17.8 15.3 15.4 14.2 31.0 (% of full year target) 36.8 33.1 42.6 44.6 50.9 48.0 78.6 82.6 87.0 91.2 Fiscal deficit: Need some actions to meet the target Lower crude prices actually pushing the fiscal deficit up in FY15; benefit to be seen in FY16 Fiscal deficit reaches 83% of FY15 budget target in Apr-Sep 14 s remain considerably behind the budget target 100 90 80 70 60 50 40 30 20 10 0 Net tax revenue Non-tax revenue Apr-Sep FY14 Expenditure Fiscal deficit Revenue deficit Apr-Sep FY15 Expenditure Non-tax revenue Growth, %, yoy 6.6 12.9 15.1 10.0 5.1 16.9 0 5 10 15 20 Apr-Sep FY15 FY15BE Source: Comptroller and Auditor General (CAG), Spark Capital Research Excise duties, corporate tax and custom duties behind budget target 35 30 25 20 15 10 5 0-5 -10 Income tax Corporate tax Custom duties Excise duties Service tax Source: CAG, Spark Capital Research Fiscal deficit reaches 83% of FY15 budget target in Apr-Sep 14 as net tax revenues remain considerably behind the budget target Lower crude oil prices are actually resulting in increasing the fiscal deficit in FY15 because of the loss on tax revenue front and no material benefit on oil subsidy front. This is because government has to pay ~Rs. 400bn as oil subsidy for FY14 alone irrespective of the crude levels. FY15BE Source: CAG, Spark Capital Research Apr-Sep FY15 Indirect taxes excise duties, corporate tax and custom duties are considerably behind budget target 2
Fiscal deficit in FY15: Expenditure cut looming if govt. misses divestment target Possibility of 5-10% cut in plan expenditure to meet the fiscal target Absolute, Rs bn Growth, % yoy FY15E FY15 BE FY15E FY15BE Case 1 Assump. Case 2 Assump. Case 3 Assump. Case 1 Case 2 Case 3 Revenue receipts (i) 11,898 11,698 11,614 11,531 15.6 13.7 12.8 12.0 9,773 9,572 9,489 9,405 16.9 14.5 13.5 12.5 grows at 14.5% grows at 13.5% grows at 12.5% Non-tax revenue 2,125 2,125 vs. 16.9% BE 2,125 2,125 10.0 10.0 10.0 10.0 Non debt capital receipts (ii) 740 705 505 305 101.8 92.5 37.9-16.7 Disinvestment of PSUs 634 600 400 200 145.4 132.2 54.8-22.6 Miss divestment Miss divestment Largely meet Recovery of loans 105 105 105 target by Rs. 105 target by Rs. -2.6-2.6-2.6-2.6 divestment target 230bn 430bn Non plan expenditure 12,199 11,969 12,009 12,049 9.4 7.4 7.7 8.1 Expenditure on subsidies (a +b+c) = A 2,514 2,284 2,324 2,364 2.4-6.9-5.3-3.7 Food (a) 1,150 1,000 Saves Rs.150bn 1,000 Saves Rs.150bn 1,000 Saves Rs.150bn 25.0 8.7 8.7 8.7 Fertilizer (b) 730 730 on food subsidy 730 on food subsidy 730 on food subsidy 7.4 7.4 7.4 7.4 Oil 634 554 Saves Rs.80bn 594 Saves Rs.40bn 634-25.8-35.2-30.5-25.8 Pays as budgeted Other non plan expenditure 9,685 9,685 on fuel subsidy 9,685 on fuel subsidy 9,685 11.4 11.4 11.4 11.4 Plan expenditure (B) 5,750 5,750 5,750 5,750 20.9 20.9 20.9 20.9 Total expenditure (iii) = A + B 17,949 17,719 17,759 17,799 12.9 11.4 11.7 11.9 Cut either plan Fiscal deficit (iii-ii-i) 5,312 5,316 Cut either plan Meets fiscal 5,639 5,963 exp. (~10%) or 1.3 1.3 7.5 13.7 exp. (~5%) or nonplan exp. (~2.5%) 4.6 deficit target non-plan exp. Fiscal deficit (% of GDP) 4.1 4.1 4.4 (~5%) Net market borrowings 4,612 4,600 4,896 5,160 1.6 1.3 7.9 13.7 Source: India Budget, Spark Capital Research Case 1: Meets fiscal deficit target Meets its divestment target of Rs 634bn Saves Rs. 150bn on food subsidy Saves Rs.80bn on fuel subsidy Case 2: Need to cut expenditure Divestment @ Rs 400bn, saves Rs.150bn on food subsidy and saves Rs.40bn on fuel subsidy Cut either plan exp. (~5%) or non-plan exp. (~2.5%) to meet the 4.1% target Case 3: Need to cut expenditure Divestment @ Rs 200bn, saves Rs.150bn on food subsidy Cut either plan exp. (~10%) or non-plan exp. (~5%) to meet the 4.1% target 3
Disinvestment candidates in FY15 Govt. could raise Rs. 438bn through disinvestment and Rs. 50bn through SUUTI sale in FY15 Revenue from selling shares in state-owned companies is critical to the government s plans to keep the fiscal deficit at 4.1% of GDP in FY15. Companies for which divestment has already been approved Likely amount to be raised (Rs. bn) Stake dilution ONGC 180 5% Coal India 230 10% The Cabinet Committee on Economic Affairs has approved selling 10% of government's stake in Coal India, 5% in ONGC and 11.38% in NHPC, which can garner Rs. 438bn in FY15 NHPC 28 11.4% SAIL 160 5% Specified Undertaking of The Unit Trust of India (SUUTI) Govt. stake Axis Bank 11.72% ITC 11.27% L&T 8.18% Government holds11.72% in Axis Bank; 11.27% in ITC and 8.18% in Larsen & Toubro. Government plans to raise ~Rs 50bn in FY15 by selling stakes in Axis Bank, ITC and L&T though ETF. Source: GoI, Spark Capital Research 4
Fiscal arithmetic: Scenario analysis in FY16 Fiscal deficit to narrow to 3.8% of GDP on lower subsidies and higher tax revenues Absolute, Rs bn FY16E Growth, % yoy FY16E FY15BE Case 1 Case 2 Case 3 Case 1 Case 2 Case 3 Revenue receipts (i) 11,898 13,886 13,984 14,082 16.7 17.5 18.4 9,773 11,336 11,434 11,532 16.0 17.0 18.0 Non-tax revenue 2,125 2,550 2,550 2,550 20.0 20.0 20.0 Non debt capital receipts (ii) 740 326 526 726-55.9-28.8-1.8 Assumed higher tax revenue at higher crude level Disinvestment of PSUs 634 200 400 600-68.5-36.9-5.4 Recovery of loans 105 126 126 126 20.0 20.0 20.0 Non plan expenditure 12,199 13,709 13,747 13,784 12.4 12.7 13.0 Expenditure on subsidies (a +b+c) = A 2,514 2,281 2,319 2,356-9.3-7.7-6.3 Food (a) 1,150 1,265 1,265 1,265 10.0 10.0 10.0 Fertilizer (b) 730 766 766 766 5.0 5.0 5.0 Oil 634 250 288 325-60.6-54.6-48.8 Other non plan expenditure 9,685 11,428 11,428 11,428 18.0 18.0 18.0 Plan expenditure (B) 5,750 6,621 6,621 6,621 15.1 15.1 15.1 Higher crude prices would lead to Higher oil subsidy Total expenditure (iii) = A + B 17,949 20,330 20,368 20,405 13.3 13.5 13.7 Fiscal deficit (iii-ii-i) 5,312 6,118 5,858 5,597 15.2 10.3 5.4 Fiscal deficit (% of GDP) 4.1 4.2 4.0 3.8 Net market borrowings 4,612 5,312 5,069 4,860 15.2 9.9 5.4 Source: India Budget, Spark Capital Research Base Case GFD @ 4.0% Bear case GFD @ 4.2% Bull case GFD @ 3.8% 5
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