The Budget Reality Show From 2013-14 EDITOR: ARJUN PARTHASARATHY 1
Table of Content Budget 2013-14 Reality Show Part 1 Forecasts 4-5 Part 2 Non Plan Expenditure 6-8 Part 3 Revenue 9-11 Part 4 Cheat Sheet for Budget Presentation 12-14 Part 5 Weak investment demand will mark fiscal 2013-14 15-17 Part 6 Economic Survey 2012-13 in Pictures 18-24 Part 7 Post Budget Analysis 25-27 2
Part 8 Performance Monitor Tables 28-30 3
Part 1- Forecasts Government will always be optimistic The Union Budget for 2013-14 is to be tabled in the Parliament on the 28 th of February 2013. This budget will be the last full budget of the UPA government before elections in 2014. The Finance Minister (FM) Mr. P. Chidambaram will present the budget on the 28 th of February. Budget presentations are like a reality show on TV. The lead up to the event has a huge amount of noise as everyone from media to experts try and cash in on the fuss made on the event. The budget day itself is like a Reality show final, with the participants doing their utmost to win votes of the Judges. The participants in the budget are the government who is represented by the FM, government s allies in the parliament and the opposition. The speaker is moderator of the event. The public are the viewers of the show. The judges of the budget event are the media, market experts, economists, professors, students and the housewife who gets to have her say on TV. Once the event is over and the marks are awarded it is back to business the next day. The budget is a necessary exercise to show the intentions of the government. One should not expect the budget maths to come out right, it never does. The FM cannot help the economy through one budget, especially a budget just before elections next year. The FM can only guide the judges on what to expect from the government in the coming fiscal year. Budget numbers are consistently off target both on the higher side and on the lower side. Last year s budget was off the mark by a wide margin on GDP growth for 2012-13. The budget estimate for GDP growth was 7.6% and the actual number is expected at around 5.5%. The estimate for CAD (Current Account 4
Deficit) was 3.6% of GDP and the actual CAD is expected at around 4.6% of GDP. The estimate for Fiscal Deficit was 5.1% of GDP and the actual figure is expected at 5.3% of GDP. The government surprisingly got the inflation number right at 6.5% and inflation is expected at around 6.5% for March 2013. The government is like a listed corporate looking to increase shareholder value. A corporate when it throws out bad numbers will say the future looks bright and when it throws out good numbers will say the future looks brighter. It is up to the analysts and investors to forecast the future of the corporate. The same is the case with the government. The government will say growth is a priority, inflation management is a priority, deficits are a priority, FII s are a priority, industry and agriculture are a priority and voters are a priority. Ultimately the government is interested in the voter and it will do whatever it believes is right to get the voter to vote for the government in the elections. The government will be optimistic on its forecasts for 2013-14 and it is left to the judges to analyse whether the forecasts will be better than budgeted or worse than budgeted. The government will show higher GDP growth, lower fiscal deficit, lower CAD and lower inflation in its forecasts for the coming fiscal. The question the judges have to ask is whether the numbers are achievable or not. The viewers of the reality show are interested on whether their investments will do well, whether they have to pay more or less taxes, whether their children can get jobs after college and whether prices will rise at a slower rate than it did last year. The judges will have to give the right answers to the viewers leaving out any bias and this is what we will attempt to do in the Budget Reality Show series of analysis. 5
Part 2- Non Plan Expenditure www.inrbonds.com Growth in Non-Plan Expenditure Estimated at just 4% for fiscal 2013-14 The Non-Plan expenditure of the government constitutes 65% of total government expenditure that was budgeted for fiscal 2012-13. Non-Plan expenditure was estimated at Rs 969,000 crores while total expenditure including plan expenditure was Rs 1,490,000 crores. The government has overshot its non-plan expenditure for 2012-13 by Rs 93,000 crores due to rise in its subsidy bill. Non-Plan expenditure has overshot budget estimates by 10% assuming that all other headings of non plan expenditure are on target. Non-Plan expenditure of the government of India is dominated by a) Interest payments and debt servicing b) Defence and c) Subsidies. Table 1 gives the fiscal 2012-13 budget estimates and the overshoots for these three headings, which account for 71.5% of Non-Plan expenditure. Table: 1. Non-Plan expenditure for fiscal 2012-13 and overshoots 6
The subsidy bill for 2012-13 has increased by 52% and this trend cannot be allowed to continue into fiscal 2013-14 as rising Non-Plan expenditure impacts government spending on infrastructure and capacity creating in the economy. Interest expenses will continue to rise year on year as the government borrows from the markets every year to fund its fiscal deficit. Market borrowings fund over 90% of the government s fiscal deficit and the government borrowed Rs 479,000 crores in 2012-13 for funding the deficit. The government will have to pay interest on the Rs 479,000 crores of bonds issued in the coming fiscal leading to higher interest costs. Assuming that the average cost of borrowing was around 8.2%, interest outgo for 2013-14 will increase by around Rs 40,000 crores. Defence and services spending is sticky, as the government cannot compromise on national security. The government is unlikely to reduce its defence spending though it may manage to keep it from rising much higher. It is now back to subsidies. The fertilizer and petroleum subsidy bill is largely dependent on the movement of global oil prices and oil prices rose by around 20% in 2012-13. The government has allowed oil marketing companies to set petrol prices in tune to the rise in oil prices globally. Diesel prices have also been decontrolled though in a phased manner. Oil price outlook in the global markets is soft on the back of rising oil production in the US that saw the country s trade deficit fall by 21% in January 2013 on the back of lower oil imports. Petrol and diesel price decontrol coupled with stable to soft global oil prices will help the government reduce its oil subsidy bill. The fertilizer subsidy is expected to come down by 15% in 2013-14 on the back of falling fertilizer prices globally. Fertilizer prices have come off by 15% as of January 2013 on a year on year basis. Food subsidy is likely to increase by 20% as the government passes a food security bill in the parliament in February 2013. 7
Estimate for 2013-14 Non-Plan expenditure www.inrbonds.com The estimate for total Non Plan expenditure is based on lower fuel and fertilizer subsidy, higher interest costs and food subsidy and a general rise in other expenses on the back of an inflation rate of 7% (Inflation as measured by the WPI is expected at 6.5% for March 2013 and is expected to go up to around 7% levels on the back of higher fuel prices). Table 2 gives the estimate for Non-Plan expenditure for 2013-14. Table: 2. Non-Plan Expenditure Estimates Non-Plan expenditure is expected to grow by 4% in 2013-14 against a growth rate of 19% seen in 2012-13. 8
Part 3- Revenue No room for tax hikes ties government s hands on the revenue front The government is likely to close 2012-13 with a revenue shortfall on the back of slowdown in GDP growth and on the back of lower collections in spectrum auction. The shortfall in revenue is likely to be in the range of 8% to 10% of budget estimates. The question is where will the government raise revenues for fiscal 2013-14 given that it is likely to show a muted GDP growth estimate for the coming fiscal? The scope for higher revenues is limited for the government this year. Taxes cannot be raised at a time when the economy is slowing down while it cannot be broadened as elections are due in 2014. The fact that the government is committed to lower fiscal deficit by reducing expenditure will also limit its scope for raising taxes. The indirect tax reform in the form of GST (Goods and Sales Tax) has been pushed to fiscal 2014-15. The government has projected lower spectrum auction inflows for fiscal 2013-14 at Rs 25,000 crores. Disinvestment targets could be placed higher at around Rs 40,000 crores as capital markets look more stable in 2013 than what it was at the time of presenting the budget in 2012. However an increase of Rs 10,000 crores in capital receipts is not going to shore up overall government revenues for the fiscal. The government given its lack of visibility on revenue growth is focusing on the expenditure side to bring down fiscal deficit. However lower government spending will impact growth negatively and that could further impact revenues. 9
The FM will be thinking deeply on this factor as he presents the budget on the 28th of February 2013. Revenue growth will be impacted in 2013-14 Revenue growth will be difficult to achieve in fiscal 2013-14. The government will show a modest GDP growth rate of around 6.5% for the coming fiscal as against budget 2012-13 growth forecast of 7.6%. The BE (Budget Estimates) for revenues in 2012-13 was on a 7.6% growth estimate. Table 1 gives the BE for revenue receipts for 2012-13. Table: 1. Budget Estimates for 2012-13 10
The economy has not grown as per budgeted and the government has revised its growth forecast to 5.5%. Tax collections are impacted due to GDP growth slowdown as India s Tax to GDP ratio is sticky at around 10% levels and any slowdown in GDP growth has a negative repercussion on tax revenues. Tax revenues account for 82% of total revenue receipts of the government. Tax revenue growth in fiscal 2012-13 is reflecting the GDP growth slowdown with direct taxes growing at 12.5% levels in the April-January 2012-13 periods against growth estimate of 15% for full year 2012-13. Indirect tax revenue growth for the April-November 2012 period was 16.8% against a growth of 26% budgeted for full year 2012-13. The government is falling short on non-tax receipts as well with spectrum auctions raising just Rs 9400 crores against a budgeted amount of Rs 40,000 crores. The government could raise more through spectrum auctions by end March 2013 but it will not be anywhere close to the balance amount of Rs 30,600 crores left to raised. On the capital receipts side, the government has been more successful by raising Rs 21,500 crores from disinvestments against a budgeted amount of Rs 30,000 crores. The government is likely to sell more shares of its companies by end March 2013 to come close to the total disinvestment target. The government has to look at other sources of income for fiscal 2013-14 given that has limited or no room on raising tax revenues. It remains to be seen if the government will tap more revenue sources in this budget. 11
Part 4- Cheat Sheet for Budget Presentation The Budget 2013-14 Cheat Sheet The budget 2013-14 documents will have thousands of numbers floating around and the numbers are bound to confuse even a seasoned budget analyst. The markets will react to every number that is released in the budget starting from GDP growth estimates for 2013-14. Hence it is necessary to have a cheat sheet, which is a summary sheet of budget numbers that are considered important by the markets. The budget 2013-14 cheat sheet will help you focus on the numbers that your require to know in order to understand market movement post budget. The important numbers are defined and then put out in a table for you to fill up as the budget speech by the FM progresses. Important budget numbers defined GDP growth The GDP growth estimates play an important part in the union budget as most of the items are measured as a percentage of GDP. GDP growth has to be looked at in nominal terms for budget purposes. Nominal GDP is GDP growth at current market price. Real GDP is growth at constant price (2004-05 base years) and is growth arrived at after the nominal GDP is adjusted by a number known as the GDP deflator. The GDP deflator is inflation in the true sense but is more comprehensive than the WPI (Wholesale Price Index) and the CPI (Consumer Price Index). GDP (nominal) growth for 2011-12 was Rs 8,975,000 crores, a growth of 15.1% over the year. GDP for 2012-13 is placed at Rs 10,028,000 crores a growth of 12
11.7% over the year by the CSO (Central Statistical Office). The advance 2012-13 estimate of the CSO is likely to be revised upwards by the government by around 0.5%. The government is likely to place the GDP for 2012-13 at Rs 10,078,000 crores, a growth of 12.3% over the year. The government is likely to place nominal GDP growth for 2013-14 at around 13% (real GDP growth of 6.5% plus inflation of 6.5%). Nominal GDP is expected to be placed at Rs 11,388,000 crores. Fiscal Deficit The fiscal deficit is shown as a percentage of GDP and the markets will be keenly watching the budget estimate for the same. Fiscal Deficit is the difference between revenues and expenditure of the government. Fiscal deficit for 2012-13 is estimated at 5.3% of GDP, which is an absolute amount of Rs 534,000 crores based on estimated GDP of Rs 10,078,000 crores. Fiscal deficit for 2013-14 is expected at 4.8% of GDP, which an absolute amount of Rs 547,000 crores is going by 2013-14 GDP estimate of Rs 11,388,000 crores. Government borrowing The government financed its estimated 2012-13 fiscal deficit of Rs 534,000 crores through market borrowings. The government borrowed a net amount of Rs 467,000 crores through issue of dated government securities in 2012-13. Government borrowing constituted 87% of fiscal deficit in 2012-13 against budget estimate of 93% of fiscal deficit. The government in fact borrowed less than targeted amount of Rs 479,000 crores in 2012-13 The government will finance its fiscal deficit for 2013-14, estimated at Rs 547,000 crores, predominantly through issuance of dated government securities. Government borrowing would constitute 93% of fiscal deficit for 2013-14 and 13
net borrowing will be around Rs 508,000 crores. The Rs 508,000 crores of net borrowing will be higher by Rs 41,000 crores over the actual net borrowing of Rs 467,000 crores for fiscal 2012-13. The government is expected to go into fiscal 2013-14 with a cash surplus of around Rs 80,000 crores to Rs 100,000 crores. The government can use the cash surplus to fund bond redemptions of Rs 95,000 crores and if that is true, the gross borrowing of the government will be at or around the net borrowing of Rs 508,000 crores. The gross borrowing of the government was Rs 557,000 crores in fiscal 2012-13. Gross borrowing is net borrowing plus bond redemption for the year. GDP Growth, Fiscal Deficit and Government Borrowing are the key numbers to watch out for in budget 2013-14. Table 1 gives the Cheat Sheet for you to use during the budget presentation. Table: 1. Cheat Sheet for budget 2013-14 14
Part 5- Weak investment demand will mark fiscal 2013-14 Weak investment demand will mark fiscal 2013-14 The union budget 2013-14 is a media event and once it is over the economy goes back to business. The wide coverage given to the 28 th February 2013 budget presentation suggest that this budget will be about lowering the fiscal deficit to improve the country s image in the eyes of the foreign investor. The government is looking at portfolio flows to stabilize the INR that is trading just off 7% from all time lows. Fiscal deficit numbers are widely expected to be pegged at around 4.8% of GDP for the coming fiscal and there is widespread expectation by bond markets of a lower government borrowing program. Ten year benchmark bond yields are trading at fiscal year 2012-13 lows as various reports point to the government borrowing being pegged below the current fiscal s gross borrowing of Rs 557,000 crores. Assuming that the government delivers on markets expectations on fiscal deficit and government borrowing, what would be the effect of this on the economy for fiscal 2013-14? Reduction of fiscal deficit is definitely positive for the economy in the long term. Inflation and interest rates can come down while productive investments can increase. However long term gains involve short term pains and pains would be in the form of a sluggish economy, political infighting and weak investment demand. 15
Fiscal 2013-14 will be characterized by weak investment demand more than anything else. The Indian economy is witnessing a demand slowdown with many sectors including automobiles, infrastructure and even IT showing visible signs of lack of demand. Passenger car sales growth is expected at 0% to 1% for this fiscal while commercial vehicle sales is expected to grow by 0% to 2%. Infrastructure spending is down in the economy with companies such as BHEL seeing order books decline by 7% year on year as of December 2012 quarter. The IT sector that was adding jobs at a healthy pace in 2011-12 is now slowing down on job additions as bench strength is going up for many large IT companies. Bench strength, which reflects idle employees, is at around 75% levels for IT companies and unless the existing bench is put to work fresh hiring will be slow. Companies such as NIIT that train students for IT jobs are witnessing slowdown in demand for training, as job placements are a question mark. A weak demand scenario coupled with spending cuts by the government is not positive for economic growth. The government will hope for agriculture and services that contribute to around 14% and 60% of GDP respectively to pull up 16
GDP growth that has fallen to ten year lows at around 5.5% in this fiscal. Manufacturing will falter on weak demand expectations both on the domestic and global front. Eurozone is expected to show no growth for 2013 and just 1% growth for 2014 while other global economic including the US and China are expected to show below trend level growth in 2013. The corporate sector is highly sentiment driven. In an environment where demand is faltering, corporates will operate at lower capacities and hence capacity utilization will first have to go up before any corporate will even think of capital expenditure. The year 2014 is an election year and it is highly unlikely that any corporate facing weak demand conditions will venture into building capacities until a new government is formed. The budget may be positive in terms of the government showing commitment to fiscal consolidation but the fact is that any clear direction on economic growth will only be seen after 2014 elections. 17
Part 6- Economic Survey 2012-13 in Pictures Economic Survey 2012-13 in Pictures The Economic Survey is released one day prior to the budget. The survey is released by the Ministry of Finance and details the performance of the economy during the fiscal year under review and in the previous fiscal years. The survey also outlines the outlook for the coming fiscal. The Economic Survey 2012-13 presents a challenging year (s) for the Indian economy. GDP growth has slowed, inflation at the consumer level is high, fiscal and current account deficits are rising and investments and savings are down. Budget 2013-14 needs to address all these issues if the Indian economy is to strengthen. The economic survey is an exhaustive document running into many pages. We present a pictorial snapshot of the survey that will give you a perspective on the issues facing the economy. Chart: 1 Sharp slowdown in GDP growth in 2012-13 18
Chart: 2 Quarterly trends in GDP growth The government has estimated that GDP will grow in a 6.1% to 7% range in 2013-14. Is it achievable? Services contribution to GDP was at 65% while industry and agriculture contribution to GDP was at 27% and 8% respectively for the last ten years. Services will have to lead GDP growth higher given decline in growth in agriculture and industry. 19
Chart: 3 Savings and Investment Gap Savings and investment gap has increased and this increase has to be bridged. Chart: 4 Rising trade deficit is impacting current account balance 20
Chart: 5 Rising Gold imports is contributing to higher CAD www.inrbonds.com Gold imports have gone up by nine times since 2008. High inflation is attributed to increased demand for gold in the country. Chart: 6 Inflation has hit financial savings of households. 21
Shares and debentures as a percentage of household financial savings has seen a decline from 13% in the 1990 s to 4.8% in the 2000 s. This trend has to be corrected for the country to create productive capacity. Chart: 7 Food inflation is preventing WPI (Wholesale Price Index) from coming off 22
Chart: 8 Foreign capital flows are financing the CAD The government is keen on more capital flows to negate a rising CAD. Chart: 9 Fiscal deficits requires to be brought down Government estimates a fiscal deficit of 5.3% of GDP for 2012-13 23
Chart: 10 High nominal GDP growth is financing the fiscal deficit www.inrbonds.com The government cannot inflate away the fiscal deficit as repercussions are seen elsewhere in the form of lower household savings, high current account deficit and high interest rates. 24
Part 7- Post Budget Analysis Will Sensex, ten year bond and Rupee bounce back? www.inrbonds.com The reaction by the markets to the budget was negative. The Sensex and Nifty fell over 1.5% each, the Indian Rupee (INR) fell close to a percent while the ten year bond yield rose by 8bps. Equity market volumes touched record highs of Rs 427,000 crores as derivative market volumes jumped 100%. The negative market reaction to the budget was largely caused by a few factors affecting sentiments of investors. On the equity side, increase of surcharge in corporate tax and dividend distribution tax from 5% to 10% for domestic companies hurt market sentiments. The INR followed equity markets down as FII s sold around Rs 1300 crores of equity. Bond yields rose on the back of higher than expected borrowing numbers. The government is borrowing a net of Rs 484,000 crores and a gross of Rs 629,000 crores while the markets expected a lower gross borrowing number as the government had hinted of using its excess cash balances of Rs 80,000 crores for debt repayment. The gross borrowing number on a pure net borrowing plus redemption basis is Rs 579,000 crores and the government is planning to carry out a switch of illiquid to liquid securities for Rs 50,000 crores. The question is whether the post budget fall in markets will continue or will markets stabilize at lower levels and climb up again? Markets will stabilize at lower levels and climb up. The budget itself is not going to do much for the economy in terms of taking it up or bringing it down. GDP growth is estimated in a 6.1% to 7% range for 2013-14 from growth levels of 5% in fiscal 2012-13. The budget does not have enough thrust in spending or reforms to take up GDP growth by 1% and above. Plan expenditure for 2013-14 25
is pegged 29.4% higher in the coming fiscal but it remains to be seen if the target will be achieved. The budget on the other is addressing some pressing problems of the economy in terms of deficits. Fiscal deficit issue is being addressed with commitment to lower fiscal deficit to 3.6% of GDP in 2015-16. The government has not stuck to earlier fiscal deficit targets but this time around the weak INR, that is trading around 6% off all time lows, is forcing it to act on deficits. The fact that the government achieved a 5.2% fiscal deficit in 2012-13 despite GDP growth falling to ten year lows indicates the keen eye on deficit numbers. The FM is also watchful of the current account deficit (CAD) that is trending at all time highs of 4.6% of GDP as of first half of 2012-13. The FM is looking to plug the CAD through foreign capital flows and for more flows to come through the macro fundamentals of the economy must strengthen. Hence lower fiscal deficit and lower inflation is the priority for the government. Inflation as measured by the WPI (Wholesale Price Index) is down from levels of 9% to levels of 6.5% over 26
the last one and half years. Inflation is expected to stay at around 6% to 6.5% levels in 2013-14 despite weak economic growth as prices of administered goods is passed on to the consumer. The economy correction process is not short and easy. It is long and painful as growth is sacrificed for long term fiscal consolidation. India is in the long and painful path of economic correction and that is wholly positive for markets. Lower fiscal deficit and lower inflation will bring down interest rates in the economy leading to lower bond yields. Equities will start doing well as the economy is seen, as being on the mend while a good equity market will bring in capital flows leading to a stronger INR. Global factors of central bank liquidity and good prospects of growth in the US on the back of improving housing and labour market will help Indian equities stabilize and run up going forward. Short term volatility will be high for markets but that is part and parcel of the game. 27
Part 8- Performance Monitor Tables It is important to monitor performance against estimates? The Union Budget 2013-13 estimates a nominal GDP growth of 12.8%. The fiscal deficit is placed at 4.8% of GDP. Total revenue is expected to grow by 21.2% with tax revenue growth pegged at 19.1% and non tax revenue growth placed at 32.8%. Non plan expenditure and plan expenditure is budgeted to grow by 10.8% and 29.4% respectively. Total expenditure is expected to grow by 16.4%. The government has to meet its revenue and expenditure goals to achieve a fiscal deficit of 4.8% of GDP. Hence it is important to monitor the performance of the government on an ongoing basis to check if budgeted targets are on track. The performance monitor of budget 2013-14 will help you track the government s performance and deviations from the goals will help you recalibrate your investment portfolio. Table 1, Table2 and Table 3 gives the Fiscal Deficit estimates, budgeted revenue and budgeted expenditure for 2013-14. Table: 1. Fiscal Deficit Estimates for 2013-14 28
Gross borrowing is net borrowing plus bond redemptions of Rs 95,000 crores and Rs 50,000 crores for buying back illiquid bonds from the market. Table : 2. Budgeted revenue for 2013-14 29
Table: 3. Budgeted expenditure for 2013-14 30