Budget FY 2012: A neutral event

March 8, 2011

Finance Minister Pranab Mukherjee (C) arrives at the parliament to present the 2011/12 budget in New Delhi February 28, 2011.  REUTERS/B Mathur/Files(The views expressed in this column are the author’s own and do not represent those of Reuters)

The FY 2012 Union Budget is largely a neutral event:

The Budget provides incentives for increased infrastructure spending along with increased funding sources while highlighting supply side issues in agriculture with an effort to provide solutions.

It also creates an avenue for funding of the current account deficit (albeit still linked to capital markets) and creates a roadmap to rationalize subsidies, moderates expenditure growth and takes another small step towards the implementation of DTC and GST.

From a macro perspective, the budget was largely a neutral event. It did not make a major announcement of acceleration of key reforms. At the same time the government maintained restraint by not making populist announcements, such as immediate plans to please the lower- and middle-income sections of the population, considering there are a few state elections due in the current year.

Key Budget Announcements

Overall Budget

  • Aggregate expenditure up 3.4%
  • Aggregate tax revenues growth at 18.5%
  • Market borrowings estimated at 3.43 trillion rupees
  • Fiscal deficit estimated at 4.6%
  • Subsidy spending estimated to decline 12.5%
  • Social sector spending increased by 17% YoY
  • Divestment target of Rs400 billion
  • Substantial increase in health and education spending

Tax Proposals

  • Marginal corporate tax rate reduced by 0.8%
  • Marginal change to personal taxation
  • Baby steps towards GST – Excise duty unchanged – implying GST rate could be 10%
  • No tax hike for cigarettes, autos; 20% export duty on iron ore
  • No rationalization of fuel duties
  • SEZs to be charged MAT rate of tax
  • Tax on dividends received by Indian companies from its foreign subsidiary reduced to 15%
  • Total tax proposals neutral to revenue

Other Announcements

  • Infrastructure – FII limit on infra bonds from USD 5 to 25 billion and plan spending for infrastructure is up 23% over budget estimates for FY 2011, Tax free bonds of 300 billion rupees to be issued , reduction in withholding tax for FIIs
  • Nandan Nilekani’s committee to evaluate direct transfer of cash subsidy to people living below poverty line and execution of recommendations by end of FY2012
  • Fertilizer, cold chains made infrastructure sub sectors
  • Foreign investors who meet SEBI KYC norms can invest in domestic mutual funds
  • Agriculture – focus on increasing storage facilities, credit target to the sector upped by 27%
  • UID to achieve daily enrollment of one million by October 2011
  • Steps to counter black money generation
  • Performance monitoring and evaluation system introduced for 62 government departments

New deficit target is optimistic: The government is targeting a deficit of 4.6% of GDP in FY 2012 against the revised estimate of 5.1% of GDP in FY 2011. The government has been optimistic on revenue estimates and has assumed very low expenditure growth in FY 2012.

Market implications – more positive than negative:

There is a small upside to profit forecasts owing to the net change in tax rates. Apart from this, there are a couple of sentiment boosters.

  • The biggest positive impact on sentiment is the move to allow foreign individuals who meet SEBI’s KYC norms to invest in domestic mutual funds. This opens up a new source of funding for the current account deficit as well as for Indian equities.
  • The divestment target of Rs 400 billion does not appear disruptive to the market.

  • A committee will make recommendations on direct cash transfer to provide subsidies to poor people. This is a move to rationalize subsidies longer term.
  • There are a few small steps towards GST and a focus on infrastructure spending.

The immediate market outlook remains largely dependent on oil prices and global equities: Rising oil prices and a selloff in global equities are possibly the greatest risk factors to Indian equity performance.

Independent of the Budget, the market has been concerned about two key macro issues inflation and acceleration of private corporate capex and infrastructure spending.

Given the price erosion and negative position in the market, the current market levels provide attractive entry opportunity in select sectors such as infrastructure, engineering & capital goods, financials.

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