STCI

19- Mar-2012

Primary Dealer Ltd

Neetika Shridhar [email protected] +91-22-66202229 Amol Agrawal [email protected] +91-22-66202234

Union Budget 2012-13: Review

The Finance Minister presented the Union Budget for 2012-13 on 16-Mar-12 amidst much expectations and hope. In this report, we look at the key highlights of the Union Budget mainly from fixed income market perspective.

I. Revenue Side
Domestic and global factors combined have had a bearing on the tax revenues during 2011-12, which comprises the bulk of the total receipts of the government. Total revenue growth for 2011-12 which was estimated at 3.6%, is expected to show negative growth of 3.3% as per revised estimates of the government. However hoping a revival in economic conditions, for 2012-13 the government has estimated a robust increase of 22.7% in total receipts at Rs 9.77 lakh cr.
Table 1: Government Revenue (in Rs Cr) 2011-12 2011-12 (BE) (RE) Revenue Receipts 789892 766989 Tax 664457 642252 Non Tax 125435 124737 Non Debt Capital Receipts 55020 29751 Recovery of loans 15020 14258 Other Receipts 40000 15493 Total Receipts 844912 796740 Source: Union Budget Documents

2012-13 (BE) 935685 771071 164614 41650 11650 30000 977335

Taxes are expected to contribute close to 78% to the total revenues of the government in 2012-13. On an optimistic note the government has estimated a little over 20% increase in Net tax revenue in 2012-13 compared to a rather modest growth of 12.7% seen in 2011-12. Within taxes, the government estimates the indirect taxes to grow at a faster pace compared to direct taxes. The proposed change in the Budget on the Direct Taxes front is estimated to result in a net revenue loss of Rs 4500 Cr in 2012-13. On the other hand proposed changes related to Indirect taxes are estimated to result in a net revenue gain of Rs 45940 Cr in the same period.
Table 2: Tax Break Up (In Rs Cr) 2010-11 2011-12 (Actual) (RE) Gross Tax Revenue 793072 901664 Corporation Tax 298688 327680 Taxes on Income 146587 171879 Wealth Tax 687 1092 Customs 135813 153000 Union Excise Duties 138299 150696 Service Tax 71016 95000
1

2012-13 (BE) 1077612 373227 195786 1244 186694 194350 124000

STCI
19- Mar-2012

Primary Dealer Ltd

Taxes on Union Territories Less - Transfers to Funds Less - State's share Centre's Net Tax Revenue Source: Union Budget Documents

1982 3900 219303 569869

2317 3998 255414 642252

2310 4620 301921 771071

On expected lines the government brought the service tax rate and excise duty from 10% to pre crisis level of 12% along with increase in number of services to be taxed. The government has proposed to tax all services except those in the negative list comprising 17 heads. The government has estimated additional revenue of Rs 18,660 Cr from the above mentioned changes in the service tax regime. For eventual transition to GST, the government will make efforts to align service tax and excise duty. The peak customs duty of 10% on non agricultural goods has been left unchanged. Apart from routine items like dividends and profits under Non Tax revenues, government has estimated to garner Rs 40,000 Cr from the sale of spectrum in 2012-13. Non debt capital receipts include Rs 30,000 Cr through disinvestment of part of equity in various state owned enterprises. Receipts from disinvestment remain vulnerable to performance of Equity markets as is evident from the fact that the government has been unable to meet the target disinvestment in the last two years. Against the BE of Rs 40,000 Cr worth of disinvestment each in 2010-11 and 2011-12, only 57% and 39% respectively were realized in each of the years. Disinvestment proceeds though are estimated to contribute only about 3% to the total receipts in 2012-13, nevertheless in trying times every penny counts as much.

II. Expenditure Side

Table: 3 Government Expenditure ( In Rs Cr) Actual 2010-11 RE 2011-12 BE 2012-13 Non Plan Expenditure 818299 892116 969900 Plan Expenditure 379029 426604 521025 Total Expenditure 1197328 1318720 1490925 Source: Union Budget Documents

For 2012-13, the government appears to have forecasted more realistic growth on Total Expenditure after failing to achieve the over optimistic targets set in the previous budget. According to the revised estimates of 2011-12, total expenditure is estimated to record an annual growth of 10.1% against the originally budgeted growth of 3.4%. As against an envisaged decline of 0.7% in Non Plan Expenditure, in 2011-12 the growth has been revised up sharply to 9%. This is largely on account of higher outgo towards subsidy payment. The government had to shell out an additional Rs 72,727 Cr on subsidy payments over an above Rs 143,570 Cr estimated in Budget 2011.
Table: 4 Total Subsidies ( In Rs Cr) 2010-11 Actual BE 2011-12 RE 2011-12 Petroleum Subsidy 38,371 23,640 68,481 Food Subsidy 63,844 60,573 72,823 Fertilizer Subsidy 62,301 49,998 67,199 Other Subsidies 8,904 9,359 7,794 Total Subsidies 1,73,420 1,43,570 2,16,297 Source: Union Budget Documents
2

BE 2012-13 43580.0 75000.0 60974.0 10461.0 190015.0

STCI
19- Mar-2012

Primary Dealer Ltd

For 2012-13 once again the government has estimated a lower outgo towards subsidy compared to the revised estimates of 2011-12. Fuel subsidy which comprises about 23% of the total subsidy in 2012-13 is estimated at Rs 43,580 Cr. Out of the total fuel subsidy Rs 40,000 Cr is meant for compensating Oil Marketing Companies (OMCs) for selling diesel, PDS kerosene and Domestic LPG at below market price. As there is an upside risk to oil prices which are currently above $125 per barrel, the only other way OMCs can be compensated is by raising prices. While this will put an upward pressure on inflation in the short term, subsidizing these items is inflationary in the long term.
Figure 1 Figure 2

Source: Union Budget Documents

Source: Union Budget Documents

However in its bid to provide a road map for fiscal consolidation the government in the Budget 2012 has suggested some caps on subsidies. The budget says that From 2012-13 subsidies related to food and for administrating the Food Security Bill will be fully provided for. All other subsidies would be funded to the extent that they can be borne by the economy without any adverse implications. Accordingly the government has proposed: To restrict the expenditure on Central subsidies to under 2% of GDP in 2012-13 To be brought down to 1.75% of GDP over the next three years This is a welcome step towards restricting Non Plan revenue expenditure but adherence to the projections still remains to be tested. Interest and Defense expenditure still forms about 53% of the total non-plan expenditure. These two categories continue to grow in double digits in line with the trend.
Table 5: Major Heads of Non Plan Expenditure (In Rs Cr) 2010-11 Actuals Interest Payments Defense Expenditure Subsidies Pensions Total Non Plan Expenditure Source: Union Budget Documents
3

2011-12 BE 267986 164415 143570 54521 816182

2011-12 RE 275618 170937 216297 56190 892116

2012-13 BE 319759 193407 190015 63183 969900

234022 154117 173420 57405 818299

STCI
19- Mar-2012

Primary Dealer Ltd

III. Sources of Financing Fiscal Deficit

Fiscal deficit for 2012-13 is pegged at Rs 5.13 lakh Cr. Market Borrowings including dated securities and T-bills form around 4.88 lakh crore of sources of financing the fiscal deficit. This implies market borrowings form nearly 95% of sources of financing the fiscal deficit. Though, the government expects a marginal inflow of Rs 1198 Cr in Securities against Small, getting this small inflow might be difficult as well. The government does not expect to have any cash balances in the beginning of the year as last years expected cash surplus turned into a deficit.
Table 6: Sources of Financing the Fiscal Deficit 2011-12 2011-12 (RE) External Financing 14500 10311 Market Borrowings 358000 552497 Dated (net) 343000 436414 T-Bills 15000 116084 Securities against Small Savings 24182 -10302 State Provident Funds 10000 10000 Other receipts -13866 -15862 Cash Balance 20000 -24664 Fiscal Deficit (Sum of 1 to 6) 412817 521980

1 2

3 4 5 6 7

2012-13 (BE) 10148 488000 479000 9000 1198 12000 2245 0 513590

For 2011-12, fiscal deficit is revised upwards by 26.4% from 4.12 lakh crore to Rs. 5.21 lakh crore. Market borrowings form nearly 106% of the total fiscal deficit as two sources (viz. Securities against Small Savings and cash balances) show an outflow against the inflow expected in the budget.

IV. Market Borrowings

Gross Market borrowings in dated securities for 2012-13 is pegged at Rs 5.69 lakh cr which is around 12% higher than 2011-12 (RE). The net borrowing for 2012-13 is higher by around 10%. The analysts had estimated gross market borrowing in the range of Rs 5 lakh cr to Rs 5.5 lakh cr. The budgeted numbers of are much higher than even the most pessimistic estimate of Rs. 5.5 lakh cr.
Table 7: Market Borrowings (in Rs Cr) 2011-12 2011-12 (RE) Dated Securities Gross Redemptions Net Source: Union Budget Documents 417128 -74128 343000 510000 -73586 436414 2012-13 (BE) 569616 -90616 479000

Last year, the government funded its rise in fiscal deficit mainly via the T-Bill route. The net T-bills were pegged at Rs. 15,000 Cr but the actual amount raised via T-bills was Rs. 1.16 lakh cr which is about 7.7 times the budgeted amount. Within T-Bills, in 91 Day T-bills was pegged at Rs 473 Cr but the final amount raised was Rs. 64039 Cr which is 135 times of the budgeted amount. In 182 day and 364 day the ratio of actual/budgeted was 6.9 and 4.7 respectively.
4

STCI
19- Mar-2012

Primary Dealer Ltd

In 2012-13, the gross T-bill issuance in the main 3 T-bill categories is going to be issued by a higher amount compared to previous year. However the net amount outstanding under the T-Bills is kept at Rs 9000 Cr. In 91-day T-Bill, Government expects to reduce net issuance by Rs 5,000 Cr. In 182 day T-bill issuance, it expects to balance the entire issuance with the maturity keeping the outstanding at nil. For 364 day T-bill, net amount outstanding is kept at Rs 14,000 Cr.
Table 8: T-Bills Issuances and Redemptions (in Rs Cr) 2011-12 2011-12 2012-13 (RE) (BE) 14 Day Gross Redemptions Net 91 Day Gross Redemptions Net 182 Day Gross Redemptions Net 364 Day Gross Redemptions Net All T-Bills Gross Redemptions Net Source: Union Budget Documents 2500566 -2500566 -310244 -309771 473 54994 -50595 4399 52610 -42482 10128 2918414 -2903414 15000 2076132 -2102377 -26245 456577 -392538 64039 94001 -63601 30401 90371 -42482 47890 2717081 -2600997 116084 2145265 -2145265

532547 -537547 -5000 99353 -99353

104371 -90371 14000 2881535 -2872535 9000

Apart from T-Bill issuance, government has budgeted a higher CMB issuance for next year and has marginally lowered the Ways and Means advances.
Table 9: CMB and WMA Balances (in Rs Cr) 2011-12 2011-12 (RE) Cash Management Bills Gross 20000 93000 Redemptions -20000 -93000 Net ... ... Ways and Means Advances Gross 130876 716819 Redemptions -130876 -716819 Net ... ... Source: Union Budget Documents 2012-13 (BE) 95000 -95000 ... 700000 -700000 ...

STCI
19- Mar-2012

Primary Dealer Ltd

V. Fiscal Consolidation and Proposed Amendments to FRBM Act

Finance Minister announced that though fiscal deficit is to be lowered to more sustainable level but at the same time government expenditure has to continue towards priority sectors like health, education, infrastructure etc. The fiscal policy is based on balancing these two goals. To reinforce its commitment towards fiscal consolidation along with reorientation of expenditure, Government is bringing out amendment in the FRBM Act -2003. There are two main changes being proposed in FRBM Act - 2003: Statutory recognition to concept of effective revenue deficit (ERD): The Centre transfers large amount of resources from Centre to States, local bodies and other scheme implementing agencies who are mandated to provide certain services. These transfers are included in revenue expenditure but actually help in creation of capital assets. Hence last year the government had proposed a new measure called effective revenue deficit which excludes these transfers from the revenue deficit.
Table 10: Revenue Deficit and Effective Revenue Deficit (in Rs Cr) 2011-12 2011-12 2012-13 (BE) (RE) (BE) Revenue Deficit 307270 394951 350424 Grants for creation of Capital Assets Effective Revenue Deficit (% of GDP) Revenue Deficit Effective Revenue Deficit Source: Union Budget Documents -3.4 -1.8 -4.4 -2.9 -3.4 -1.8 146853 160417 137505 257446 164672 185752

Now the government proposes to include ERD in the FRBM act as it overstates the revenue deficit figures. The FRBM Act mandates the government to reduce its revenue deficit to 0% but this could also lead to lower transfers for creation of capital assets which will hurt the economy. Hence, it wants to differentiate between the two deficit measures. This will help balance the two goals of reducing the wasteful items in revenue expenditure category without sacrificing development related expenditure. It proposes that it will reduce ERD to 0% by Mar-15 and generate adequate surplus thereafter. Introduction of Medium-term Expenditure Framework Statement: government to present three documents along with its budget statements: o The Macro Economic Framework Statement o The Medium Term Fiscal Policy Statement o The Fiscal Policy Strategy Statement FRBM mandates

In the amendment to FRBM Act 2003, it proposes to introduce a new statement called Mediumterm Expenditure Framework Statement which will provide certainty of allocation to Ministries and Departments over three year time frame. This will help Ministries/Departments in planning and allocating their resources better. This statement would set forth a three year rolling target for expenditure indicators with specification of underlying assumptions and risk involved. However, government has chosen not to implement FRBM Act in 2012-13. This is disappointing as markets were expecting a clearer time-frame on implementation FRBM.
6

STCI
19- Mar-2012

Primary Dealer Ltd

The Budget also presents targets for deficit indicators and compares it with the proposed targets given in 13th Finance Commission (13th FC). As we can see, the fiscal deficit targets are expected to be much higher than suggested by 13th FC. It is also interesting to note that in Budget 2011-12, government planned to better the fiscal deficits targets suggested by 13th FC. The dismal fiscal statistics in 2011-12 has led to a strong reality check. Though, the new fiscal targets look more credible but the analysis also suggests that fiscal consolidation has become far more complex than expected last year. One year of fiscal slippages has made a large difference in both the targets and governments expectations on lowering fiscal deficits.
Table 11: Comparison Of MTFP Fiscal Deficit Target with 13th Finance Commission Fiscal Roadmap (Given in Budget 2012-13) 2011-12 (RE) 2012-13 2013-14 2014-15 MTFP 5.9 5.1 4.5 3.9 13th FC 4.8 4.2 3 3 Source: Union Budget Documents

Table 12: Comparison Of MTFP Fiscal Deficit Target with 13th Finance Commission Fiscal Roadmap (Given in Budget 2011-12) 2010-11 2010-11 2011-12 (BE) (RE) (BE) 2012-13 2013-14 MTFP 5.5 5.1 4.6 4.1 3.5 13th FC 5.7 5.7 4.8 4.2 3 Source: Union Budget Documents

VI. Conclusion
The Union Budget 2012-13 tries to give a more realistic picture of India governments fiscal position. However, just like previous budget some questions still remain on subsidies. Major subsidies for 2012-13 imply a decline of 14% from 2011-12. All the major subsidies are pegged to be lower compared to 2011-12 except food subsidy. Even in food subsidy the rise is a marginal 3% considering Food Security Act is to be implemented this year. Hence, there could again be some issues on subsidy front. The higher than expected market borrowings will again put supply pressures on bond markets. The revision in excise duty will put pressure on inflation trends which only recently started to trend lower. Overall, the year 2012-13 is again expected to be a difficult and volatile year for fixed incomes markets.

STCI
19- Mar-2012

Primary Dealer Ltd

STCI Primary Dealer Ltd. A/B1- 801, A Wing, 8th floor, Marathon Innova, Marathon Next Gen Compound, Off. Ganpatrao Kadam Marg, Lower Parel (w), Mumbai 400013. Dealing Room: (022) 66202217-20 Settlements: (022)66202262-64, Fax (022) 66202288 Delhi Office: (011) 47676555-570 Bangalore Office: (080) 22208891 Please mail your feedback to [email protected] Website: http://www.stcipd.com

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 STCI PRIMARY DEALER