“The Finance Minister will present the FY2013-14 budget amid high expectations. The initiation of the reforms process over the past 4 months has raised expectations about continuation of the same in the budget. Moreover, the FM has already indicated that this will be a 'Responsible Budget' with FY14 fiscal deficit pegged at 4.8%. Markets are now looking out for an 'achievable budget'.
The FM's priority in the 2013-14 budget will be fiscal rectitude. A lower fiscal deficit will leave more money for the private sector and moderate interest rates. The rating agencies are also closely watching out for any further fiscal slippage. India needs to sustain and improve the strong capital flows of CY2012. We expect the FM to stick to the revised fiscal deficit of 5.3% for FY13 and budget for a 4.8% deficit for 2013-14, based on a nominal GDP growth expectation of 13% in FY14.
The reduction in FY14 target will be achieved by controlling expenditure - both plan and non-plan, we opine. With the given plan expenditure constraints, which may impact growth, the FM will likely rely on private sector to boost investments by giving incentives for the same in targeted areas. However, several initiatives need to be taken even outside the budget to support and promote private investments. Speedier implementation of allocated budgets will make these spends more effective. We believe that, significant stress will be laid on more effective implementation of the outlays rather than any increasing outlays significantly.
Real GDP growth target for FY14 will be set at 6%, we believe. The budget will aim to provide an investment - led supply push to growth (with private sector participation) as against a consumption - led demand pull (higher subsidies, etc). Targets for subsidies will likely be controlled, especially fuel subsidies. However, containing subsidy burden beyond a point may prove difficult especially keeping in mind the high food inflation and rising food subsidy bill. Along with the fiscal deficit, market will focus on the revenue deficit as well, we opine.
WPI inflation for FY13 is expected to average round 7%; much higher v/s the comfort levels. We expect measures towards easing supply constraints, especially on primary articles. We expect a further roadmap for Aadhar-based subsidy distribution. However, we understand that, most supply side constraints can be addressed only in the long term. On the other hand, non-food manufacturing (Core) inflation has already come down to comfortable levels of sub-5%.
On reforms, the FM may signal the Government's intention to move ahead with the reforms process on several fronts. DTC and GST are now expected to be implemented totally WEF FY15 only. However, some enabling measures may be announced. There are several reform initiatives which the Government has initiated outside the budget. The budget may take some of them ahead or announce new ones including Insurance reforms, Pension reforms, etc. Critical issues like labour reforms may need broader political consensus.
We expect stability in tax rates, though there may be some adjustments in the list of exemptions, deductions, etc, keeping in mind the eventual movement to GST and DTC. Tax exemptions on targeted investments may also be announced. We expect the divestment target to be increased to Rs.400bn v/s FY13 target of Rs.300bn.
We do not expect any major initiatives for the stock markets. Any reduction in STT will be cheered by the markets. If Commodity Transaction Tax (CTT) is levied, it will be negative for commodity markets. Thus, we believe that, the focus of the markets will be on fiscal prudence, on effective implementation of investments, and on sectors which are impacted by the budget proposals.
We believe that, the budget may have the following implications for the sectors:
Dipen Shah, Head of PCG (Private Client Group) Research, Kotak Securities
- Positive for Banking, NBFCs, Capital Goods, Construction, Media, Oil & Gas, Power, Real Estate, Shipping & Logistics.
- Neutral for Automobile, Aviation, Cement, FMCG, Hotels, Information Technology, Metals”