[T.S.R:16927] India: Fixing The Deficit, But With Some Divine Help

We anticipate that the government will face significant fiscal challenges in FY2012E, in the absence of any likely one-time bonanza such as the 3G/BWA receipts. The 13

th Finance Commission targets GFD/GDP at around 4.8%. We believe that the Finance Minister is likely to deliver on this target at the time of the announcement of the budget but it will likely exclude a few expenditure items such as fuel subsidies. The major items of revenue and expenditure for FY2012E and compares the same with those of the past few years.  

The key to achieving a GFD/GDP ratio of 4.8% in FY2012E would be (1) buoyant revenue assumptions, which may not be misplaced as inflation is likely to stay high; nominal GDP numbers will likely be strong given our GDP estimates of 8.1% and high inflation (average of 6.5%); (2) increase in the median excise duty by 2 ppts; (3) high customs revenues as commodity prices will likely remain strong; (4) strong growth in income taxes due to wage inflation (indexation to CPI-IW) and strong hiring in certain sectors; (5) likely disinvestment target of `500 bn; and (6) underreporting on certain expenditures mainly on account of the subsidy bill. 

The biggest under-provisioning (as also was the case in FY2011) would be in the case of the oil subsidy where the Finance Minister is likely to assume a sum of `30-32 bn only versus possible under-recoveries of `808 bn (assuming US$85/bbl average crude price and no change to domestic selling prices). The government may have to bear `446 bn (0.5% of GDP) out of the total under-recoveries if it follows its historical subsidy-sharing mechanism and does not raise domestic selling prices for consumers.

 

Safe Harbor Statement:

Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.

 

Nothing in this article is, or should be construed as, investment advice.

 

 

 

 

 

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