28th Feb to bring a dream budget - AMBIT Capital

We expect the Government to limit fiscal slippage in FY13 through deep cuts in plan expenditure and postponement of the petroleum subsidy bill payment into FY14. We expect the Finance Minister to deliver a dream budget for FY14 with the promised fiscal consolidation as well as progressive tax reforms. However, mid-year increases in discretionary expenditure in a pre-General Election financial year (in the form of populist schemes such as a farm-loan debt waiver) is likely to result in moderate fiscal slippage of ~50bps in FY14. We expect the Oil & Gas sector to be a key beneficiary of the likely disinvestment of Indian Oil, because this is likely to ensure the continuance of diesel price reforms. From a medium-term perspective, retailers are likely to benefit the most from the eventual implementation of GST.

How is the Government likely to limit fiscal slippage in FY13?

The new Finance Minister (FM), who took over mid-year, is likely to have averted much of the fiscal slippage that could have materialised sans corrective action and is likely to limit the fiscal deficit in FY13 at 5.3% of GDP (vs the budget estimate of 5.1% of GDP). The FM is likely to have done this by making deep cuts in plan expenditure, and taking advantage of the fact that Government accounts are maintained on a cash basis (which allows for postponement of expenditures like the petroleum subsidy bill payment).

Union Budget FY14: A dream budget in the making

The Union Budget for FY14 is likely to be dream budget that will deliver the promised fiscal consolidation as well as imbibe progressive tax reforms. The FM is likely to peg the budget estimate (BE) at 4.8% of GDP, thereby offering fiscal consolidation of 50bps vs FY13 (see exhibit 2 pg page 4 for details).

With regards to tax-related measures, the Union Budget FY14 is likely to be characterised by the following:

- Headline service tax and excise duty revenues are likely to be left unchanged at 12% with a clear focus on getting rid of exemptions and concessional rates to prepare for GST implementation.

- An upward shift in personal income tax slabs coupled with the imposition of a higher tax rate for the super-rich. This is likely to assume the form of a 10% surcharge on the super-rich and thereby help the Government meet the twin goals of tax augmentation and a pro-poor stance (refer to Exhibit B in the right-hand margin) as the super-rich in India (i.e. with an income of >Rs2mn) account for 1% of tax payers in India and they pay 63% of total income taxes.

- Imposition of a temporary 10% tax on annual dividend income exceeding Rs1.5mn.

- Increase in basic custom duty on crude from the current 0% to 5%, because history suggests that the customs duty rate on crude follows a counter-cyclical path (refer to Exhibit C in the right-hand margin).

- 'Rationalisation' and 'base expansion' are likely to continue to be key budget themes, with administration of a reduction in surcharges for corporates, an increase in MAT, enhanced incentives for fixed investment, etc.

Other features of the budget are likely to include: (1) a heavy disinvestment agenda for FY14, (2) postponement of GAAR applicability by two years, and (3) meaningful ramp up in the direct cash transfer of subsidies with a clear focus on districts that will see State Elections later this year.

However, we expect moderate fiscal slippage of ~50bps to materialise mid-year in FY14 on account of: (1) mid-year increases in discretionary expenditure in a pre-General Election financial year in the form of populist schemes such as a farm-loan debt waiver or social spends and (2) underestimation of the petroleum subsidy bill.

Investment implications

We expect the Oil & Gas sector to be a key beneficiary of the likely disinvestment of Indian Oil, because this will ensure the continuance of diesel price reforms. Our Oil and Gas analyst views ONGC, BPCL, HPCL and Indian Oil as plays on this theme. From a medium-term perspective, retailers are likely to benefit the most from the eventual implementation of GST.

Source : Equity Bulls

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