Union Budget FY14-Preview - Fiscal prudence/credibility-FY14 & beyond... - Emkay

- Union Budget FY14 will need to juxtapose imperatives of Fiscal sustainability (India's credit rating concerns), stimulate growth and cater to populism ahead of an election year

- Achievement of FY13 FD/GDP target of 5.3% based on quick fixes, viz. leveraging PSU balance sheets, curtailment in capital spending & plan spending and likely postponement of subsidy payment

- Target of 4.8% FY/GDP in FY14 against the backdrop of slower tax revenue growth will require higher dependence on non-tax revenue and non-debt capital receipts. Expected 14% tax revenue growth target will also require increase in tax rates. We expect budget to target expenditure growth at 10%

- Sharp curtailment in revenue spending growth to 6-7%YoY necessary for achieving 3% FD/GDP by FY16. Trend revenue spend growth of 13% could result in unbounded fiscal deficit

Union Budget FY14 would test Government's predicament to ensure concurrence of Fiscal sustainability, faster economic growth momentum and the requisite expenditure space ahead of an Election year. While garnering tax receipts could remain a challenge (as seen in FY13), allocation of expenditure to accomplish the contradicting objectives would be interesting.

Lenient fiscal expansion and rising subsidy burden, resulting in adverse growth inflation dynamics and an unfavorable revenue-expenditure mix necessitate fiscal prudence. Fiscal consolidation becomes a quintessential to create space for monetary policy easing, tame inflation, reduce the crowding out effect of higher government spending and lessen external sector vulnerabilities. Finance Minister envisages a medium term target of 3% by FY16 from 5.3% in FY13.

FY13 GoI's accounts till Dec FY13 reflect constraints and quick fixes: FY13 highlights the compromise on quality plan and capital spending to compensate for lower revenue receipts and higher than budgeted subsidy bill. Likewise probable postponement of subsidy payment to the next fiscal serves as a quick fix to achieve the desired fiscal deficit target.

Union Budget FY14 will likely be conservative: Amidst the imperatives of reigning in fiscal imbalances and political expediency ahead of the 2014 election, Budget FY14 will lean towards aiming FD at 4.8% of GDP. This target would hinge upon, lower subsidy allocations with curtailment in overall expenditure and measures to boost revenue (predominantly non-tax).

Market movement based on cyclical economic growth: Historical data provide little evidence of directional impact of Union Budget on markets. Market returns around the budget announcement are strongly aligned to expectations on economic cycle. Unlike the tax sops driven 1997 "Dream Budget" or the hyper expansionary 2009 budget, there is little change of dramatic upsurge against an austerity budget this time around

Structural analysis-Fiscal consolidation needs halving of revenue spending growth: Decline in tax elasticity indicates larger fiscal structural constraints that would continue in FY14. Lower tax elasticity would necessitate scaling down of revenue spending growth to 6-7% for several years for fiscal consolidation targets to be met, in our view. At 13% growth ("business as usual" scenario) there is strong probability of fiscal deficit/GDP becoming unbounded; rising to 6% by FY16.

Source : Equity Bulls

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