Friday, March 1, 2013

Chidambaram, budget and unjustifiable numbers

 This post is by Bhushan Gajaria, CEO of Beehive Capital Advisors Pvt Ltd. An alumnus of Sydenham College aud Jamnalal Bajaj Institute of Management Studies, Bhushan last worked with IDFC Securities (earlier SSKI) as Sr VP - Research


There is a conundrum – Should the FM be given a flak for a placid Union Budget and unrealistic numbers or should he get a pat on the back for not falling prey to extravagant populist announcements. PC had to fine balance the budget to please the party on one hand and Financial markets and rating agencies, which consider him a savvy finance minister, on the other hand. And A SMART Finance Minister (I said smart, not good) that he is, he chose “not to displease Madam” on one hand and “fool the financial markets with un realistic fiscal deficit numbers of 4.8%, which the financial markets will take as a Gospel Truth, until proven otherwise”. But in all this the biggest miss has been – THRUST ON EXPORTS, WHEN CURRENT ACCOUNT DEFICIT AND INELASTICITY OF IMPORTS REMAIN CONCERN AREAS.

The FM was so pre-occupied with Election Freebies and Fiscal Consolidation that he missed out on the biggest need and the opportunity of the hour – promoting exports (Detailed explanation given below).   

Here is a macro view on the Union Budget…

Loyal to its rural vote bank in the election year, FM has upped allocation towards rural development by a whopping 46% to Rs800bn and allocated additional Rs100bn towards Food Security (Rs1trillion in all). While the Plan Expenditure is budgeted to increase by 16% in FY14, UPA continues to focus on Revenue Expenditure, rather than Capital Expenditure (which is more important to drive sustainable growth). Sorry state of economy (increasing inflation and slowing investments) can be explained from the fact that share of capital expenditure has dropped from 33%+ in NDA regime to 20% now. But then, I am not complaining as I feared worse. Given the compulsion of the hour, UPA could not be as maverick or extravagant as in 2008 to spend government coffers to buy their votes. Thankfully, there was no Farm Loan Waiver and no sharp jump in NREGA allocation. FM had to target his vote bank through cosmetic announcements – Bank for Women, additional allocation for minorities, Nirbhaya Fund for women security and making vague references of skill development for youth without any concrete announcements. And hence I say, between an option of pleasing the UPA Chief or displeasing her, FM made a smarter choice of “not displeasing her”

There is nothing that RAJNI KANT.. PC seems to be thinking that it applies to him as well. Either he considers himself to be a super hero or he considers us fools, or probably both. FM has increased the expenditure budget by 16% from FY13’s Revised Estimates (RE). Should we believe that? While the FY13RE is in line with initial Budgeted Estimates (BE), it has been achieved by cutting down planned expenditure by nearly 20%. This is unlikely to be repeated in an election year and hence 29% jump in FY14 BE will be a reality. On the other hand, government is building in Oil Subsidy of meager Rs650bn in FY14, as against FY13 RE of Rs969bn. Despite the government’s serious attempts to curb fuel subsidy in the recent past, USD105/barrel of Crude Oil prices and sustained price hikes in H2FY14 (closer to state and national elections) seem to be false assumptions to start with. More unbelievable is the 21% revenue receipt growth target. While increase in surcharge and likely corporate earnings growth of 12-13%in FY14 will help government achieve 17% growth target in corporate taxes, indirect tax collections in all probability will miss the budgets. With no change in excise duty and service tax rates and overall economy growth remaining subdued, government is unlikely to achieve its 16% and 36% growth target respectively. To put into perspective, government revised its FY13 revenue estimates downward by nearly 7%. On the other hand, government has increased its target from disinvestments from Rs240bn in FY13 to Rs558bn in FY14, including Rs400bn from spectrum auction – Again a steep task! Hence all in all, projected attempt of fiscal consolidation through excel sheet working is an EYEWASH. And for those who take it as a gospel truth, be prepared for a disappointment in the coming months. And any slippage in growth (Q3 GDP growth at multi year low of 4.5%, as against projected growth of 6.2-6.7% in FY14 as per Economic Survey) can prove to be a nightmare as cascading effect of fiscal deficit on forex currency could be dangerous.

This probably is the only good move in the entire budget. Few announcements like 15% investment allowance on capex upward of Rs100cr in plant and machinery, 3000km of road projects in H1FY14, increasing target of tax free bonds, more infrastructure development funds, extending 80IA benefits for power companies by one year, Rs1lac of additional benefit on interest on new home loans, etc will help revive the investment cycle partially. Though the issue of green clearance remains to be addressed, we see some positive impact of the announcements. While PPP in coal mining can be extremely beneficial, what FM has spoken on this topic is more of a passing reference.         

With equity markets seeing value destruction in the recent years, retail investors have developed a penchant for investment in Gold. Participation in Debt instruments, though on an upmove, has remained significantly lower in India.  Hence, large portion of retail savings has been towards unproductive gold. This has had two negative effects – on one hand high gold import has put pressure on current account deficit, on the other hand, gold remains an un productive investment tool. In this context, government could have done a lot more to draw investors away from GOLD through higher taxes, and towards DEBT through additional tax benefits for investments in Infra Bonds. Failure of recent tax free bond issues, owing to low coupon, puts doubt on government target to issue Rs500bn worth of Tax Free Bonds in FY14.

While acknowledging that Current Account Deficit at near 4% remains a cause of concern, FM also accepted inelasticity of two biggest import items – crude oil and gold. But that being the reality, government could have focused a lot more on boosting exports through increasing incentives. Slowdown in global economy and simultaneous process of currency devaluation by countries like Japan puts added pressure on Indian exports. In this context, government should have reintroduced the tax benefits under DEPB, provided special benefits for auto exports, etc.

All in all, we believe that this budget was a NON EVENT, thankfully… in an election year, a PLACID BUDGET IS BETTER THAN POPULIST BUDGET. Had it not been an election year, I would have termed this budget as disastrous…