Union Budget 2012-13

The economic framework and Impact on Industry

An analysis by Prof. Manasi Phadke

The solution to a problem begins with the acceptance that there IS a problem
- Albus Dumbledore in the Harry Potter series

Budget: The Good, The Bad and the Ugly

Full points to Pranabda for accepting that we are truly in a corner Full points for identifying areas where India can change the growth thrust inclusively

Full points for talking about fiscal prudence like its an economic parameter
Lesser points for not taking through key reforms Even lesser for being unduly optimistic Zero for (yet again) building an entire budgeting exercise on a hope (call it a wild possibility?) that the GDP will grow at unusually good rates

The Union Budget 2012-13

Some defining statements of Pranabs AOP
The life of a Finance Minister is not easy

I have to be cruel, so that I can be kind

So, what is a budget really?

A statement of how the FM raises money and on what he would like to spend it It also needs to talk of how the FM will fund a deficit, if there is one

Next: Inside the budget

Structure of the Budget

Revenue Account
Receipts Expenses

Capital Account
Receipts Expenses

Tax Non-tax

Interest Subsidies Salaries O&M Grants to State Govts.

Disinvestment Spectrum Loans

Infrastructure

(Irrigation, power etc.) Defense Health Education

Next: Deficit measures

Deficit measures

Revenue Deficit Budget Deficit Fiscal Deficit: Excludes loans as an earning source of the GOI Primary Deficit: Excludes interest payments as well Effective Revenue Account Deficits: New
Next: So what if theres a deficit?

Effects of an overly expansive budget

Creates demand and growth

Problem is that the growth is to be funded through borrowing

If the RBI prints too much money, causes inflation (Expansive monetary policy) If the RBI forces its banks to subscribe to GOI bonds, causes hike in interest rates i.e. creates a crowding out effect

Next: It happens only in India: A narrative on Indian issues

The Great Indian Stagflation Episode2008

We lost a lot of momentum in September 2008, with the US sub-prime FII outflows: Sensex crashed and so did the Rupee Export growth and IIP growth negative due to global imbalances India under the recession cloud

Low growth accompanied with low inflation indicating bad demand: A fiscal stimulus was designed. RBI put in liquidity to sanction loans to cash strapped businesses

The Great Indian Stagflation Episode2009

We bounce back: Growth steady Murphys law: Bad monsoons Supply shock new mantra Food prices skyrocket
Moderate growth and steep price hikes: A worried RBI starts sucking out liquidity. Fiscal stance continues to be expansive

The Great Indian Stagflation Episode2010

Liquidity crunch becomes acute So much that interest rates on a crazy high This impacts growth adversely: Consumption and Investment demand falls GOI tempted to support through spending schemes like NREGA Monsoons fail yet again; inflation on a 3 yr high RBI tempted to prioritize inflation

The Stagflation fear creeps inGOI wants more growth and RBI wants less inflation. Its a policy nightmare

Next: ESI, 2011

The Great Indian Stagflation EpisodeEconomic Survey 2011

GDP is estimated to grow by 6.9% in 2011-12, after having grown at 8.4% in preceding two years. Key reasons for the problems in Indian economy: Euro zone crisis, political turmoil in Middle East and rise in crude oil price. Growth moderated due to tight monetary policy. Economy is turning around as core sectors and manufacturing show signs of recovery.

The Great Indian Stagflation DilemmaEconomic Survey 2011

Inflation, specifically food inflation may look softer with good monsoons registered in 2011 As China applies fiscal brakes and Euro and US still on a soft pedal, oil should hopefully soften over the next year, further giving respite to inflation At this juncture, decisions needed to improve macroeconomic environment and strengthen domestic growth drivers.

Twelfth Five Year Plan to be launched with the aim of "faster, sustainable and more inclusive growth".
Next: Budget 2012 parameters

Budget 2012: Key Parameters

Wants to create growth but recognizes importance of fiscal prudence (at least on paper!) Estimates real growth in 2012-13 at 7.6% Inflation to be softer at 6.4% Projects that Current Account Deficit will reduce to 0.3% of GDP Will bear revenue loss on direct taxes to counter revenue loss on indirect taxes Caps subsidies at 2% of GDP

Keeps fiscal deficit at 5.1% of GDP

Next: Comparison of RE 2011-12 and BE 2012-13

Economic Indicators

Estimated 2011-12 (RE)

Projected 2012-13 (BE)

GDP growth rate Fiscal Deficit/GDP

6.9% 5.6%

7.6% 5.1%

Effective Revenue Deficit/GDP

Tax/GDP Disinvestment targets Inflation

2.5%
10.4% Rs.40,000 cr. 8.6%

1.8%
10.6% Rs. 30,000 Cr. 6.4%

The magic question

Can we really reach 7.6%???

Next: Where will 7.6% come from?

Where will the 7.6% growth come from?

Agriculture, infrastructure and inclusion programs

Plan outlay on agriculture increased by 18% to Rs. 20,208 crores

Special emphasis on creating irrigation potential

Infrastructure investment under 12th Plan to go up to Rs. 50 lakhs crores, half of which comes from private sector
National Manufacturing Policy announced with objective of raising share of industry share to 25% of GDP Thrust on rural development, maternal and child development programs, nutrition programs, employment and skill creation

Next: Why 7.6% is unrealistic

Why 7.6% is questionable

7.6% GDP growth achieved if Govt. spends in key sectors So FD will be at Rs, 5,10,000 crores i.e. 5.1% of GDP 93% of this to be funded by borrowing from banks With such high interest rates 7.6% becomes ambitious Interest Rates may hike/ not reduce Inflation still not in RBI comfort zone

Rs. 4.79 lakh crore of banking liquidity to go to GOI

Creates liquidity pressure

Next: A look at budget numbers

Union Budget 2012-13 A look at the numbers

Expenditure Head Total Expenditure Rs. Crores Comments

14,90,925

Plan Expenditure

5,21,000

Mostly capital account entries: Growth of 18% over last year. Encouraging.

Non-Plan Expenditure

9,69,900

Bad news. High due to unduly high interest payments and subsidy outgo. Growth of 9% over last year

Revenue receipts
Receipts Gross tax receipts Rs. crores 10,77,612 Comments

The rogue entry in 2011-12. Upset targets. Greatly dependent on 7.6% growth figure. Revenue losses on direct taxes, gains on indirect taxes. After making state payouts

Net tax receipts accruing 7,71,071 to Centre

Non-tax receipts
Dividends Interest receipts Others 50,153 19,231 91,000

The savior entry in 2011-12

Revenues from services, coinage etc.

Revenue Expenditure
Expenditure Interest Rs. crores 3,19,759 Comments

The biggest bully. Will require next 20 years of fiscal prudence to control this Dubious. To be capped at 2% of GDP but food to be supported fully. Fuel hikes now a possibility. Can this Government afford fuel hikes politically? Especially after what happened when rail fares were hiked?

Subsidies

1,90,015

Pensions

63,183

Revenue Account mismatches

Revenue Account Deficit: 3.4% of GDP Effective Revenue Account Deficit: 1.8% of GDP Lies, Damned lies and Statistics!

Capital receipts
Receipts Total capital receipts, of which Disinvestment proceeds Rs. crores 5,55,241 30,000 Comments

Depends on market sentiment. The Rajiv Gandhi Equity Fund Scheme could help this along Could fetch extra cash for the GOI The truly scary and spooky entry on the entire budget

Spectrum sale Net Market Borrowings

40,000 4,79,000

Next: Possible directional change in 2012-13

Summary look at the change

Key macroeconomic indicators GDP growth rate Agriculture growth Irrigation sector prospects Directional change

Infrastructure prospects
Inflation and input costs Interest rates Oil prices Domestic credit availability

External financing
Exchange rates

Impact of the Budget on industry segments

Thrust Areas: Agriculture Irrigation Power Roads Mining Education Health Food Security perspective Infrastructure

Social Inclusion

Impact of budget on industry

Sector Impact on the sector Budgetary Measures Comments

Agriculture and Irrigation

Plan outlay on agriculture increased to Rs. 20,208 crores for 2012-13

Flagship

In tune with 12th FYP

Food Security Bill Food inflation control priority

scheme RKVY outlay increased to Rs. 9200 crores, under which Rs. 300 crores provided specifically for Vidarbha Intensified Irrigation Program Apart from RKVY, all support clubbed under 6 different missions such as National Oilseeds Mission etc.

Impact of budget on KBL verticals

Sector Irrigation Impact on the sector Budgetary Measures National Mission on Sustainable Agriculture including Micro Irrigation and Rainfed Area Development Program to be merged

Comments

Structural changes in the Accelerated Irrigation Benefit Program to dovetail micro irrigation with water harvesting schemes
Allocation

on AIBP up by 13% to Rs. 14242 crores

Impact of budget on KBL verticals

Sector Impact on the sector Budgetary Measures

Irrigation

A Govt. owned Irrigation and Water Resource Finance Company to commence operations in 2012-13 and start financing micro-irrigation, contract farming, waste water management and sanitation
Viability Gap Funding (VGF) program for PPP projects now extended also to irrigation projects including dams, channels and embankments

Water

Increased

budgetary outlay of Rs. 14000 crores on rural drinking water and sanitation

Impact of budget on industry

Sector Impact on the sector Budgetary Measures
Coal

Comments

Power

India advised to sign fuel supply agreements with power plants Exemption of BCD on coal, Natural Gas and LNG Tax holiday extended Additional depreciation of 20% in first year of new power projects ECBs may part finance Re. debt of existing power projects Enhanced limit for issuing tax free bonds Full exemption from special CVD on plant and equipment for setting up solar energy projects

All suppliers/ equipment mgrs, project analysts will be in the green

Power sector thrust should see new projects coming up. Also in tune with plan targets to create 100000 MW of power in next 5 years Thrust on renewable energy

Impact of budget on industry

Sector Impact on the sector Budgetary Measures
Cess

Comments

Oil and Gas

increased on production of crude oil Declared subsidy likely to be a conservative estimate Oil cos. will be forced to absorb this subsidy as a loss But Oil and gas pipelines to be included under VGP

Pipeline projects could get renewed thrust under VGP: CRISIL However, no clear direction on oil prices

Impact of budget on industry

Sector Cement Impact on the sector Budgetary Measures
Coal

Comments Prices to maintain levels helping construction, a chief sector for India More activity expected in construction Crisil estimate is that total investments in construction will double in next 5 years Industrial construction will be thrust areas

imports exempted from BCD Excise incidence higher

Financial

Construction

eased up Tax free bond issue doubled Access to Viability Gap Funding allowed for construction of irrigation projects Input costs on steel to go up

constraints

Impact of budget on industry

Sector Impact on the sector Budgetary Measures
ECBs

Comments

Housing

allowed as funding option for affordable hsg Interest rate subvention for hsg loans extended Rural housing fund enhanced Steel input prices to hike
Tax

Thrust only on affordable housing In tune with multiplier creation through NREGA initiatives

Ports

free infrastructure bonds of Rs. 50 billion may be issued Amount unchanged since last year Provision unused since last year

Status quo on port projects

Impact of budget on industry

Sector Impact on the sector Budgetary Measures Comments Steel
Excise

duty increase

The excise increment will be passed on to customers

Price of steel could increase from Rs. 700 to Rs. 1000 per tonne
Will impact practically every industry negatively Sugar
No

measures declared

Fertilizers

Exemption

of BCD on capital equipment for setting up new units VGF for new projects Better credit to farmers

Local outfits s.t. more foreign competition Possibility of more projects

General Risk factors for Business Units

Higher excise on inputs means costlier sourcing

Generic reduction in BCD could imply higher competition, reducing the scope to pass on higher input costs to the customer
Possibility of tight liquidity conditions continuing in this fiscal Interest rates could stay high, if not increase Capital market conditions could remain choppy and unpredictable Paralysis on bold reforms due to coalition compulsions

Thank you!
Pls address your queries to

Prof. Manasi Phadke manasi.phadke@gmail.com