2013-14 Budget Preview - Balancing Economics With Politics Is Daunting Task - Nirmal Bang

The Union Budget for 2013-14 is expected to be a classic case of setting a right balance between political compulsions and economic obligations as policy-makers put their heads together to devise a strategy that revolves around fiscal consolidation, restoration of confidence of foreign institutional investors (FIIs) post acceptance of Shome Committee's recommendations on tax anti-avoidance and yet be populous in nature. We believe that despite fiscal prudence being high on the agenda, the United Progressive Alliance-led government would try to avoid any political backlash considering the fact that this is a final opportunity to present its full-year Budget ahead of Lok Sabha elections scheduled in early 2014. Weighed by structural issues troubling the domestic economy, the need to maintain fiscal deficit at 5.3% and 4.8% of gross domestic product (GDP) in FY13 and FY14, respectively, and little headroom in the wake of slower growth (FY13 GDP growth estimate at 5%), we believe the emphasis would be on providing a credible roadmap for fiscal consolidation while at the same time spurring savings as well as investments and providing stimulus to manufacturing entities. We believe the thrust would be on capping the government's expenditure through subsidy rationalisation, restricting budgetary allocation to flagship programmes, increasing tax revenue (through higher excise duty and service tax and also bringing in more services under the tax net), controlled borrowing and levy of import duty on gold. Also, the Budget may lay greater stress on planned expenditure to induce private investments in core infrastructure through higher budgetary allocation and tax exemptions/benefits, thereby reviving the capex cycle by instilling confidence in the private sector.

Tackling twin (fiscal and current account) deficits is a challenge: We feel the Budget would present a credible roadmap for fiscal consolidation measures aimed at tackling problems relating to twin deficits. We believe that steps would be taken for fuel and fertiliser subsidy rationalisation through partial de-regulation of fuel prices and slashing fertiliser subsidy. Also, the emphasis would be on widening the tax base (as taxing the rich more eventually encourages higher tax evasion) and cutting down defence expenditure. The Budget could increase the scope of tax collected at source as more areas are brought under its ambit. We expect the government to target fiscal deficit at 5.3% of GDP in FY13. The government, bogged down by fiscal prudence commitment, would judiciously aim to strike a balance between lowering its expenditure and at the same time look at increasing tax revenue and incentivising investment in core infrastructure segments. We feel the most challenging task before the government is to bring back confidence among the private players to revive their investment plans and look at structured and time-bound reform measures to win back the confidence of FIIs.

Social sector to take a backseat: We believe the flagship programmes like Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and other welfare schemes would be at the receiving end due to limited budgetary allocation amid strategic monitoring of subsidy disbursal through Aadhar-based transfers. Without changing the tax slabs, the government may also look at tweaking the Rajiv Gandhi Equity Savings Scheme (RGESS) to make it more investor-friendly and also not alter the Securities Transaction Tax (STT) despite the growing demand in favour of slashing STT to induce higher participation by retail investors in equities.

Outlook: We believe the government has its task cut out to tackle the twin deficits, reduce subsidy burden, curtail its expenditure and devise a concrete roadmap for garnering higher revenue and win back FIIs' confidence. However, balancing all this without any political backlash is a daunting task.

Source : Equity Bulls

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