Union Budget 2013-14 Preview - Religare

How to get 5.3%/4.8% fisc for FY13/14

We believe and illustrate how the Govt. could meet its fisc targets of 5.3% for this fiscal, and then a lower, 4.8% for FY14, using a mix of a tight belt on plan expenditure, and some help from accounting this fiscal, with some subsidy rationalization in FY14. Our assessment would be 5.8%/5.2% for FY13/14.

Lower subsidies are desirable, could be inflationary, and negative for growth and consumption in the near-term, but on the whole are preferable to a higher-growth-high-fisc scenario. On these lines, policy-based intervention would be the feasible choice over fiscal pump-priming for the Govt., given its strained finances.

Union budgets in India have progressively lost significance for the markets in the past few years. Despite being the next macro trigger for the markets, we think this year may not be very different, other than the sustained equity supply. The budget recipe is likely to be a sweet-and-sour mix of reform and populism in a pre-election year, with a potential dose of regressive policies thrown in.

- Expect to see a 5.3%/4.8% fisc for FY13/14: Meeting the fiscal target is primal for the Govt. this year, and we believe it's possible for these seemingly optimistic estimates to be met, with subsidy deferrals, thanks to cash accounting, and a tighter plan expenditure being the likely tools of choice. Our estimates are more sedate at 5.8%/5.2% over this period as we factor in lower tax revenues and lower deferrals.

- Potential consequences of a lower fisc: Apart from the obvious benefits, we believe a lower subsidy-led fisc would be negative for growth and consumption in the near-term, with 5.3%/4.8% over FY13/14 leading to a potential -25bps on growth, implying a lower FY14 growth estimate to ~5.5% (from 5.8%).

- For the market: While it remains the next macro trigger, the sustained PSU equity supply is likely to remain an overhang for the markets over the next few months, short of a substantial positive surprise. A 4.8% fisc for FY14 is structurally positive, save the higher fuel/fertilizer inflation, potentially back to FY12 levels, delaying the rate-cut cycle. On the bright side could be steps to channelize longterm capital into investments (details in the note). Markets would look at a lower fisc print positively as it improves Govt. finances in the longterm.

Sector-wise impact:

Positive – Infrastructure, Energy, Industrials, Banks;

Negative – Consumer, Autos, Real Estate; Neutral – IT, Telecom, Healthcare, Metals.

Source : Equity Bulls

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