Indian equities have taken a breather since mid January 2013 as market participants ponder over the outcome of the Union Budget. We take it as a foregone conclusion that the Finance Minister will deliver a reformcentric Budget addressing the fiscal and current account deficits in the wake of the sustained country downgrade scare. In our opinion, the FM cannot even afford a Budget which is termed as a non-event, leave alone a bad one.
Attempts to revive the industry cycle, infrastructure and deepening the corporate bond market are other market-friendly measures likely to be taken up. The Finance Minister would obviously want to serve customary populist carrots to appease the critical vote bank ahead of the forthcoming elections but, his Budget, by and large, is likely to be balanced, certainly devoid of any ambiguous provisions to help maintain investor confidence as also to attract foreign capital. We believe the Budget will deliver a good vibe and provide fresh legs to the market to scale new highs.
First and foremost, the FM will try and achieve the fiscal deficit target of 5.3% that he had promised for 2012- 13. He is likely to succeed in getting close primarily through tighter expenditure control and higher PSU dividends that may offset to an extent, slippage in tax collections, lukewarm spectrum response and spillage in unrealistic subsidy targets set by his predecessor. Already, we have heard of tight spend controls imposed across ministries in the last few months.
Next, the FM would want to keep his promise of fixing fiscal deficit at 4.8% next year. If one looks at the India Inc statement of account, all revenue earned by the government goes towards fulfilling non-plan expenditure and consequently we run a fiscal deficit that equals the size of our plan expenditure. This is the result of wasteful and unchecked spending over the years and the noose has been tightening. It's obvious the FM can't reduce fiscal deficit significantly solely through revenue boost. We expect a massive expenditure control in this Budget. The FM is likely to provide for no growth or only a marginal rise in expenditure. This will be a major move, which should excite the market and make the deficit target look achievable. Apart from the flagship schemes like the NREGA, many centrally-sponsored schemes are likely to be given lower allocations or abandoned altogether.
Subsidy of course, cannot be reduced in the current scheme of things, but reducing wastage will be attempted through direct transfers, and over time, by deregulating fuel prices. To make up for the fuel subsidy, we expect additional duty on diesel vehicles. Interest subsidy to farmers and raising purchase limit for housing to Rs30 lacs from Rs25 lacs may be popular moves from the election perspective; so also Food Security Bill, access to medicines through higher allocations and substantial rise in agriculture allocations. Sops are also likely to help boost exports and aid the current account deficit cause.
On the direct taxation front, we expect no change in personal income tax and corporate tax rates, given the prevailing mood. The FM too, hinted at stable rates at a recent investor seminar. Perhaps, he would impose a surcharge, for the higher tax brackets in particular, in line with the philosophy to tax the rich. Contrary to popular opinion, we doubt the FM would increase exemption slabs beyond Rs2 lacs. For one, the DTC recommends a limit of Rs2 lacs and more importantly, enhanced tax collection is critical given the reigning deficit. In this pressure scenario, an exemption of say Rs2.5-3 lacs will help many people escape the tax net. The FM simply cannot afford this potential loss.
With Mumbai and Delhi contributing 50% of the country's income tax collections, our tax base needs to be seriously widened both to boost nation-wide collections and those from hitherto untapped sources. An amnesty scheme could be one good way to boost tax collection.
We expect section 80C to be extended beyond Rs1 lac to Rs1.5 lacs or may be even Rs2 lacs, if the Rajiv Gandhi Equity Savings Scheme is included under this section (FM acknowledged the fact that the scheme is complicated and promised to address it in Budget). Likely inclusions to the 80C could be Pension schemes of mutual funds. The section 80C extension helps in many ways: it leaves more money for the lower income groups to tackle inflation, hopefully discourages gold investment to an extent and encourages mass savings and investments to help fund infra and other national development projects. There is a strong case to enhance exemption limit for medical allowance, which hasn't been revised since 1999-2000.
As for wealth tax, we expect rates to be raised but don't see a downward revision in STT rates in the light of the 10% drop in collections from last year's level. Instead, we see the possibility of a commodity transaction tax to boost collections under the garb of better regulation. It's prudent to note that the current Finance Minister was the first to propose it way back in the 2008-09 Budget.
When it comes to indirect taxation, given that peak Service Tax and Excise rates were increased last year, they are unlikely to be raised in times of falling GDP growth. Customs duty may be raised to discourage imports and help improve current account deficit. The variable rates in Customs duty could be raised by 1% and a Countervailing duty could be imposed.
GST looks a difficult prospect for implementation without state support. The government may explore a way out on the lines of FDI (ie. implementation by wilful states). The FM is likely to share his thoughts in this context.
On the non-tax revenue front, the FM will set a big target for disinvestment, higher than Rs300bn.
We believe that the budget would be positive for sectors like FMCG, Infrastructure, Oil & Gas & Pharmaceutical and negative for sectors like Automobile & Cement.