Pre-Budget Expectation 2013: Max Life Insurance

The coming budget would be very important for the Finance Minister given the current state of the economy, need to boost confidence and forthcoming general election. Since this is the last budget before the Elections, the Finance Minister would like to balance advantages for all stakeholders and yet show fiscal prudence. Key to 2013-14 budget will be to rein in fiscal deficit, control expenditure (slashing subsidies etc), show buoyancy in tax revenues and at the same time present a people friendly and investment friendly budget. Many of these objectives run contrary to each other, and it will be a tightrope walk for the Finance Minister to balance all of these. However, we are hopeful that the budget will be a practical budget and not a populist budget, given the FM’s track record and his recent reassurances to various segments of the market that the budget would be a pro-growth and responsible. We also expect several confidence building steps so that “animal instincts” in the economy are revived and India is set firmly on a high growth path. Chidambaram took over the charge of the Finance Ministry in September 2012, when the three key economic imbalances (trade deficit, fiscal deficit, inflation) were in a downward spiral. True to his reputation of being a reformist, he has initiated several reform measures, which has led to a recovery of investor sentiment. The rupee has stabilized for now and both FII and FDI seem to be heading for India. In FY13, the central government''s fiscal deficit is likely to be kept within 5.3% of GDP and the target for FY 14 will likely be pegged at 4.8%. The sharp cut in plan expenditure in FY 13 would offset shortfall on account of lower tax revenues, lower spectrum sale income and higher than budgeted subsidy expenditure. Inflation is on a downward trajectory and should aid RBI in bringing the interest rates lower. Critical pointers on the FY 14 budget: 1) Budget 2014: A pro-growth budget: With the RBI reducing the repo recently by 25 bps, the Finance Minister’s position has been strengthened before the budget. The funding of the infrastructure sector, deepening the bond market and enhancing foreign investments are expected to form the heart of the budget. We expect announcements of fiscal incentives/ tax exemptions to promote capital formation. One can also expect a grant of infrastructure status to the affordable housing sector. On the power front, the Minister could address issues of coal price pooling and SEB restructuring to drive growth particularly in the private sector. In this manner, the exposure of the banks to SEB’s can be safeguarded. Also, we expect some incentives for exporters in the budget. 2) Fiscal Consolidation : The Finance Minister has indicated that the Budget for 2013-14 would focus on cutting wasteful expenses and promoting investments. We expect a hike in excise duty, broadening of tax base and a higher disinvestment target to support higher revenues. We also expect the budget to articulate a definitive timeline and roadmap for implementation of GST. Similarly, more clarity on implementation of the Direct tax code will be helpful. In FY14, an economic recovery along with reduced under-recovery of oil prices may help stabilise the deficit. Recent talk about a cash transfer in lieu of a subsidy also indicates the realisation of fiscal constraints, while at the same time retains the political reality of subsidising the poor. While steps have been taken towards rationalisation of fuel subsidies, it will be reassuring to see some roadmap for rationalising fertilizer subsidies as well. 3) Incentivize increase in financial savings and move people away from physical savings: RBI estimates show that the net financial saving of the household sector declined further to 7.8 per cent of GDP at current market prices in 2011-12 from 9.3 per cent in the previous year and 12.2 percent in 2009-10. The budget should take steps towards promoting financial savings by giving additional tax incentives for long term deposits, life insurance and making equity investments more attractive for individuals. 4) Enable investment in public and private infrastructure: The projected rate of gross capital formation in the 12th plan is 37% of GDP, where 34.1% could be out of domestic savings and net external financing could be around 2.9%. The channelizing of domestic retail investments could partly help in financing the infrastructure needs. The remaining funding constraints can be partially addressed by the huge cash held by public sector companies. We could also expect the attention on the supply side issues to curb inflation. Certain import-export measures, enhanced production and greater efficiency in the transportation network could help to address such issues. As revival of capex cycle and infrastructure investments are key policy objectives, we expect greater budgetary allocation for the infrastructure sector and continuation/ new tax incentives for the sector. These have to be played out with actual implementation so that investment cycle recovery is seen. Investment processes can be made easier for private players. Corporate will invest when there is a stable regime with favourable policies and low interest rates. All in all we expect a healthy, responsible and growth supportive budget. The budget has the potential to turn out to be a game changer for the Indian economy that is currently witnessing a below potential growth along with high inflation.