-------- Forwarded Message --------
Subject: India's 2016 Budget And The Fiscal Math (Myth) Behind 3.5%
Fiscal Deficit Projection
Date: Mon, 7 Mar 2016 17:56:37 +0530
From: Asis Ghosh <asis...@gmail.com>
Reply-To: asis...@gmail.com
*The "most important" fiscal deficit is projected as 3.5% of nominal GDP;*
**
*But in real terms, it may be 3.9-4.6% *
In 2016 budget, apart from the projected fiscal deficit figure, there
are absolutely nothing new, which may be unknown to our market.
*Projected Fiscal Math of the Govt for FY:17 (approx in Rs. cr) *
Total receipts: **
Divestment in PSUS: 36000.00
Divestment in SUTTI: 20500.00
-------------------
Total divestment target: 56500.00 (up by 123% against FY-16 figure
of Rs. 25312 helped by LICI)
Tel/Spectrum auction: 99000.00 ( up by 125% against FY:15-16
average figure of Rs.44000)
Gross tax revenue: 1221522.00 (up by 11.7% against FY-16 RE)
Capital receipts: 601038.00 (up by 3.8% against FY-16 RE)
------------------
Total receipts: 1978060.00 (up by around 10.8%
against FY-16 RE of Rs.1785391)
Revenue deficit: 354015.00 ( against FY-16 RE of
Rs.341589 and FY-15 actual Rs.365519)
Fiscal deficit: 533904.00 (against FY-16 RE of
Rs.535090 and FY-15 actual Rs.510725)
Absolute nominal GDP: 15065010.00 (assuming 11% growth over FY-16 number
against 8.6% RE)
FD/Nominal GDP: 3.5% (Approx projected for FY-17 against FY-16
RE of 3.9%)
*Add: 7-PC impact: * 102000.00 (For FY-17 Rs.73650 + Arrears
Rs.18412 + OROP Rs.10000)
*Less: Govt BE* : (-) 40000.00 ( Govt allocated Rs.225000 cr
against FY-16 RE of Rs.185000 cr)
---------------
*Net 7-PC/OROP*: 62000.00 ( under allocated for FY-17 7-PC/OROP
impact excluding railways)
*Pending FF subsidy*: 100000.00 (approx amount of pending food &
fertilizer subsidy bill)
---------------
*Approx unaccounted*:162000.00 ( pending expenses for cash accounting
system instead of accrual)
*
*
*Actual total FD*: 695904.00 (reported fiscal deficit figure of
Rs.533904 + Rs.162000 approx)
*Actual FD/GDP*: 4.6% ( after accounting the full 7-PC impact for
FY-17 & FF subsidy burden)
3.9% (if only 7-PC impact is accounted
properly for FY-17)
As par various reports, total states & central gross/consolidated fiscal
deficit may be above 8% of the gross GDP for India.
For China, its may be around 2.4% for 2015 (which they are planning to
increase to 3.5% over the years to stimulate its economy).
Now, from the above math, its clear that some of the revenue and
expenditure projections are made on the higher and lower side:
*1. Divestment in PSUS/SUTTI: *
Govt projected a 123% hike from the actual figure of Rs.25312 cr to
Rs.56500 cr. In the last year, Govt had assumed Rs.69500 cr through
disinvestment proceeds, but so far may have collected only Rs 25312 cr
(with the last minute NTPC OFS of Rs.5000 cr). But in this regard, LICI
came to the rescue of the Govt time to time in a major way and
effectively, its can't be called a disinvestment, because in true sense,
LICI money is moving from one arm of the Govt to another (i.e. transfer
of assets).
Given the present condition of the market, the projected disinvestment
figure is looking too ambitious and if the Govt resorts to distress
selling, it may lead to more price erosion in the market for the PSUS
(say Coal India, ONGC etc) and even for the SUTTIS ( like ITC, Axis Bk,
L&T etc). Govt should have thought of massive disinvestment, when market
was around 8500-9000 and sentiment was good and not in the current state
of "gloom & doom" scenarios, where 7000 may be the new normal of the
market in the foreseeable future.
Another point that, some of the analysts are pointing out is the
accounting treatment of disinvestment proceeds (asset sales). As par IMF
rules, any kind of assets sales by a Govt needs to be treated as a
"financing item" rather than "revenue receipt" as the Indian Govt is
doing now to come up with a lower fiscal deficit figure. Its like a
company selling its assets/stakes and accounting the total proceeds into
its revenue/PL, rather than considering only the capital gain/loss
portion. Any way, any kind of receipt is a "revenue receipt", whatever
be its origin and that's the way the Indian Govt is accounting it for
the years.
*2. Ambitious telecom spectrum auction projection:*
GOI projected around Rs.99000 cr for FY-17 on this account against the
actual figure of Rs.57384 cr for FY-16 and Rs.30616 cr for FY-15 (total
collected for around Rs.88000 cr with an average of Rs.44000 cr in
CY:2015-16).
Thus GOI projected an increase of around 74% from the actual FY-16
figure and a whooping 125% from the average figure of the last two
years, which may be much more on the higher side, considering the
present state of balance sheet issues of the telecos and the PSBS (who
will fund ?). Going by the recent commentary of some of the telecos
after this budgetary spectrum target, the figure of Rs.99000 cr may be
an act of over ambition.
*3. Gross tax revenue (direct & indirect):*
Projected 11.7% increase in GTR seemed to be normal and achievable,
specially backed by the black money window ("Fair & Lovely") scheme,
various cess on income taxes, service taxes, imposition of incremental
ED on petrol/diesel, import duty on crude oil etc. Virtually, GOI is
making no stone upturned in any indirect tax collection scope, but that
is not making India a place of "ease of doing business" either and
gradually turning it into a "high cost" economy, where cost of doing a
decent business is quite high, if one consider the complex and high
regulatory charges and comparatively high RRR.
As par the GOI, various indirect tax measures may lead up to Rs.21670 cr
in additional revenue, while some direct tax measures may result in a
loss of Rs.1060 cr, leading to a net gain of around Rs.19610 cr in FY-17.
For FY-17, direct taxes (personal income tax & corporate tax) are
estimated to increase by 12% and indirect taxes (service tax, custom
duty, excise duty, various cess etc) by 11% over the FY-16 RE.
Again, in this GTR account, GOI is projecting an increase of around
11.7% against projected growth in gross GDP of 11% in FY-17, whereas GDP
RE for FY-16 of 8.6%.
As par various reports, although it appears that India is growing around
7.5% in the new GDP methodology, the same is not supported by other high
frequency data like electricity consumption, railway freights, steel &
cement consumption, automobile sales data, bank credit growth, corporate
earning numbers etc. As par some calculation, India may be growing
around 5.5% in the old series GDP data. In that scenario, the current
fiscal slippage may actually end near 4.1% against RE of 3.9% for FY-16
(due to possible lower than anticipated nominal GDP).
Analysts are eager to see capex by GOI at 2% of the absolute GDP figure
against present level of 1.7% for any meaningful stimulation of our
economy.
*4. Capital receipts:*
It consists of GOI borrowings, recovery of loans given by the GOI and
external debt.
*5. 7-PC & OROP impact not fully accounted for FY-17 : *
Total financial impact of 7-PC is around Rs.102000 cr for central Govt
employees with arrears and Rs.35562 cr for Indian Railways in FY-17.
Further, with its gradual implementation, various states may also revise
pay scales for its employees, which may jeopardize the the cumulative
fiscal deficit of the GOI and states further.
As par the above calculation, GOI has not accounted for Rs.62000 cr for
the 7-PC/OROP impact in FY-17. If we took the railway 7-PC figure, then
it may be around Rs.98000 cr. Indian railway is expected to meet its own
7-PC impact by increasing various sources of revenues/asset
sales/monetization etc after its request for help/support was rejected
by the Govt. But it will be very difficult in the current scenario of
bad shape in the IR to meet the 7-PC impact.
It appears that GOI may pass the 7-PC impact in a staggered way over the
next 3-5 years. But in that scenario, it has to pay arrears in the years
to come and that will also add to the expenditure side along with fiscal
deficit. So, in that case, the current fiscal deficit figure appeared to
be projected on the lower side.
As long as the GOI do not come "clean" on this vital 7-PC transmission
issues, its full impact on the consumer demand and inflationary effect
on our economy will not be clear and RBI may not act in a ultra dovish
way with an expected rate cut of 0.50-1.00% in FY-17.
*6. Pending food & fertilizer and petroleum subsidy:*
GOI follows cash accounting system, while corporate India (business)
follows accrual accounting system. In cash accounting, the GOI
acknowledges an expense, only after actual payment is made for that
expense item.
Now, over the years, this lead to a situation, where the FFP subsidy
bill of more than Rs.100000 cr is pending at any point of time. The
total FFP bill is projected to fall by around Rs.7368 cr (2.9% ) to
Rs.2.50 lakh cr in FY-17 from RE of FY-16.
In FY-17 BE, gross expenditure on food subsidy has the highest share of
Rs.1.35 lakh cr (54%), followed by fertilizer subsidy at Rs.0.70 lakh cr
(28%) and petroleum subsidy at Rs.0.27 lakh cr (11%).
It may be noted that petroleum subsidy has fallen by over 50% from
Rs.0.60 to 0.27 lakh cr from FY-15 to FY-17 (BE) amid steep decline in
Crude oil prices.
The FF subsidy is projected to fall by around 3.3% from Rs.2.12 lakh cr
(FY-16 RE) to Rs. 2.05 lakh cr (FY-17 BE). In the absence of specific
expenditure break ups in the budget document, it is being presumed by
some analysts that more than Rs.1 lakh cr subsidy bill (around 50%) is
pending at any given point of time to FCI and the fertilizer companies.
Now, in this scenario, FCI is borrowing constantly from the market
backed by its Govt structure (as FCI essentially is a GOI company),
which is equivalent to borrowing by GOI itself. This essentially tells
that this FF subsidy has already been incurred but has not been
accounted so far properly.
Thus the current FY-16 RE fiscal deficit figure of 3.9% of GDP may be
revised later to around 4.1% (actual), if projected nominal GDP failed
to reach the target at FY-16.
The projected FY-17 BE fiscal deficit figure of 3.5% of gross GDP may
also be on the lower side side looking at the unrealistic and overstated
projected receipts, while the expenditure has been understated. In
reality, as par accrual accounting system, the same may be around 4.6%
as calculated above and even if the GOI cash accounting system, it may
end up around 4.3%, if hopes of nominal GDP growth of 11% is not
materialized in reality at FY-17.
Apart from the above projected fiscal deficit figure of 3.5% , which
surprised the market with an imminent rate cut expectation, there is
little cause of cheers in the 2016 budget. Total expenditure is
projected to grow by around 10.8% with major emphasis on rural economy.
Cumulative infra spending is projected to be around 25% including
provisions of railway budget and some joint center-state programmes.
This figure underscores the Govt's twin targets of rural demand support
and investment acceleration and may be below street expectation.
In one simple word, the 2016 budget may be termed as a "rural budget"
aimed at wooing the rural voters of the forthcoming series of state
elections with an eye on the 2019 parliament election after debacle of
BJP in Delhi & Bihar. In the coming five state elections, BJP is
expected to loose in all and up to 2019, it may loose 90% of the coming
state elections .
*Even with the fading NAMO wave and significant decrease in approval
ratings with a visible sense of disappointment and resurgent RG-V-2
(courtesy political strategist Prashant Kishore ??), 2019 general
election may not be a smooth affair for NAMO unlike in 2014. In that
scenario of political uncertainty and anarchy like situation, Nifty may
gradually drift towards 6300-5800 instead to 8500-9200 by 2018-19.*
*Analytical Charts:*
<https://2.bp.blogspot.com/-kgYPv1xsQN4/Vt1vYp4suJI/AAAAAAAAGXI/MQBk7o5VDhs/s1600/NF-PATTERN-LT-06-03-2016.png>
--
Thanks & Regards,
Asis Ghosh
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