{LONGTERMINVESTORS} Fwd: India Budget: Adherence to fiscal roadmap- a key positive

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From: <research@icicibank.com>
Date: Mon, Feb 29, 2016 at 8:47 PM
Subject: India Budget: Adherence to fiscal roadmap- a key positive
To: stockdesai@gmail.com

India The Budget laid out a medium term roadmap to achieve sustainable growth especially through policy intervention in rural economy and investment into the road sector Fiscal discipline was preferred over growth consideration, even though there is scope to enhance capital expenditure through extra budgetary resources We believe that the RBI will look favourably at the budget and deliver a 25 bps rate cut in the April monetary policy meeting. An inter-meeting cut in the policy rate cannot be ruled out completely Government adheres to fiscal consolidation roadmap The budget laid out a medium term roadmap for holistic recovery in the crucial sectors of the economy. The multifaceted targeting of diverse areas such as stress in the agrarian economy, banking, intent of providing statutory support to Aadhar, initiation of the tax rationalization measures with focus on reducing tax evasion and increasing tax base, investment in the roads and irrigation sectors, implementation of GST and bankruptcy laws, etc are likely to go a long way to bolstering sustainable growth in the economy. Fiscal prudence received preference over growth consideration as the Government adhered to the fiscal consolidation roadmap. The Government has also proposed to set up a panel to review the FRBM Act and shift to a fiscal deficit target range. While medium term growth focus is in place, however, near term growth drivers are not immediately visible. However, implementation of the 7th PC has the potential to act as a catalyst to support domestic demand in FY2017. Direct tax and indirect tax collection to balance out The nominal GDP growth is projected at a slightly higher rate of 11% in FY2017 as against 8.5% in FY2016. Gross tax has been conservatively budgeted but direct taxes are projected to grow at a faster pace as compared to indirect taxes. The optimism built into the higher income tax collection is likely to be offset by increased collections on the indirect tax front especially related to excise duty. Non tax revenue in the form of spectrum receipts and disinvestment are to be the key drivers of revenue collection. Spectrum revenues are estimated to contribute ~INR 990 bn in FY2017 (~INR 560 bn in FY2016) while disinvestment has been budgeted at INR 565 bn for FY2017. From a medium term perspective, to enhance the quality of fiscal consolidation the reliance on non tax revenues such as asset/spectrum sales has to reduce and focus should shift to enhancing tax revenues through increasing the tax base. Expenditure mix disappoints; off-balance sheet funding to be watched Expenditure mix has been projected to become unfavorable in FY2017 on account of 7th Pay Commission and One Rank One Pay related outflows. The subsidy related payout is conservatively budgeted at 1.7% of the GDP as against 1.9% previously. Capital expenditure growth is budgeted at a mere 3.9% YoY growth (prior: 20.9% YoY). However, we note that there is scope to generate extra budgetary resources through NIIF, NABARD funds and other market borrowings to fund capex and developments in this regard will be closely watched. Though PSU banks recapitalization plan of INR 250 bn was in line with our expectations, the lack of clarity on roadmap for recapitalization is likely to disappoint market participants. Other major announcement relates to modification of insurance and pension related FDI policy as well as listing of general insurance PSUs. The net borrowing for FY2017 has been budgeted lower at INR 4.3 tn vs. INR 4.4 tn in FY2016. Gross borrowings are estimated at INR 6 tn. Bottom line: Room for post-Budget rate cut We believe that adherence to the fiscal consolidation roadmap is a positive and RBI will look at it favourably. Against this backdrop we expect a 25 bps rate cut in April policy meeting but an inter-meeting cut cannot be ruled out as well. Please refer to the attached document for a detailed report. Regards, ICICI Bank : Treasury Research Contact: Samir Tripathi +91 22 4008-7233 samir.tripathi@icicibank.com Niharika Tripathi +91 22 4008-6943 niharika.tripathi@icicibank.com ​

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CA. Rajesh Desai

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