Budget 2012: Achieving 7.6 percent GDP growth will be difficult

By Amar Ambani, Head of Research, IIFL

The Union Budget received a lack lustre response from the equity market. Even the hardening of yields suggested that the bond market wasn’t convinced that government borrowing would reduce next year. The government has tried to bridge the deficit by raising rates of excise and service tax, which are likely to prove inflationary. This may cause the RBI to go slow on monetary rate cuts, especially in a rising crude scenario. A resultant slowdown in GDP would mean difficulty in achieving 7.6% targeted GDP growth.

Widening of personal income tax slabs, allocations to agriculture and addressing financing issues for the infrastructure space are positives from the budget. Introduction of the Rajiv Gandhi scheme for equities, reduction in STT, deepening the bond market are also good moves for the long term. But the government could have made better use of this platform to send a strong signal to the country.

Tax revenue calculations look achievable but the non-tax revenue projection look steep and subsidies appear understated, the same like last year’s budget, which resulted in a 130 basis point overshooting of the fiscal deficit in FY12. Disinvestment target of Rs 300 billion would be difficult to achieve if sentiment for the equity market remains dull. The government also seems to be hoping to make significant income from spectrum sale with its Rs580bn figure. A projected drop of 12% in subsidies (compared to 24% rise in FY12) looks tough, to say the least.

Our research estimates suggest government borrowing to be higher in FY13 compared to FY12. We expect fiscal deficit at 5.4% of GDP v/s budget estimates of 5.1%.

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