Budeget expections

Expectations From Union Budget 2011

Weekly News

What investors expect from the Union Budget 2011

• After the steep fall in the indices last month, stock markets are looking forward to the forthcoming Union Budget as an event that could fix some of their troubles.

• India was one of the first countries to implement the stimulus programs to pull the economy out of recession.

• As a corollary, India is again one of the first countries to face the problem of inflation.

Contd.

• The challenge the Finance Minister now faces is how to control inflation without affecting growth.

• Investors expect three major things from the budget

1. Controlling inflation

2. Controlling fiscal deficit

3. Investments in infrastructure.

Inflation

• Inflation reached uncontrollable levels in the second half of 2010, not due to the stimulus alone. Rising commodity prices due to supply side constraints was also a major contributor.

• Globally, prices of commodities rose whether it was metals or agri commodities like coffee, sugar and cotton.

• The main problem that the agri commodities sector faces is logistics.

Contd.

• Lack of proper roads for fast and easy transportation of perishable goods, and good quality cold storage chains are the bottlenecks that have to be removed immediately.

• Allowing large investments in this sector will transform it, leading to efficient use of resources and minimizing wastages.

Infrastructure

• Government wants the country to grow at double-digit rate but is providing infrastructure that is bursting at the seams today.

• Be it traffic jams or near collision of planes at airports, the capacity of all types of infrastructure is constrained.

• This is not due to lack of allocation or lack of financial commitment but due to lack of execution.

Contd.

• Currently, infrastructure sector faces issues like higher commodity prices and higher cost of funds.

• India desperately requires large capacity additions in roads that can transport higher capacities, and more investments in power.

• Hence, investors are expecting a renewed emphasis on execution of existing projects and further enhancing public-private partnership projects that help in cost mitigation.

Fiscal deficit

• The lack of control over the fiscal deficit is said to be of the major reasons for foreign institutional investors (FIIs) withdrawing their investments this year.

• There is no sale of assets planned for this year, investors fear there is a risk of unexpected rise in the deficit.

• A fiscal deficit of 4.8-5% of the GDP in 2011-12 could equate to a rise in the central government's net market borrowing to Rs 3,70,000 crores that is acceptable for the investors.

Contd.

• However, the worry line arises if the net borrowed amount rises significantly above Rs 4,00,000 crores.

• Numerically, the fiscal deficit in 2010-11 could fall (from 5.5 to 4.8 percent of GDP) simply due to the recent upgrade in GDP denominator.

Contd.

• This could mask the real rise in the fiscal deficit. The fear is that the combination of lower GDP growth and rising oil price could throw the fiscal deficit numbers completely off balance.

• Hence, investors want a clear roadmap of how the fiscal deficit will be controlled by the government in all scenarios - be it falling GDP, rising oil price, or increase in other subsidies and sops.

Govt may hike gold import duty

• Record demand for gold despite high prices may increase the odds that the government will raise import duty on the metal in the forthcoming budget, World Gold Council (WGC)

• Since high prices did not deter consumers from making a record purchase of 745.7 tonne jewellery

Contd.

• The high demand resulted in the country importing 918 tonne, the highest in a year so far

• At the current import duty of Rs 30,900 on one kg of gold, the government would have raked in Rs 2,836.6 crore

• The jump in demand amid rising prices may act as an incentive for the government to raise the duty

Contd.

• This was a growth of 66% from what they purchased in 2009. ETIG data showed that the average price of gold in Mumbai rose by 20% to Rs 18,488 a tola.

Budget 2011: Possible questions & answers FM faces

Will India further trim fiscal stimulus?

• In last year's budget, he trimmed the package by raising factory gate duties on all major items to 10 percent from 8 percent and reimposing the taxes on crude oil, petrol and diesel that were withdrawn in 2008.

Will New Delhi follow the fiscal consolidation path?

• The Indian central bank, which has raised rates seven times since March to tackle high inflation, hopes the government moves towards fiscal consolidation in 2011/12.

• The finance minister may also marginally lower government borrowings below this year's 4.47 trillion rupees ($98 billion) to show his commitment to fiscal consolidation

Contd.

• The government could raise up to 400 billion rupees from the sale of stakes in companies, partially offsetting a swelling food subsidy bill estimated at 700 billion rupees. A downturn in the stock market, however, has curbed investor appetite for new issues for the time being.

What are the options on oil subsidies and duties?

• The widening gap between international crude prices, now over $100 a barrel, and domestic retail prices of diesel, cooking gas and kerosene could slash levies on imported crude and domestic petroleum products.

• High inflation and upcoming state elections mean Mukherjee will not pass along the full impact of rising crude prices.

• The oil ministry has urged Mukherjee to eliminate the 5 percent customs duty on crude and reduce duties on petrol and diesel to 2.5 percent from 7.5 percent.

How can India curb inflation without hurting growth?

• India wants its economy to grow at 9 percent in 2011/12, up from about 8.5 percent this fiscal year, even as inflation remains well above government targets, at 8.23 percent in January.

• More infrastructure would help ease bottlenecks. The Planning Commission, a government body, has recommended an increase of up to 20 percent from last year's $38 billion budgeted for sectors including roads, ports, airports and railways, as well as for health and education.

Contd.

• Mukherjee may direct funds towards more production of milk, poultry, fish, vegetables and fruit, which have driven food inflation running at 11 percent annually.

Will the finmin announce major reforms?

• The government is focused on blunting opposition attacks over a series of corruption scandals.

• Mukherjee will not announce any major economic reforms such as opening the retail sector more broadly to foreign investors or raising foreign investment limits in insurance.

• He may announce the set-up of an infrastructure debt fund and initiatives to deepen the corporate debt market

Will there be any steps to address the current account

gap?• More exports are needed, and the budget may

include incentives for labour-intense export sectors such as textile, leather and wood products.

The current account deficit is on track to touch 3.5 percent of gross domestic product this fiscal year, which the central bank governor has said is unsustainable.