The FY12 budget backdrop is challenging.
The backdrop of the FY12 budget is bearish, due to (1) rising prices, interest rates and persistent deficits and (2) poor governance, slowdown in decision making and lack of execution, in our view. As a result, the FM will need to walk the tight-rope in keeping the populace happy and addressing the urgent issue of fiscal containment, given the limitations of further monetary action to address inflation.
Fiscal outperformance for FY11 is priced in…
We think it is now well-priced in is that due to higher nominal GDP and buoyancy in revenues offsetting supplementary expenditure, the deficit in FY11 is likely to see some improvement from 6%+ in FY10. Incorporating the advance GDP numbers (nominal GDP growth of 20.8% v/s budgeted 12.6%), the fiscal deficit target for FY11 would stand at 4.8% v/s the 5.5% budgeted. Depending on the extent of higher subsidies, we expect a print of 5.1-5.2%.
…But the picture is not likely to be as bright in FY12
In fact, a combination of factors both on the expenditure (implementation of food security bill, rising oil under-recoveries) and revenue front (delays in tax reform) could result in the pace of deficit consolidation being stalled. While we are likely to see measures aimed at reducing food inflation (i.e food processing, agri-related steps),infrastructure financing and FDI, another encouraging factor could be the introduction of biometric cards, which would help stem leakages on food subsidy/ employment guarantee scheme.
CAD could surprise positively, pressure on INR ....
Possibility of a positive surprise on the current account.
On the external front, export growth continues to post sustained trends, with growth averaging at ~30% levels. Moreover, import growth has seen some moderation in recent months, thus resulting in the trade deficit averaging US$8-9bn from US$11-13bn levels earlier. This could result in the current account deficit surprising positively from our estimate of US$56.4bn (3.2% of GDP), vs. US$38.4bn in FY10.
…But weak sentiment and a stronger USD add to depreciation pressure on the INR.
While overall capital flows are more than sufficient to finance the CAD, the deceleration in FDI needs monitoring, given that the CAD is being largely financed by portfolio flows, which is a concern especially in the current risk on/off environment. This, coupled with weak sentiment on India due to recent corruption/governance related issues and a near-standstill on policy progress, as well as our global team’s outlook for a marginally stronger dollar, places downward pressure on our currency estimates. We are thus revising our Mar11 INR forecast to 46.5/$ from Rs44.5/$ earlier; and our Mar12 forecast to Rs45.5/$ from Rs43.5/$ earlier. However, a recovery in sentiment would lead us to relook at these forecasts more optimistically.
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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