Interim Budget 09-10 Analysis

February 17, 2009

Policy on Freeze, Politics Welcome
Current Scenario:
Advance estimates indicate FY09 GDP growth of 7.1%, running second fastest in the world

“Politically Correct” Interim Budget puts policy in freeze and opens door for politics The “new” government, ready to live with high deficit level seen in 2002-03. Though there is nothing that prevents the new rulers to add further or roll back some of these measures Emphasis on social schemes obviously to garner “aam aadmi” votes Interest rates may remain firm as the biggest borrower, the GoI, willing to borrow more to fund social schemes and avoid job-losses ahead of elections. Does it threaten sovereign rating? Benefit to cement, construction and steel industry due to huge infrastructure spending in urban as well as rural areas Consumer and Retailing to benefit from doubling of expenditure on rural development Rural employment, as well as chance to garner votes, get a boost by allocation of Rs 300 bn to infrastructure development and National Rural Employment Scheme Full budget in the next quarter may raise tax rates. Current economic conditions (slowdown) and political compulsions (elections) may not continue As elections code of conduct puts fiscal policy on hold, all eyes shift to monetary moves by the RBI, which has limited options

KSL – Interim Budget 09-10

Fiscal deficit target under FRBM deferred on account of sharp increase in oil prices and focus on rural folks, social and health oriented sectors Gross tax receipts during the first nine months FY09 increased 9.6% over the corresponding period in the previous year Private final consumption growth expected to decline to 6.7% in FY09 compared to 8.1% in the previous year, the Government consumption, on the other hand, expected to increase to 16.8% from 7.4% Five PSU banks have CRAR between 10-11%, out of which three banks have obtained capitalization worth Rs 38 bn, the remaining two banks will be recapitalized by end of FY10 Enormous focus is given on the health, socially deprived and education sectors in the current budget Export oriented sectors will enjoy lower interest rates till the end of Sep’09 The continued cheaper credit will provide relief to the farmers

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Interim Budget 2009-10: Key Highlights
Fiscal FY10 fiscal deficit target at 5.5% of GDP as compared to FY09 RE of 6.0%. Total expenditure for FY10 is estimated at Rs 9532 bn, while expected gross budgetary support is Rs 2852 bn FY10 revenue deficit is budgeted at 4% of GDP as compared to the FY09 RE of 4.4%. Revenue expenditure is projected at Rs 8481 bn. Gross market borrowing seen at Rs 4 tn in FY10. Spending FY10 defence allocation increased to Rs 1417 bn, which includes Rs 548 bn for Capital Expenditure. Rs 740 bn allocated for Rajiv Gandhi Rural drinking water plan for FY10. Rs 409 bn allocated for Bharat Nirman for the FY10. A provision of Rs 1 bn is made for Unique Identification Authority of India for the FY10. Allocation of Rs 118 bn proposed for Jawaharlal Nehru National Urban Renewal Mission for the FY10. Social Sector Rs 67 bn is proposed for Integrated Child Development Scheme for the FY10. Rs 80 bn allocated for Mid-day Meals Scheme for the FY10. Rs 301 bn allocated for National Rural Employment Guarantee Scheme for the FY10. Authorised capital of National Safai Karamchari Finance and Development Corporation is being raised by Rs1 bn to Rs 3 bn. Annual ad-hoc grant for pre-metric scholarship for children in unclean occupations has been increased by 50%. Introduction of two new schemes ‘Indira Gandhi National Widow Pension Scheme’ which will provide pension of Rs 200 to widows between age groups of 40-64 years and ‘Indira Gandhi National Disability Pension Scheme’ which will provide pension for severely disabled persons. Widows in the age group of 18-40 years to be given priority in admission to ITIs, and cost of their training and stipend of Rs 500 pm will be provided for. Farm, Rural Sector Interest subvention in short-term crop loans upto Rs 3 Lakh will be continued for FY10 to cap the interest rate at 7.0%. Under RIDF a separate window for rural roads will continue with a corpus of Rs 40 bn in FY10 with the initial corpus of Rs 140 bn Subsidy Major subsidies including food, fertilizer and petroleum for FY10 is estimated at Rs 956 bn. Industry Interest subvention of 2% on pre & post shipment credit is provided to textiles, carpets, leather, gem & jewellery, marine products and SME’s which is extended till 30th Sep’09, thereby increasing the financial outflow by Rs 5 bn Financial Sector Government is expected to recapitalize the public sector banks over the next two years to maintain CRAR of 12%. Education Approximately 98% habitations are covered by primary schools under Sarva Shiksha Abhiyan, for the FY10 Rs 131 bn is allocated which has increased by 571% over the 5-year period. Health Rs 12 bn allocated for Rural Sanitation Programme. Rs 120 bn allocated for National Rural Health Mission.

KSL – Interim Budget 09-10 Analysis February 17, 2009


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Government Finances at a Glance
(Rs Bn; % GDP) Gross Tax Revenue Net Tax Revenue Non-Tax Revenue Net Revenue Receipts Capital Receipts Privatization Total Revenues Revenue Expenditure Capital Expenditure Plan Expenditure Non-Plan Expenditure Total Expenditure Deficit Trends Fiscal Deficit % to GDP Financing Deficit Borrowing & Other Liab.
Source: 2009-10 Budget Document

FY04A 2,543 1,870 769 2,639 841 170 3,480 3,621 1,092 1,223 3,490 4,713 1,233 4.5 1,233

FY05A 3,050 2,248 812 3,060 665 44 3,725 3,843 1,139 1,323 3,660 4,983 1,258 4.0 1,258

FY06A 3,662 2,689 768 3,457 122 16 3,580 4,394 664 1,406 3,651 5,057 1,478 4.1 1,478

FY07 4,344 3,512 832 4,344 64 5 4,413 5,146 688 1,699 4,135 5,834 1,426 3.5 1,426

FY08A 5,419 4,395 1,024 5,419 51 388 5,858 5,945 1,182 2,051 5,077 7,127 1,269 2.7 1,269

FY09BE 6,029 5,072 958 6,029 45 102 6,176 6,581 928 2,434 5,075 7,509 1,333 2.5 1,333

FY09RE 5,622 4,660 962 5,622 97 26 5,744 8,034 975 2,830 6,180 9,010 3,265 6.0 3,265

FY10BE 6,096 4,976 1,120 6,096 97 11 6,204 8,481 1,051 2,851 6,681 9,532 3,328 4.0 3,328

Plan Outlays by Major Sectors:
(Rs Bn; % YoY) Agriculture & Allied Activities Rural Development Irrigation and Flood Control Energy Industry & Minerals Transport Communications Science, Technology & Environment General Economic Services Social Services General Services Grand Total
Source: 2008-09 Budget Document

FY09RE 100 489 4 989 272 783 202 85 53 897 8 3,880

FY10BE 101 428 4 1,145 338 862 167 96 62 943 10 4,157

% YoY 1.7 -12.5 19.6 15.8 24.4 10.2 -17.6 11.8 17.7 5.1 34.1 7.1

KSL – Interim Budget 09-10 Analysis February 17, 2009


Khandwala Securities Limited

Tax Collection at a Glance
INR Cr Total Tax Collection Direct Tax Corporate Tax Income Tax Wealth Tax FBT BCTT STT Indirect Tax Customs Excise Duty Service Tax Sales Tax
Source: 2009-10 Budget Document

2003-04 254,348 105,082 63,562 41,379 136 148,608 48,629 90,774 7,891 77

2004-05 304,958 132,761 82,680 49,258 145 590 172,197 57,611 99,125 14,200 108

2005-06 366,151 165,208 101,277 55,976 250 4,772 321 2,559 199,818 65,067 111,226 23,055 121

2006-07 473,512 230,184 144,318 75,081 240 5,316 507 4,646 242,066 86,327 117,613 37,598 165

2007-08 593,147 312,202 192,911 102,644 340 7,098 586 8,576 279,621 104,119 123,611 51,301 129

2008-09RE 627,949 345,000 222,000 108,000 400 8,500 600 5,500 281,359 108,000 108,359 65,000 NA

2009-10RE 671,293 380,000 244,200 118,800 425 10,200 50 6,325 289,691 110,187 110,604 68,900 NA

KSL – Interim Budget 09-10 Analysis February 17, 2009


Khandwala Securities Limited

Inflation, a concern of the past
Average inflation for the first ten months of FY09 was at 9.6% as against 4.3% in the last year. Inflation has been tamed in the recent weeks with 4.4% in the last week of January. Inflation will not be a major concern will provide incentive to the RBI in easing the monetary policy.
15 (%) (Actual) 12 9 6 (Projected)

The spread between corporate bond and the Gsec witnessed a peak during Nov- Dec period mainly because banks were reluctant to lend to the corporate sector while preferring a safer zone of Gsec.

4.5 (%)


3 0 -3 -6 Sep-08 Sep-09 Jan-08 Jan-09 May-08 May-09 Mar-08 Nov-08 Mar-09 Nov-09 Jan-10 Jul-08 Jul-09


0.5 Apr-06 Apr-07 Apr-08 Oct-06 Oct-07 Oct-08 FY09RE Jan-06 Jan-07 Jan-08 Jan-09 FY10BE Jul-06 Jul-07 Jul-08

Source: Khandwala Research, Bloomberg

Source: Khandwala Research, Bloomberg

Easy Liquidity
A steep drop in commodity prices provided enough reason for RBI to loosen the monetary policy. The series of rate cuts coupled with reduction in SLR by 1.0% eased the liquidity position considerably.

Fiscal Deficit and Revenue Deficit as a % of GDP
In the current situation the fiscal deficit and revenue deficit targets are much higher than the FRBM target but are still in the line with the international best practices considering the global turmoil in the market. The FM’s fiscal deficit and revenue deficit FY10 targets are at 5.5 % and 4.0% of GDP respectively.
6 (%)

26 (%)



4 20 3 17 2 14


11 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 May-04 May-05 May-06 May-07 May-08 Jan-09

0 FY03 FY04 FY05 FY06 FY07 FY08

Source: Khandwala Research, Bloomberg

Source: Khandwala Research, 2009-10 Budget Document

KSL – Interim Budget 09-10 Analysis February 17, 2009


Khandwala Securities Limited


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KSL – Interim Budget 09-10 Analysis February 17, 2009


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