Can Pranabda deliver 4.6% of GDP as fiscal deficit?

The intraday graph of Nifty looks like a hill. The expectations before the honorable finance minister started his speech before 11 AM were bleak. But once he uttered the magic number of 4.6% as fiscal deficit, the markets took off – mostly because of short covering. As he ended the speech and the market participants started using their right brain, they realized that 4.6% may not be achievable after all.

I turned my attention into the budget numbers to see if Pranabda could achieve what he has set out to achieve. There are more questions raised than answers.

1. To start with, the finance minister expects the tax collections to go up by 18%. Last year he budgeted an increase of 19% and over achieved it by 5%. Can this year be a repeat of last year? Looking at the last years numbers, one would believe that he could achieve the target. However, a look into Q3 FY11 GDP numbers could shake that belief. In Q3 FY11, the economy grew by 8.2%. If we break it up, Agriculture, Industry and Services grew by 8.9%, 6.4% and 8.8% respectively. These numbers certainly are not as appealing as they were in Q2 FY11. I wonder, if the growth of industry and Services is slowing down, how can the tax collections grow at 18%?

2. The above numbers also throw a spanner into the allocations made to MNREGA. There has not been an increase in the budget of MNREGA because the government believes that work force would be employed by private participants. It is only when the private participants are not able to employ will they approach the MNREGA program. With slowing economy, the enrollment in MNREGA may increase and the government may be compelled to increase allocation to the program.

3. As against a divestment target of Rs 40,000 crores, he could achieve only Rs 22,744 crores. This year he expects to do Rs.40,000. The question is: If he could not achieve the target when capital markets were hot, how could be achieve the target this year when markets look weak (atleast for now)?

4. The Finance Minister has collected Rs 150,000 crores as other non-tax revenue last year through the 3G and BWA auctions. This year he expects to collect Rs 62,000 crores. What can he sell now?

5. When crude oil has gone up from $80/bbl to $120/bbl, how can he expect to spend Rs 14,700 crores less on fuel subsidies? How can he spend Rs 5000 crores less on fertilizer subsidies?

6. The only way he could spend on subsidies is by direct transfer to end users as is done in Mexico and Brazil. However, for that to happen Aadhaar system has to be set up. Mr. Nandan Nilekani has been asked to submit a report on direct transfer of subsidy by Jun’2011 and put up the system in place by Mar’2012. If we cannot use the direct transfer facility to reduce leakage this year, how can we spend less on subsidies?

The more one thinks the more questions come up. I hope that our finance minister has a solid plan in place.

Concerns on Indian Markets

To get the call on Indian equity markets right, one should get the answers for the following:
1. Where are the interest rates headed?
With one year deposit rates touching 10% and banking borrowing more than 1 lakh crores from RBI, there is a clear sign of tightening. The loan rates have also gone up steeply. My home loan costs 1.25% more in less than two months.
With the windfall gains (due to 3G) missing in the next fiscal and government fixed on increasing spending on NREGA & implementing right to food & education, it would borrow more. This leads to crowding and further hardening of the interest rates.

2. Where is the Current Account Deficit headed?
Thanks to Egypt crisis and QE money chasing commodity prices, India would have to spend more on oil subsidies. This increases the trade deficit.
The CAD may be exacerbated by decreased flow of foreign capital in the form of FII, FDI and repatriations.

3. Is government under control?
Every day sees a new scam. CWG, 2G spectrum, Adarsh, Black money and the lost goes on. All these new items do not give confidence that the government is under control. Where has the promise of 20 km road per day gone? When will railways start to improve its security, infrastructure, sanitation and catering? When will food inflation come down? When will reforms process restart?

4. Is the growth under trouble?
The corporate earnings season for the third quarter has seen no upgrades from analysts. The initial trend shows that the margins are under pressure due to increase in raw material prices. The 20% Sensex EPS growth for FY12 could be tempered downwards by atleast 5%. With FY11 EPS at 1050 and FY12 EPS at 1200, we could see the fair value for Sensex at 18,000. As we know, market over react on either side and can expect the same now.

I am not too worried about the decreasing government consumption figures. It would come back if other sources dry up. However, I am getting concerned about lower numbers for the Index for Industrial Production. The IIP number has come at 2.7% for Nov’10 and the expectation for Dec’10 is 0.6%

What is heartening is that the CSO has pegged FY11 Agriculture growth at 5.6%. This takes the GDP growth to 8.6%. As FY10 growth has been revised upwards, we are growing slower than envisaged.

5. When will inflation subside?
WPI for Dec spiked up to 8.43% from7.48% of the previous month. The food inflation in higher double digits still persists. There seems to be no silver lining in the nearby horizon

6. Who wants to buy?
- FIIs do not want to buy Indian equities because the developed world is looking attractive
- FDI is slowing down because of lack of reforms and our dear environment minister putting road blocks
- Mutual Funds have no additional inflows to buy. Funds into ELSS are trickling in
- Insurance companies’ business has slowed and hence the incremental money has gone down
- Corporates are not buying as liquidity is king and they do not want to lock in as March is round the corner
- HNIs will not buy until the confidence is back
- Retail will not buy until the market bounces