Interim Budget 09-10 Analysis

February 17, 2009

Policy on Freeze, Politics Welcome

Current Scenario: Outlook:

Advance estimates indicate FY09 GDP growth of  “Politically Correct” Interim Budget puts
7.1%, running second fastest in the world policy in freeze and opens door for politics
 Fiscal deficit target under FRBM deferred on  The “new” government, ready to live with
account of sharp increase in oil prices and focus high deficit level seen in 2002-03. Though
KSL – Interim Budget 09-10

on rural folks, social and health oriented sectors there is nothing that prevents the new rulers

Gross tax receipts during the first nine months to add further or roll back some of these
FY09 increased 9.6% over the corresponding measures
period in the previous year  Emphasis on social schemes obviously to
 Private final consumption growth expected to garner “aam aadmi” votes
decline to 6.7% in FY09 compared to 8.1% in the
 Interest rates may remain firm as the biggest
previous year, the Government consumption, on
borrower, the GoI, willing to borrow more to
the other hand, expected to increase to 16.8%
fund social schemes and avoid job-losses
from 7.4%
ahead of elections. Does it threaten sovereign

Five PSU banks have CRAR between 10-11%, rating?
out of which three banks have obtained
capitalization worth Rs 38 bn, the remaining two
Benefit to cement, construction and steel
banks will be recapitalized by end of FY10 industry due to huge infrastructure spending
in urban as well as rural areas

Enormous focus is given on the health, socially
deprived and education sectors in the current
Consumer and Retailing to benefit from
budget doubling of expenditure on rural development

Export oriented sectors will enjoy lower interest
Rural employment, as well as chance to garner
rates till the end of Sep’09 votes, get a boost by allocation of Rs 300 bn to

The continued cheaper credit will provide relief infrastructure development and National
to the farmers 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

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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
KSL – Interim Budget 09-10 Analysis
February 17, 2009
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.
2
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Government Finances at a Glance

(Rs Bn; % GDP) FY04A FY05A FY06A FY07 FY08A FY09BE FY09RE FY10BE
Gross Tax Revenue 2,543 3,050 3,662 4,344 5,419 6,029 5,622 6,096
Net Tax Revenue 1,870 2,248 2,689 3,512 4,395 5,072 4,660 4,976
Non-Tax Revenue 769 812 768 832 1,024 958 962 1,120
Net Revenue Receipts 2,639 3,060 3,457 4,344 5,419 6,029 5,622 6,096
Capital Receipts 841 665 122 64 51 45 97 97
Privatization 170 44 16 5 388 102 26 11
Total Revenues 3,480 3,725 3,580 4,413 5,858 6,176 5,744 6,204
Revenue Expenditure 3,621 3,843 4,394 5,146 5,945 6,581 8,034 8,481
Capital Expenditure 1,092 1,139 664 688 1,182 928 975 1,051
Plan Expenditure 1,223 1,323 1,406 1,699 2,051 2,434 2,830 2,851
Non-Plan Expenditure 3,490 3,660 3,651 4,135 5,077 5,075 6,180 6,681
Total Expenditure 4,713 4,983 5,057 5,834 7,127 7,509 9,010 9,532
Deficit Trends
Fiscal Deficit 1,233 1,258 1,478 1,426 1,269 1,333 3,265 3,328
% to GDP 4.5 4.0 4.1 3.5 2.7 2.5 6.0 4.0
Financing Deficit
Borrowing & Other Liab. 1,233 1,258 1,478 1,426 1,269 1,333 3,265 3,328
Source: 2009-10 Budget Document

Plan Outlays by Major Sectors:

(Rs Bn; % YoY) FY09RE FY10BE % YoY
Agriculture & Allied Activities 100 101 1.7
Rural Development 489 428 -12.5
Irrigation and Flood Control 4 4 19.6
Energy 989 1,145 15.8
Industry & Minerals 272 338 24.4
Transport 783 862 10.2
Communications 202 167 -17.6
Science, Technology & Environment 85 96 11.8
General Economic Services 53 62 17.7
Social Services 897 943 5.1
General Services 8 10 34.1
Grand Total 3,880 4,157 7.1
Source: 2008-09 Budget Document

KSL – Interim Budget 09-10 Analysis 3

February 17, 2009
Khandwala Securities Limited

Tax Collection at a Glance

INR Cr 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09RE 2009-10RE
Total Tax Collection 254,348 304,958 366,151 473,512 593,147 627,949 671,293

Direct Tax 105,082 132,761 165,208 230,184 312,202 345,000 380,000

Corporate Tax 63,562 82,680 101,277 144,318 192,911 222,000 244,200
Income Tax 41,379 49,258 55,976 75,081 102,644 108,000 118,800
Wealth Tax 136 145 250 240 340 400 425
FBT - - 4,772 5,316 7,098 8,500 10,200
BCTT - - 321 507 586 600 50
STT - 590 2,559 4,646 8,576 5,500 6,325

Indirect Tax 148,608 172,197 199,818 242,066 279,621 281,359 289,691

Customs 48,629 57,611 65,067 86,327 104,119 108,000 110,187
Excise Duty 90,774 99,125 111,226 117,613 123,611 108,359 110,604
Service Tax 7,891 14,200 23,055 37,598 51,301 65,000 68,900
Sales Tax 77 108 121 165 129 NA NA
Source: 2009-10 Budget Document

KSL – Interim Budget 09-10 Analysis 4

February 17, 2009
Khandwala Securities Limited

Inflation, a concern of the past Spread

Average inflation for the first ten months of FY09 was at The spread between corporate bond and the Gsec
9.6% as against 4.3% in the last year. Inflation has been witnessed a peak during Nov- Dec period mainly because
tamed in the recent weeks with 4.4% in the last week of banks were reluctant to lend to the corporate sector while
January. Inflation will not be a major concern will provide preferring a safer zone of Gsec.
incentive to the RBI in easing the monetary policy.

15 (%) 4.5 (%)

(Actual) (Projected)
12

3.5
9

6
2.5
3

0
1.5

-3

-6 0.5
Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09
Source: Khandwala Research, Bloomberg Source: Khandwala Research, Bloomberg

Easy Liquidity Fiscal Deficit and Revenue Deficit as a % of GDP

A steep drop in commodity prices provided enough In the current situation the fiscal deficit and revenue
reason for RBI to loosen the monetary policy. The series of deficit targets are much higher than the FRBM target but
rate cuts coupled with reduction in SLR by 1.0% eased the are still in the line with the international best practices
liquidity position considerably. 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.

26 (%) 6 (%)

5
23

4
20

17
2

14
1

11 0
FY03

FY04

FY05

FY06

FY07

FY08

FY09RE

FY10BE
Jan-04

May-04

Sep-04

Jan-05

May-05

Sep-05

Jan-06

May-06

Sep-06

Jan-07

May-07

Sep-07

Jan-08

May-08

Sep-08

Jan-09

Source: Khandwala Research, Bloomberg Source: Khandwala Research, 2009-10 Budget Document

KSL – Interim Budget 09-10 Analysis 5

February 17, 2009
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KSL – Interim Budget 09-10 Analysis 6
February 17, 2009