by NR INDRAN / INT

HFY12 Fiscal Deficit : 71% of BudgetTargets; Slippages Well Priced in — Trends in public financesremained unchanged with the 1HFY12 fiscal deficit coming in at Rs2,925bn or 71%of budget estimates of Rs4,128bn (v/s Rs1,333bn last year). This compares withan average of 50% seen in the last six years. As mentioned earlier (see FiscalUpdate – Not Looking Good: Revenues and Expenditure Both Under Pressure),we expect the government to miss its deficit target due to both lower revenuesand higher expenditures. Depending on the pay-out to oil companies, theheadline deficit number could come in the 5.1% to 5.8% range v/s budgetestimates of 4.6% of GDP.

·Pressure Points Unchanged: Revenues Lower,Expenditures Overshooting —

·Revenues: Total revenues in 1HFY12 camein at Rs3.1trillion v/s Rs4 trillion last year, down 24.2% YoY v/s budgetestimates of a 3.6% increase. In addition to the absence of the one-off telecomauctions, this is due to: (1) Lower Tax Growth: Due to moderating realGDP growth and duty cuts on petro products (Rs490bn), the current run rate ofgross and net tax collections are 10.3% and 4.1% respectively v/s budgetestimates of 18.5% and 17.9% (see pg 2). (2) Divestments: WithRs12bn in the kitty, market conditions make the Rs400bn divestment targetdifficult to meet.

·Expenditures: Total expenditure in 1HFY12stands at Rs6 trillion v/s Rs5.4 trillion, up 11.4% v/s budget estimates of3.4%. The key worry is a higher subsidy outlay (budget estimates of a 12.5%contraction in the subsidy bill). Slippages could be on account of: (1) Fuel:Assuming average prices of US$105/bbl for the Indian basket, thegovernment’s subsidy share could touch Rs681bn (0.7% of GDP). (2) Food:The recent rise in Minimum Support Prices by 15% to 38% is likely to take itstoll not only on inflation but also the food subsidy bill (see pg 3).

Bottom Line: Maintain our View of theDeficit coming in at 5.1%-5.8% of GDP — Given trends in revenues andexpenditures, we maintain our view of a minimum slippage in the deficit to 5.1%of GDP. This could rise to 5.8% if the government does not defer theunder-recoveries payment to the oil companies (see pg 3).

Market Impact — Thegovernment’s borrowing program has already breached initial targets byRs530bn (see FiscalUpdate: Apr – Aug Deficit 66% of Target; 2HFY12 Borrowing ProgramHigher by Rs530bn) and resulted in 10-year yields edging to 8.8% levelsfrom 8.3% before the announcement of higher borrowing. Interestingly, thegovernment has said that it is maintaining its fiscal deficit calculations andthat the additional borrowing was required due to: (1) lower govt cashbalances, and (2) a lower pool of small savings. Thus going forward, yields arelikely to remain under pressure and could edge higher if the higher deficitresults in higher borrowing v/s resorting to Open Market Operations.

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