fearful symmetry

February 2013

a monthly chronicle of the Indian economy

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Finance Minister P. Chidambaram presented his 2013/14 Union

After the release of last years Budget, fearful symmetry wrote that
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Westpac Institutional Banking Group

Economic Research

economics@westpac.com.au

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

... The main exception in the credibility stakes is the fuel subsidy bill, which is budgeted to decline by 36% on the current years outlay. That will require both tough political decisions on domestic pricing (most see Congress willingness and ability to act decisively as severely constrained) and a lower average oil price than seems likely in this fractious world. The tyranny of the subsidy bill was that it left the budget exceptionally vulnerable to movements in commodity prices (principally food, fuel and fertilizer) and the rupee, which have been large and generally unfavourable in recent years. When the subsidy bill beats expectations, the only short term expedient to keep the overall budget on track is to cut capital outlays. That is a terrible outcome for long run productive potential as well as current activity. Yet the politics of achieving reasonable reductions in subsidies in low income per capita, high Gini coefficient societies are such that they are anathema to all but a) the bravest of

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outcome for 12/13 is expected to come in at 5.2% of GDP, against the estimate at this time a year ago of 5.1% of GDP, noting that the adoption of the main points of the Kelkar roadmap arrested an alarming degree of slippage half way through the fiscal year. The forward estimates anticipate a considerable and protracted consolidation effort, with the 13/14 deficit estimated at 4.8%, 14/15 at 4.2% and 15/16 at 3.6%. The fiscal impulse will be around 0.4% of GDP in 2013/13, a slightly lesser drag than in 2012/13 (0.6%). Outstanding liabilities are projected to decline by 3.6% of GDP by 15/16, to an end point of 42.3%. The consolidation relies on modest growth of non-plan expenditures, outright declines in food and fuel subsidies, a recovery in growth, and a rise in the revenue elasticity of activity, whereby the tax-to-GDP ratio rises back towards its all-time high just below 12% from less than 10% in 2010/11. In addition the Budget contains a range of modestly sized individual measures that accumulate to a material rise in overall receipts. The revenue-positive measures are a range of direct and indirect initiatives, including bracket creep (steady income tax rates and unchanged brackets, or slabs as India indelicately labels them), a one-off doubling of the surcharge for large domestic companies (5% to 10%, for 2013/14 only) and a rise for foreign corporations operating in India from 2% to 5% (noting they are disadvantaged by their corporate tax rate, hence the lower surcharge), a super rich surcharge of 10% for individuals with incomes exceeding R10 million, closing of loopholes and a new commodity transaction tax. They are offset by tax credits for low income earners and first home buyers, investment allowances for manufacturers, ongoing tax breaks for infrastructure and a few other baubles.


Quickly reviewing the key budget numbers, the fiscal deficit

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Budget to the Lok Sabha on the final day of February. fearful symmetry notes that in 2012 then-FinMin Mukherjee held the release back until March 16, seemingly influenced by the RBI monetary policy meeting schedule. There are no such worries for P. Chid in 2013 - not only has the RBI cut rates already this year, the government has already done much to ingratiate itself with Indias money mandarins in the time since Mukherjees inglorious ascent to the Presidency. fearful symmetry suspects that the RBI will be satisfied that fiscal policy is now doing some genuine heavy lifting, and will duly ease again in either March (which would imply a 25bps move) or in April in tandem with their annual statement (which might see a 50bps move delivered).

www.westpac.com.au

fearful symmetry
a monthly chronicle of the Indian economy

The Finance Minister clearly shares the RBIs concerns about gold
imports, the move towards physical over financial savings and the accompanying rise in the current account deficit. The pre-Budget increase in the tariff on gold imports, from 4% to 6%, was the first major policy step to target gold, while the RBI has reiterated that state and central cooperative banks are not to provide credit for the purchase of the metal. The Budget attacked the gold question indirectly. It did so through a number of measures designed to boost financial markets, which simultaneously increases the channels for funding the current account deficit and encourages financial rather than physical saving by the household sector. The introduction of inflation protected savings vehicles, including indexed bonds, was flagged. The SEBI has been tasked with simplifying the procedures for foreign portfolio investors, principally to encourage greater inflows from real money, with sovereign wealth funds, reserve managers, pension and endowment funds mentioned specifically. Securities transaction tax rates have been reduced. FIIs will be

allowed into the exchange trade currency derivatives markets, with their limits set by their onshore rupee exposure. They will be allowed to use their fixed income holdings as collateral. The range of securities that pension funds can access has been widened and stock exchanges are being encouraged to open dedicated debt segments. There are also tax incentives for India firms to repatriate earnings from subsidies.

As a very quick aside, the December quarter national accounts

described an economy running below potential on all fronts. However, that simple characterisation hides a tentative bottoming in the cyclical sectors evinced by fearful symmetry, even though nontraded services activity admittedly remains in a relative torpor, while the fiscal drag in the quarter was substantial. GDP expanded by a puny 4.5%yr, with calendar 2012 recording a 5.0% outcome.

Obligatory Chinese comparison stats: The average years of schooling

for Indian and Chinese adults is, respectively, 5.1 years and 6.4 years.

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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that wont like some aspects of the revenue raising effort, and they will be joined by the leisure classes. The customs duty on cars with a CIF value in excess of $US40,000 is rising from 75% to 100%; the tariff on imported TV set top boxes is rising from 5% to 10%; the excise on SUVs is rising from 27% to 30%; the customs duty on 800cc and above motor cycles will rise from 60% to 75%; and mobile phones costing more than R2000 (a little less than one third of sales) will attract a 6% duty - previously 1%. Even pleasure craft come in for extra attention. Separately, the travellers duty free allowance for jewellery has been raised (curiously, males and females have different thresholds) to update the nominal amount set in 1991.

fearful symmetry is certain that there are a number of multinationals

were the goodies designed to shore up Congress Party support heading into the 2014 national polls? There were a few, but despite the presence of the odd carrot, the vibe remains one of prudent penury. The give-aways include a tax credit available to those in the R2 lakh to R5 lakh slab. fearful symmetry notes that an increase in the tax free threshold for the low income groups is a tremendously expensive undertaking, and with the Budget hoping to claw back some ground through bracket creep, it was not a realistic option. This deduction is thus a nifty piece of electioneering without a long tenured fiscal legacy. A second is the 3000kms of road projects in Gujarat, Maharastra, Rajasthan and Uttah and Madhya Pradesh earmarked for the first six months of the fiscal year. A third is support for low cost housing and first home buyers, with an additional interest rate deduction of up to R100,000 on loans up of to R2,500,000 (for the 2013/14 year only). There are also a range of sops for individual sectors, some shrouded in competitiveness concerns, references to infant industry arguments - and some transparently protectionist.

This has been billed in the lead-up as an election budget - so where

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governments, or b) the most desperate of governments (in terms of financing themselves or the nations current account) or c) the least democratically accountable of governments. The Congress led UPA coalition, in the post Mukherjee era, circa the September quarter of 2012, qualified as both moderately brave and moderately desperate when it moved to rationalise its fuel programme (and adopt a range of other reforms besides). They still have some work to do of course, as the subsidy rate for kerosene, the key energy source of the poor, will have been reduced by just one third by 2014/15 under the Kelkar guidelines, whereas diesel and LPG subsidies will have been eliminated by that time.

fearful symmetry
Summary data
2012 Monthly Industrial production %yr, of which Manufacturing Electricity Basic goods Capital goods Intermediate goods Consumer durables Manufacturing PMI (index) New orders to inventories (ratio) Services PMI (index) Composite PMI employment (index) Motor vehicle sales %yr, of which Two wheelers Passenger cars New cellular phone subscription mn units Domestic credit %yr, of which Commercial Commercial nonfood Resident deposits %yr Wholesale bank financing (% res. deposits) External commercial finance* USDbn Exports %yr Imports %yr Nonoil imports %yr Trade balance USDbn Foreign direct investment USDbn Foreign portfolio investment USDbn Net foreign official assets USDbn Wholesale price index %yr, of which Primary articles food %yr Primary articles nonfood incl. energy %yr Manufactured products excl. food %yr %3th annualised %6th annualised Policy repo rate %pa Policy reverse repo rate %pa Call money (weighted avg) %pa Cash reserve ratio % 3mth Treasury bill %pa 12mth Treasury bill %pa INR per USD Nominal effective exchange rate index^ Real effective exchange rate index^ Bombay Sensex 30 NIFTY 50 Foreign instit. investment net debt INRbn Foreign instit. investment net equity INRbn Mar 2.8 3.6 2.7 1.1 20.1 0.0 1.2 54.7 1.13 52.1 50.8 11.0 10.3 15.1 6.9 Mar 15.9 15.8 16.8 13.5 3.54 3.8 Mar 7.1 23.5 18.4 14.1 2.6 0.6 292 Mar 7.7 10.1 0.8 4.8 5.4 5.6 Mar 8.50 7.50 9.02 4.75 9.02 8.40 50.4 88.5 96.0 17,404 5,296 66 84 Apr 1.3 1.8 4.6 1.9 21.5 1.8 5.4 54.9 1.20 52.3 50.8 8.6 10.7 0.6 6.5 Apr 15.7 15.2 16.9 13.4 3.30 2.7 Apr 0.7 3.2 2.7 14.2 2.8 1.3 289 Apr 7.5 10.9 1.4 4.7 6.4 6.1 Apr 8.00 7.00 8.38 4.75 8.39 8.17 51.7 86.2 94.8 17,319 5,248 38 11 May 2.5 2.6 5.9 4.4 8.6 3.4 9.7 54.8 1.16 53.1 50.8 9.7 11.0 8.3 2.1 May 16.0 16.1 16.8 14.0 3.32 3.4 May 6.3 8.2 15.9 16.7 2.3 0.2 285 May 7.5 10.6 8.6 4.9 7.7 6.0 May 8.00 7.00 8.09 4.75 8.39 8.28 54.3 83.1 91.7 16,219 4,924 36 3 Jun 2.0 3.2 8.8 3.6 27.7 0.9 9.1 55.0 1.11 52.7 51.5 6.2 6.7 11.5 4.6 Jun 16.9 17.2 18.7 16.6 3.31 2.0 Jun 6.9 12.5 11.4 11.0 2.2 0.4 285 Jun 7.6 10.9 7.2 5.0 6.9 6.1 Jun 8.00 7.00 8.21 4.75 8.31 8.12 55.9 81.6 90.7 17,430 5,279 17 5 Jul 0.1 0.0 2.8 1.0 5.8 0.1 0.8 52.9 1.09 53.1 51.1 4.3 4.7 4.2 1.7 Jul 15.9 16.6 16.9 14.0 3.22 1.1 Jul 13.8 1.3 5.0 17.8 2.4 1.8 283 Jul 7.5 10.2 13.3 5.4 5.1 5.7 Jul 8.00 7.00 8.03 4.75 8.14 7.98 55.4 82.6 92.5 17,236 5,229 34 103 Aug 2.0 2.4 1.9 3.0 4.4 2.7 1.0 52.8 1.06 53.8 52.2 5.1 4.8 20.7 5.5 Aug 15.6 15.9 16.4 14.2 3.21 2.4 Aug 11.1 6.6 11.0 15.3 3.9 1.5 284 Aug 8.0 9.3 14.1 5.6 4.4 6.0 Aug 8.00 7.00 7.96 4.75 8.23 8.12 55.5 82.0 92.3 17,430 5,259 3 108 Sep 0.7 1.6 3.9 2.7 13.3 1.7 1.5 52.8 1.03 53.6 52.2 9.2 12.7 2.4 1.9 Sep 15.4 15.8 16.1 13.8 3.24 2.8 Sep 9.1 4.9 5.1 17.6 5.1 4.2 285 Sep 8.1 8.1 10.4 5.6 4.4 5.6 Sep 8.00 7.00 8.03 4.50 8.14 8.06 54.6 82.5 93.1 18,763 5,703 6 193 Oct 8.3 9.8 5.5 4.1 7.5 9.3 16.9 52.9 1.14 53.6 52.2 13.0 10.3 24.2 1.1 Oct 15.2 15.3 15.6 13.8 3.04 4.3 Oct 2.7 9.0 4.0 21.9 3.3 3.0 293 Oct 7.3 6.7 11.4 5.1 3.3 4.2 Oct 8.00 7.00 8.04 4.50 8.14 8.11 53.0 84.1 94.9 18,505 5,620 79 114 Nov 0.8 0.6 2.4 1.5 8.5 1.6 1.3 53.7 1.23 52.0 53.2 1.3 0.2 1.9 9.0 Nov 16.7 17.4 18.0 14.2 3.18 1.3 Nov 6.4 6.1 1.0 19.7 2.4 2.0 287 Nov 7.2 8.8 14.0 4.6 2.1 3.2 Nov 8.00 7.00 8.02 4.25 8.19 8.11 54.8 81.9 92.5 19,340 5,880 3 96 Dec 0.6 0.7 5.2 2.6 0.9 0.1 8.2 54.7 1.21 54.3 50.6 4.0 5.1 4.0 6.6 Dec 15.1 15.3 14.9 11.2 3.19 1.1 Dec 1.9 6.3 0.9 17.7 2.6 4.9 291 Dec 7.2 11.2 13.2 4.2 0.2 2.3 Dec 8.00 7.00 7.95 4.25 8.19 8.01 54.6 81.5 91.7 19,427 5,905 17 251 Jan 53.2 1.16 54.7 51.0 4.0 7.6 12.7 0.4 Jan Jan 0.8 6.1 5.7 20.0 288 Jan 6.6 11.9 10.5 4.1 1.6 2.4 Jan 7.75 6.75 7.95 4.00 7.94 7.84 54.3 82.1 92.4 19,895 6,035 29 221

Sources: CEIC, Westpac Economics, government agencies. *Sum of foreign currency convertible bonds and external commercial borrowings. ^Broad BIS measures.

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

fearful symmetry
Summary data
2010 Quarterly Agriculture etc %yr Nonagriculture %yr Manufacturing %yr Utilities %yr Construction %yr Commerce & logistics %yr Finance & commercial services %yr Other services %yr Real GDP# %yr Nominal GDP %yr Implicit deflator %yr Private consumption %yr Public consumption %yr Gross fixed capital formation %yr Exports %yr Imports %yr Shares of GDP* Private consumption % Investment^ % Gross implied savings % Exports % Imports % Central fiscal situation Revenue growth %yr Expenditure growth %yr Central revenue deficit % GDP Central government debt % GDP Balance of payments Current account USDbn Merchandise balance USDbn Invisibles balance USDbn Direct investment balance USDbn Portfolio investment balance USDbn Net loans USDbn Overall balance USDbn Current account % GDP Jun10 3.1 9.4 9.1 2.9 8.4 12.6 10.0 4.4 8.5 19.1 10.6 Jun10 10.2 11.1 8.8 10.8 17.2 Jun10 61.9 38.6 35.0 21.9 29.5 Jun10 32.2 17.3 3.8 52.1 Jun10 12.7 31.9 19.2 3.5 4.6 9.0 3.7 3.6 2010 Sep10 41.5 34.1 5.8 3.1 150.0 Sep10 4.9 8.0 6.1 0.3 6.0 10.6 10.4 4.5 7.6 16.5 8.9 Sep10 9.7 10.5 6.9 12.2 16.8 Sep10 61.7 40.4 35.6 22.2 30.4 Sep10 34.6 13.2 3.8 51.3 Sep10 16.9 37.0 20.1 3.6 19.2 6.6 3.3 4.8 Dec10 47.5 39.6 7.2 9.2 163.5 Dec10 11.0 7.6 7.8 3.8 8.7 9.7 11.2 0.8 8.2 16.8 8.6 Dec10 7.2 4.7 11.1 29.7 12.5 Dec10 60.3 38.1 35.7 23.7 29.1 Dec10 38.7 11.0 3.0 50.8 Dec10 10.0 31.5 21.5 1.2 6.3 6.4 4.0 2.4 2011 Mar11 50.1 41.1 9.5 8.3 171.2 2011 Mar11 7.5 9.5 7.3 5.1 8.9 11.6 10.0 9.5 9.2 17.7 8.5 Mar11 5.5 6.7 3.7 36.1 16.1 Mar11 51.9 37.2 35.7 25.3 28.7 Mar11 37.6 16.9 3.5 49.8 Mar11 6.4 30.2 23.8 1.1 0.2 6.4 2.0 1.4 Jun11 41.4 33.4 4.4 3.8 183.3 Jun11 3.7 8.7 7.3 8.0 3.5 13.8 9.4 3.2 8.0 17.7 9.7 Jun11 4.9 4.9 14.7 18.0 19.3 Jun11 59.5 40.2 36.1 23.7 32.3 Jun11 3.0 13.7 5.1 49.9 Jun11 17.5 45.0 27.5 9.3 2.5 6.5 5.4 4.1 Sep11 39.8 30.6 4.3 2.5 143.6 Sep11 3.1 7.2 2.9 9.8 6.3 9.5 9.9 6.1 6.7 16.3 9.6 Sep11 4.6 7.2 5.0 19.7 27.0 Sep11 60.3 39.7 35.2 24.9 36.2 Sep11 4.2 13.0 5.2 50.0 Sep11 18.9 44.5 25.6 6.5 1.2 8.5 0.3 4.5 Dec11 35.2 26.3 0.3 1.6 143.7 Dec11 2.8 6.8 0.6 9.0 6.6 10.0 9.1 6.4 6.1 14.7 8.6 Dec11 6.4 4.7 0.3 6.1 27.0 Dec11 60.4 35.8 32.2 23.7 34.8 Dec11 8.5 18.4 5.3 50.0 Dec11 20.0 48.7 28.7 5.0 1.9 1.6 12.8 3.6 2012 Mar12 33.6 25.2 0.9 2.9 156.2 2012 Mar12 1.7 5.9 0.3 4.9 4.8 7.0 10.0 7.1 5.3 12.0 6.7 Mar12 6.1 4.1 3.6 18.1 2.0 Mar12 52.2 36.4 31.5 28.3 27.8 Mar12 4.1 8.4 4.7 50.7 Mar12 21.8 51.5 29.8 1.4 13.9 2.7 5.7 4.9 Jun12 34.6 27.7 0.9 1.2 150.0 Jun12 2.9 5.9 0.2 6.3 10.9 4.0 10.8 7.9 5.5 13.5 8.1 Jun12 4.0 9.0 0.7 10.1 7.9 Jun12 59.5 37.5 33.4 25.1 33.6 Jun12 15.4 10.9 4.7 51.5 Jun12 16.6 42.3 25.8 3.9 1.9 5.9 0.5 4.1 Sep12 30.6 23.6 1.5 3.6 136.1 Sep12 1.2 5.8 0.8 3.4 6.7 5.5 9.4 7.5 5.3 13.6 8.3 Sep12 3.7 8.7 4.1 4.3 6.6 Sep12 60.8 39.2 33.5 25.2 37.5 Sep12 15.2 10.7 4.9 51.6 Sep12 22.4 48.3 25.9 8.9 7.7 5.4 0.2 5.7 Dec12 32.2 25.8 2.0 1.3 140.8 Dec 12** 1.1 na 2.5 4.5 5.8 5.1 7.9 5.4 4.5 12.4 8.9 Dec-12 4.6 1.9 6.0 2.1 0.3 Dec-12 61.7 35.5 na 22.7 32.2 Dec12 17.9 6.6 4.4 Dec12 2013 Mar13 146.8

Corporate sector (net balances) RBI survey business conditions RBI survey financial conditions RBI survey capacity utilisation level RBI survey profit margins Dun & Bradstreet optimism index

Sources: CEIC, Westpac Economics, government agencies. # Production basis at factor cost. * Expenditure basis at market prices. ^ Includes inventories & valuables. ** Historical revisions to the national accounts have not yet been incorporated in this table.

Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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