India Market Strategy

FY23 Budget: The struggle to spend productively

Research Analysts
Neelkanth Mishra, Neelkanth.Mishra@credit-suisse.com /
Abhay Khaitan, Abhay.Khaitan@credit-suisse.com /
Prateek Ancha, Prateek.Ancha@credit-suisse.com
February 2022
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure:
Credit Suisse does and seeks to do business with companies covered in its research reports. As a result,
investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this
report. Investors should consider this report as only a single factor in making their investment decision.
Key Takeaways

 Much fiscal space to spend, but productive and efficient spending needs time
– Room to spend: Tax to GDP 1% higher, market fiscal deficit expectations 3pp higher
– Higher interest costs and GDP 5-10% below pre-pandemic path boost expenditure to GDP by 1.5pp
– Centre using this to clear arrears and move off-budget spending to on-budget. The rest accruing as cash
– Using some of these resources to spur state spending is a good idea, but execution a bigger issue for states

 Fiscal arithmetic appears overly conservative

– As expected, tax to GDP expected to fall in FY23, but even the implied 4Q taxes for FY22RE are too low
– Expenditure growth for 4QFY22 also looks ambitious; some revenue spending is just transfers and can happen
– Large part of capex growth an interest free loan to states and off-budget spending brought in; adj. growth 12%

 Continue to prefer domestic cyclicals to global cyclicals

– Government still struggling to spend in FY22, and this challenge should persist in FY23
– The 2.5% of GDP (and rising) government cash with RBI are funds already paid for (higher yields), and a
stimulus if eventually spent; the other option is the government having to cut borrowing targets, lowering yields
– Government focus remains on productive spending: appear unwilling to raise subsidies

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 2

Fiscal consolidation, FY23 spending growth just 5%
FY22 revised target 6.9%, 10bps higher than BE, FY23 at 6.4%

Deficits 40bps above expectation but consolidation continues Central government expenditure as % of GDP falling
16% 20%
As % of GDP Revenue Expenditure Capital Expenditure
14% 18%

16%
12%
14%
10%
12%
8%
10%
6%
8%
4%
6%
2%
4%
0% 2%
1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023b
0%
Union Fiscal Deficit (% of GDP) State Fiscal Deficit UDAY
1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 Government prudently resisting the temptation to consolidate too fast

 Deficits were higher than expected and than BE despite the 4% upgrade to nominal GDP
 Expenditure to GDP falling despite (as we will see) off-budget items coming into the budget

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 3

 Nominal GDP forecast by government conservative
Deficit target for both FY22 and FY23 40bps higher than consensus

FY23 nominal growth assumption Fiscal deficit targets

-4.0
14.0 India FY23 GDP Growth Forecasts Central Govt deficit (as % of GDP)
-4.5
consensus forecast
13.5
CS forecast of 13% -5.0 FY23 Budgeted at 6.4%
13.0

GoI forecast of 12% in Budget -5.5

12.5
-6.0
12.0
-6.5
11.5
-7.0
11.0
*All forecasts are in real terms. 4.5% -7.5
10.5 deflator added to get nominal FY22 FY23 FY22 Revised to 6.9%
-8.0
10.0 Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22
Jan-21 Mar-21 May-21 Jul-21 Sep-21 Nov-21 Jan-22

Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 FY23 growth consensus estimates have been rising since Oct, and likely to rise further
 Government forecasts nominal GDP growth at 12% inline with consensus, CS >13%
 FY23 deficit budgeted at 6.4% despite higher nominal GDP: 40bps higher than consensus

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 4

Sticking to the medium-term consolidation path
The glide path to 4.5% by FY26 largely maintained

Centre and state debt to GDP Glide path for union fiscal deficit
100% 10.0%
9.0%
90% Fiscal Glide Path
8.0%
7.0%
80%
6.0%
5.0%
70%
4.0%

60% 3.0%
2.0%
50% 1.0%
0.0%
40% 2020 2021 2022 2023 2024 2025 2026
1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023
Centre (Last year) State (Last year)
India Debt to GDP (%) Centre (This year) State (This year)

Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 India’s debt to GDP ratio had jumped to 90% in FY21, fell to 86% in FY22; FY23 target 86%
 FY22 could be even 84% if one adjusts for lower than targeted deficits for states in FY21 & 22
 FY23 could be lower as growth likely to surprise on the upside
 Much of this is cleaning up; high debt to GDP likely to remain an overhang till at least 2030

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 5

How much can premature monetary tightening hurt?
Higher bond yields can pressure space to spend

Debt to GDP going forward FY22-32 Interest cost as % of GDP, and forward, if yields are at 6.5%
90%
Sensitivity of India's Debt to GDP at 7.0% Estimate
different interest cost
85% 6.5%

80% 6.0%

5.5%
75%
Assuming, 5.0%
Primary deficit = 0.4%
70%
Nominal GDP Growth: 11%
4.5%

65%
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 4.0%
2008 2010 2012 2014 2016 2018 2020 2022 2024 2026
6.0% 6.5% 7.0% 7.5% 8.0%
Interest cost as % of GDP

Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 10Y bond yields have risen to 6.7% for the centre, 7.5%-plus for states
 Higher debt to GDP has meant an increase in interest costs; higher rates pressure that further
 As rates in the stock are fixed, consolidation path in early years does not change much, but can
mean 1-2pp higher debt to GDP in 5Y, and 7-8pp in 10Y

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 6

 FY23 Budget vs. FY22 revised deficits estimates
Deficit Rs0.7tn higher in absolute terms; ratio lower due to higher GDP

Fall in FY22’s deficit mainly from higher taxes FY23 Budgeted deficits funded mainly from borrowings
41 Rs. Tn
40.0 Rs. Tn
40
39 39.0
38
38.0
37
36 37.0
35
36.0
34
33 35.0
32
Deficit 34.0

FY22R
FY21

Direct taxes

Indirect Taxes

Non-Tax
Non-Debt Capital Receipts

Transfer to States

FY22R

FY23B
Deficit
Cash Drawdown
Indirect Taxes

Non-Tax
Direct taxes

Transfer to States
Non-Debt Capital Receipts
Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 Expenditure remained unchanged YoY in FY22RE, with higher taxes offsetting a lower deficit
 FY23 deficit is mostly unchanged again in absolute terms
 Expected use of cash in FY22RE shows the surpluses the government has to handle

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 7

 Tax growth for both FY22 and FY23 conservative
Government assumes buoyancy seen in FY22 will not last till FY23

Gross Tax as % of GDP (Centre+ states own) Significant change in FY23 tax growth estimates

20% 60%
As % of GDP Growth YoY
18%
50%
16%
40%
14%
30%
12%
10% 20%

8% 10%
6% 0%
4%
-10%
2%
-20%
0% Income Tax Corporate Custom Excise GST Non Tax
1986 1990 1994 1998 2002 2006 2010 2014 2018 2022r Tax

Gross Central Tax States' own tax FY22B FY22R FY23

Source: CGA, Budget documents, Credit Suisse research Source: CGA, Budget documents, Credit Suisse research

 9M tax collection was materially above FY22BE, with central tax to GDP at record high
 FY22RE growth assumed in taxes 24%, vs 17% FY22BE; 9M is up 44% YoY
 FY23BE assumes just 10% growth: a drop in tax to GDP; conservative, despite the decline in
excise, but prudent

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 8

Tax growth assumptions are conservative

Direct tax growth assumptions vs. history Indirect tax growth assumptions vs. history

50% 50%

40% 40%

30%
30%
20%
20%
10%
10%
0%

0%
-10%

-20% -10%
1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021 1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021

Direct Tax YoY Nominal GDP growth Indirect Tax YoY Nominal GDP growth

Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 Tax growth expected to be lower on top of a lower growth in GDP

 Indirect tax growth in FY22 boosted by sharp rise in excise on fuel; are to be rolled back,
implying just 6% growth in indirect taxes in FY23
 Excluding excise, growth in indirect taxes for FY23 is 15%

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 9

Tax growth versus nominal GDP growth

Direct tax and GDP growth not highly correlated Neither are indirect tax (less excise) and GDP growth
60% 50%

50%
40%

40% FY23BE
30%

Growth in Indirect Taxes less Excise

30%
20%
Growth in Direct Taxes

20%
10%
10%

0% 0%

-10% -10%
Income Tax Corporate Tax
Linear (Income Tax) Linear (Corporate Tax)
-20% -20%
5% 10% 15% 20% 5% 10% 15% 20%
Nominal GDP Growth Nominal GDP Growth
Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 “Tax buoyancy” has not been consistent in the past, for both direct and indirect taxes
 Even excluding the excise on fuel, which has risen to 2% of GDP over 6 years, no pattern visible
 Occasionally rate changes have a role to play (e.g. corporate tax cut in 2019, excise cuts in 2009)
 High informality in the economy may be contributing to the lack of a direct link

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 10

With 3 months left, how realistic are revised estimates?
Government has already disclosed monthly fiscal data till Dec-2021

Receipts Expenditure
120% 90%

100% 80%
70%
80%
60%
60%
50%
40% 40%
20% 30%
20%
0%
10%
-20%
0%
-40% -10%
-60% -20%
Direct Tax Indirect tax Non-Tax Revenue Expenditure Capital Expenditure

9MFY22 Growth 3MFY22 Growth Reqd 9MFY22 Growth 3MFY22 Growth Reqd

Source: CGA, Budget documents, Credit Suisse research Source: CGA, Budget documents, Credit Suisse research

 In prior years the last three months’ receipt assumptions appeared ambitious; this year they
appear overly conservative
 FY profit/income assumptions continue to rise: should boost taxes
 Higher capex targets though appear stretched

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 11

How much can centre + state expenditure to GDP rise?
Tax to GDP hits new highs and markets are primed for higher deficits

Centre+state expenditure as % of GDP States expenditure as % of GDP

35% FY23 for States: CS Estimate 20%
As % of GDP States expenditure as % of GDP

30% 19%

18%
25%

17%
20%
16%
15%
15%
10%
14%

5%
13%

0% 12%
1986 1990 1994 1998 2002 2006 2010 2014 2018 2022r 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022r
Net Centre Expenditure (exc. Grants to states) States

Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 Expenditure (centre + state) as % of GDP spiked in FY21 due to pandemic and lower GDP
 The budgeted increase has been substantial for the states, but miss on targets is very large
 For FY23, the challenge for centre was how to deal with expenditure rolling off
 States spending intentions likely to remain elevated when they present their FY23 budgets

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 12

States have been unable to spend
States budgeted spending at 19% of GDP, with jumps in social welfare, health

State government expenditure saw sharp revision in FY21 Much of the increase in FY22 to come from health, social
Changes as % of GDP (FY22 over FY15-19 avg)
0.5% Growth CAGR (FY22 vs FY19)
16%
21%
0.5% 14%
20%
0.4%
19% 12%
0.4%
18% 10%
0.3%
17% 0.3% 8%
16% 0.2% 6%
15% 0.2%
4%
14% 0.1%
0.1% 2%
13%
0.0% 0%
12%

Pension

Health

Others
Rural Dev
Education

Agri

Transport
Social Welfare

Interest
FY15-19 FY20BE FY20RE FY20A FY21BE FY21RE FY21 FY22BE
Average

State Expenditure as % of GDP

Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 FY21BE looks high because GDP base of FY21 at the time of budget was higher
 The actual increase in spending by states was much lower than budgeted in FY21, and is likely
to be similar in FY22 as well. Excluding salaries, pensions and interest, the rise may not be much
 The challenge has been in execution, not availability of fiscal space

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 13

Spending normalized from pandemic/one-off spending
Increase in FY22 spending on pandemic/one-offs are reversed in FY23

Much increase in FY22 spending were pandemic/one-off This has been partially reversed in FY23
40 40
Central expenditure (Rs Tn) Central expenditure (Rs Tn) One time/pandemic cost
38 40
36 39
34 39
32 38
30 38
28 37
26 One time/pandemic cost 37
24 36
22 36
20 35
Vaccines

Transport

Others
NREGA
FY19

Food

Finance

FY22
Defence
Fertiliser

Transfer to States

Finance
Vaccines

Others
Transport
NREGA
FY22

Food

FY23
Defence
Fertiliser

Transfer to States
Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 Much of the rise in FY22 spending was from spending induced by the pandemic: Food subsidy,
NREGA spending and Vaccines. Some, like higher fertilizer subsidy, should also roll off
 Government also cleared arrears in various subsidies and incentives (e.g., for exports)
 Where is the new spending?

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 14

Expenditure growth in FY23

Split of FY23 budgeted expenditure Split of incremental expenditure

Others Interest
Transfer to States
Home Affairs 10% Interest Salaries (ex-Defense)
Rural 3% 24% Transport
Defence 2021-2023B
Development Home Affairs
5% GST Comp.
Pension
Agri
Transfer to Rural Development
States Others
8% Subsidies
-100% -80% -60% -40% -20% 0% 20% 40% 60% 80%
GST Comp. Defence
3% 10%
Agri Interest
4% Transfer to States
Salaries (ex-Defense)
Subsidies Transport
Transport 8% Defence
9% Salaries (ex- Home Affairs
Defense) GST Comp. 2022R-2023B
Pension Pension
11%
5% Agri
FY23B Expenditure: Rs.39 tn
Rural Development
Others
Source: Budget documents, Credit Suisse research Subsidies
-100% -50% 0% 50% 100%
Source: Budget documents, Credit Suisse estimates

 Non-discretionary items like interest costs continue to dominate central government spending
 The sharp rebound in nominal GDP and market allowing a higher deficit opens up space
 The government has capacity issues in spending: cannot quickly raise spending in size

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 15

Significant changes to expenditure heads
Much of the change from FY22BE to FY22Re came from subsidies, Air India

% split of incremental expenditure (Fy22r vs FY23B) Split of capex

41 Rs. Tn
Others
41 Warehousing 9%
Defence
Urban1%
Dev
40 3%
20%
40
39
39
38 State Loans
18%
38
37
37
Railways
36 18%
FY22R

FY23B
Others
Home Affairs

Subsidies
Salaries (ex-Defense)

Transport

Agri

Rural Development
Interest

Defence

Pension
Transfer to States

GST Comp.

Telecom
7%

Roads
24%
Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 Incremental spending in FY23 to come from Interest, transfer to states and transport
 Changes in FY21A came from Subsidies
 FY22 spending revised up for Subsidies and transport (Air India transfer)

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 16

 Expenditure: lower salary growth releases fiscal space

Centre + State spend on salaries and pensions Central spending on salaries and pensions YoY
Fiscal space of 1.1% of 60%
25 10.0% 6th Pay
5th Pay Commission GDP released
Forecast Commission
9.5% 50%
5th Pay Commission
20 7th Pay
6th Pay 9.0% 40% Commission
Commission
7th Pay 8.5% 30%
15 Commission
8.0%
20%
10 7.5%
10%
7.0%
5
0%
6.5%

0 6.0% -10%
1996 2001 2006 2011 2016 2021 1997 2000 2003 2006 2009 2012 2015 2018 2021

Aggregate Salary and Pension % of GDP (RHS) Central Salary + Pension YoY

Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 Salaries and pensions are a large 6.5% of GDP, can vary by 2-3pp; next pay commission in 2026
 As expected, growth in salaries & pensions in FY23BE was weak; to lag nominal GDP growth again
 This releases fiscal space
 Dearness Allowance (DA: inflation adjustment in compensation) was cancelled in FY21, but
increases did occur in FY22
CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 17
 Non-tax: disinvestment targets lowered meaningfully

Disinvestment targets Sector-wise government holding in the listed space

1,200 0.9% Others Consumer
Utilities 1% Discretionary
0.8% 15% 8%
1,000
0.7%
Energy
Telecom
800 0.6% 20%
0%
0.5%
600
0.4%

400 0.3% Industrials

9%
0.2% PSU Bank
200 34%
0.1%
Metals & Mining
0 0.0% 7%
NBFC
1995 1998 2001 2004 2007 2010 2013 2016 2019 2022r
6%
Divestment (Rs bn) As % of GDP Split of Govt holdings with market cp of 14 tn

Source: Budget documents, Credit Suisse research Source: CMIE, Credit Suisse research

 Execution on disinvestment has lagged political intent so far: the latter has been pro-disinvestment
 LIC disinvestment may be possible in FY22, but a challenge still: if so, Rs780bn a realistic estimate
 Privatization of 2 PSU Banks, one GIC in addition to IDBI: the consolidation of financial assets into
overall target a marginal negative

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 18

Non-tax revenue receipts: RBI Dividend, 5G spectrum

RBI dividend projection Non-tax receipts

3,500 3.5%
2,000

1,800 3,000 3.0%

RBI Dividend to Govt. (Rs bn)
1,600
2,500 2.5%
1,400
2,000 2.0%
1,200

1,000 1,500 1.5%

800
1,000 1.0%
600
500 0.5%
400

200 0 0.0%
1995 1998 2001 2004 2007 2010 2013 2016 2019 2022r
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Non Tax (Rs bn) As % of GDP

Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 RBI dividends likely to be lower, given VRRR and large reverse repo costs: liquidity surpluses are a
drag on its income
 Other receipts lower too

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 19

Government borrowing

Government borrowing over the past few years Non-market sources of financing deficit have risen
12000 Financing of fiscal deficit (INR tn)
Net government borrowings (INR bn) 20

10000
15

8000
10

6000
5
4000
0
2000
-5
0 2009 2011 2013 2015 2017 2019 2021 2023BE
FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23
Net market borrowings Small savings + state PF
Other receipts(public account) Others
BE RE Actual
Cash drawdown

Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 FY22RE borrowing 10% lower than BE

 FY23 net market borrowing budgeted Rs12tn: appears too high, and could be Rs1tn lower
 Increased reliance on small savings schemes in FY22RE continues in FY23BE

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 20

Government cash balances are abnormally high

Government cash at RBI is currently unseasonally high Monthly cumulative accrual/disposal of cash with RBI
6 4
Government cash balance with RBI States cash balance with RBI (Rs Tn)
5
(Rs Tn)
3
4

3 2

2
1
1

0 0

-1
*Extracted from charts in RBI Annual Report *Estimated from total cash balance and
-1
-2 monthly CAG reports

-3 -2
Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 Apr-21 Apr-14 Apr-15 Apr-16 Apr-17 Apr-18 Apr-19 Apr-20 Apr-21

Source: RBI, Credit Suisse research Source: Budget documents, Credit Suisse research

 Cash balance with the RBI used to smoothen timing mismatches between receipts & expenditure
 A large part of current cash balance is for the state governments (who buy T-bills to park cash)
 Taxes are doing better than expected six months back and spending cannot catch up
 Higher than normal cash at end of FY will have implications for FY23 borrowing

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 21

Yield spike seen today should reverse

Financial savings have not slowed Net borrowing as % of incremental deposits

35,000 16% 90%

15% 80%
30,000 As % of incremental deposits
14% 70%
25,000 13%
60%
12%
20,000 50%
11%
15,000 40%
10%
30%
10,000 9%
8% 20%
5,000
7% 10%

0 6% 0%
1990 1994 1998 2002 2006 2010 2014 2018 1992 1996 2000 2004 2008 2012 2016 2020

HH Financial Savings (Rs Bn) As % of GDP (RHS) Net Borrowings

Source: Budget documents, Credit Suisse research Source: Budget documents, Credit Suisse research

 State government borrowing is also running behind the calendar: they may also be better fiscally
 Financial savings have risen substantially in FY21, and funding deficit unlikely to be a challenge
 Credit growth is still weak, but should pick up during FY22
 Both deposits and insurance and pension flows have continued to grow

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 22

The necessity of tapping new sources of funding

Change in central GSec ownership share Excess SLR elevated as SLR threshold still falling
6 SLR (%) SLR Required (%) Excess SLR (%, RHS)
4 45% 18%

2 16%
40%
0 14%

-2 35% 12%
-4 10%
30%
-6 Percent point change in share of ownership 8%
-8
25% 6%
-10
4%
-12 20%
Banks Insurance PF RBI FPIs MFs Others 2%

1Y 5Y 10Y 15% 0%
Jun-01 Jun-03 Jun-05 Jun-07 Jun-09 Jun-11 Jun-13 Jun-15 Jun-17 Jun-19 Jun-21
Source: RBI, Credit Suisse research Source: RBI, Credit Suisse research

 The increase in HTM limits encouraged banks with surplus funds to buy 3-5 year bonds.
 Over the past 1, 5 and 10 years, rise in RBI's share has offset banks: this is desirable
 Government needs to find new sources of demand for government bonds

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 23

The necessity of tapping new sources of funding

FPI holding limits were to offset SLR limit cuts FPI holdings now significantly below the permitted limits

25% 6% 6
SLR and FPI Limits in GSecs
(%)
24% 5% 5

23%
4% 4

22%
3% 3
21%
2% 2
20%

1% 1
19%

18% 0% 0
Jun-08 Jun-10 Jun-12 Jun-14 Jun-16 Jun-18 Jun-20 Jun-08 Dec-09 Jun-11 Dec-12 Jun-14 Dec-15 Jun-17 Dec-18 Jun-20

SLR FPI (RHS) FPI Holdings Limit

Source: Budget documents, Credit Suisse research Source: RBI, Credit Suisse research

 Higher FPI limits were to offset SLR cuts, but without bond index inclusion this may not work
 FPI holdings of government bonds have now gone much below the permitted limits
 Market expects inclusion in bond indices in 1HFY23.

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 24

Changes to import duties

Changes in import duties over the years Most sectors have seen increase in import duties in past 2Y
60%
% of products (HS code 6 digits) Import Duty 2014 2015 2016 2017 2018 2019 2020 2021
seeing change in import duties Electrical and
40%
Electronics Sector 7.1 7.1 7.1 7.1 7.6 7.9 12.5 15.0

20% Auto Parts 10.0 10.0 10.0 10.0 10.0 10.0 10.0 15.0
Gems and
0% Jewellery Sector 10.0 10.0 10.0 10.0 10.0 10.0 10.0 15
Chemicals (Carbon
Black) 7.5 7.5 7.5 7.5 5.0 5.0 5.0 7.5
-20% Plastic
items(Builder's
-40% Ware) 10.0 10.0 10.0 10.0 10.0 10.0 0.0 15
Electric Motors and
Generators 7.5 7.5 7.5 7.5 10.0 10.0 10.0 15.0
-60% Capital Goods and
Machinery 7.5 7.5 7.5 7.5 7.5 7.5 0.0 7.5
-80%
Textiles (Nylon) 10.0 10.0 10.0 10.0 20.0 20.0 7.5 5.0
1996-2000 2000-2005 2005-2010 2010-2014 2014-2019 2019-20
Textiles (Silk) 10.0 10.0 10.0 10.0 25.0 25.0 10.0 15.0
Increase Decrease
Metals 5.0 7.5 10.0 10.0 15.0 15.0 10.0 7.5
Source: WTO, Credit Suisse estimates Source: WTO, Credit Suisse estimates

 40% of tariff lines saw increases in import duties in the past five years. In every five year period up
until 2010, 60-70% of tariff lines used to see cuts: this has reversed since then.
 2020 saw fall in import duties, mainly for Agri, textiles, metals and autos
 Several sectors have been on the government radar for a while, as seen in the imposition or hiking of
import duties over the past few years.

CREDIT SUISSE, Equity Research, Asia Pacific February 1, 2022 25

Financials
Growth supportive

Loan growth picking up across segments, led by SME (ECLGS)

 Extension of ECGLS will aid loan growth pick-up
40%
– ECLGS scheme till Mar-23 and increase in limit to Rs5tn (from Rs4.5). SME Retail Agri Industry & Services

Sanctions so far are at Rs 3.16tn and disbursals at Rs2.4tn. 35%

Loan Growth (% YoY)
– ECLGS account for ~20% of growth in CY21 and pick-up in SME has 30%

aided loan growth recovery in 4QFY21 25%

20%
 No recap of PSU Bank budgeted, first in the last decade 15%
– FY22 recap was Rs150bn vs BE of Rs 200bn
10%
– Capital levels at PSU Banks above regulatory thresholds
5%

 No specific budgeted revenues from financial sector entity divestments 0%

-5%
Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21
 Introduction of Central Bank Digital Currency, (Digital Rupee) will be issued in
SME refers to Micro, Small and Medium as per RBI monthly data, 6.5% of overall
2022-23.

No capital infusion for FY23, reduction in FY22 planned infusion … … however, PSU Bank capital levels are healthy, with CET at 10-14%
1,600 15%
Govt Infusion LIC Infusion in IDBI CET-1 Ratio (%) FY20 2Q22
1,400 14%

13%
1,200
12%
FY21 - CET1 requirement
1,000 11%

800 10%

9%
600
8%
400 7%

200 6%

5%
-
Rs bn FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company data, Credit Suisse Month Day, Year 26

Modest increase versus large spurt in FY22
Roads growth of 10% and railways of 14%
 No step change this time: Modest
increases in spending in FY23BE versus step 5,000
Road Transport and Highways
4,500
change in FY22 budget. 4,000
Ministry of Railways (Rs bn)

 Railways: In railways, budgetary support has 3,500

been increased to Rs1371 bn from Rs1071 3,000

bn in FY22BE. Total capex is Rs2,456 bn vs 2,500

2,000
Rs2,149 bn in FY22BE. 1,500
 Roads: In roads, budgetary support and 1,000
extra budgetary resources have been 500

combined together. Total spend is Rs1340 bn -

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 22RE 23BE
from Rs1224 bn in FY22BE.

Growth over Growth over

2016A 2017A 2018A 2019A 2020A 2022BE 2021A 2022RE 2023BE 2022RE (%) 2022BE (%)
Ministry of Railways 935 1,099 1,020 1,334 1,480 2,149 2,346 2,148 2,456 14 14
Indian Railways 935 1,099 1,020 1,334 1,480 2,149 2,346 2,148 2,456 14 14
Budget support 350 452 434 528 678 1,071 1,093 1,171 1,371 17 28
IR - Public private partnership 194 - 31 243 81 236 92 118 234 98 (1)
IR - Extra budgetary resources 391 647 555 563 721 841 1,160 859 851 (1) 1
Ministry of Road Transport & Highways 737 925 1,146 1,375 1,528 1,829 1,644 1,960 1,989 2 9
NHAI total 510 480 744 970 1,063 1,224 1,111 1,301 1,340 3 10
NHAI budget support 230 149 239 358 313 574 461 651 1,340 3 10
NHAI - IEBR 280 331 505 612 750 650 650 650 -
Others 227 445 402 404 465 606 533 659 649 (2) 7
Total spend on road rail infrastructure 1,672 2,024 2,166 2,708 3,008 3,978 3,990 4,108 4,445 8 12

LEGAL ENTITY, department or author (Click Insert | Header & Footer) Month Day, Year 27
Modest increase versus large spurt in FY22
Defence budget up 13% in 22BE
 Defense capital budget up 13% over
14.0
Capex (Rs tn) 12.2
11.4 11.1
12.0
FY22BE: Strong growth in naval fleet, 10.0
9.8
9.0

R&D and other equipment (missiles and 8.0

6.0
radars etc.) but decline in aircrafts 4.0

(possibly Rafale induction led increase is 2.0

-
behind) has been crossed) 20A 21A 22BE 22RE 23BE

 Other schemes largely flattish:

Cumulative allocation to schemes like
PMAY-G and PMAY-U, PMGSY, AMRUT
and Smart Cities seem flat on a YoY
basis.

 Positive on L&T, Ultratech, ABB

Growth over Growth over
2016A 2017A 2018A 2019A 2020A 2021BE2021RE2022BE 2021A 2022RE 2023BE 2022RE (%) 2022BE (%)
Housing and Smart Cities 337 516 633 529 586 723 751 1,063 749 1,194 1,411 18 33
PMAY - U 15 42 67 61 68 80 210 80 210 270 280 4 250
PMAY - G 101 210 312 193 181 195 195 195 195 195 200 3 3
PM - Gram Sadak Yojna 183 179 169 154 140 195 137 150 137 140 190 36 27
AMRUT 25 43 43 62 64 73 65 73 64 73 73 - -
Smart Cities 13 43 43 59 32 65 34 65 33 66 68 3 5
Jal Jeevan Mission 100 115 110 500 110 450 600 33 20

LEGAL ENTITY, department or author (Click Insert | Header & Footer) Month Day, Year 28
Healthcare: National Digital Health Ecosystem launched
Overall allocation to MoHFW remains nearly constant at Rs 830bn in FY23 [BE] (Rs
829bn in FY22 [RE]). Key announcements:

 Rollout of National Digital Health Ecosystem

– Patient Health Records [PHR] will be accessible to patients digitally
– More number of doctors would be available for tele-consultation on digital platform
– Implication: This could increase digital health penetration in India and transform the way healthcare is imparted
– Refer our recent report on UHI system being implemented as part of National Digital Health Ecosystem

 Allocation towards COVID-19 vaccine reduced to Rs50bn in FY23 (from Rs350bn in FY22)
– The reduced procurement is owing to high vaccination coverage achieved already [95% of adult population has
received at least one dose, and 75% is fully vaccinated]
– The budget allocation corresponds to ~250mn vaccine doses, which would be used mainly for booster doses
and kids’ immunization (vs. 1.6bn+ vaccines to be procured in FY22, as per target)
– The implied procurement target denotes coverage of one-fourth of adult population (with single booster dose)
– Implication: Negative for Cadila, as its vaccine program is yet to kick off

LEGAL ENTITY, department or author (Click Insert | Header & Footer) Month Day, Year 29
Oil & Gas sector
 Divestment target is low: Divestment target for FY23 is low at Rs650bn and BPCL divestment
would atleast be Rs450-500bn. Other candidates for divestment would be Concor, BEML, SCI,
IDBI Bank etc.
 Low LPG subsidy provision: LPG subsidy for FY22 has been reduced from budget of Rs125bn
to just Rs34bn whereas Oil marketing companies in just 3Q22 have incurred a large loss on LPG
(RS 60bn+). LPG subsidy (direct benefit transfer) for FY23 is budgeted at Rs 40bn.
 Excise duty on unblended fuel: Unblended fuel to attract additional excise duty of Rs 2/ltr from
1-Oct-2022 but OMCs should be able to comply with this
 No further excise duty cut built in: Excise duty estimate for 2022-23 reduced by Rs561 bn YoY,
which is almost entirely explained by the recent reduction in petrol and diesel excise duties. This
suggests no further cut in duty built in for FY22-23 and no material collection built in from the
additional duty on non-blended fuel.
 Road to EV: Battery Swapping policy will be brought soon and inter-operability standards to be
formulated. This will help in OMCs to start offering EV charging facilities at their fuel stations

Reliance
 Telecom: 5G auctions to happen next year
 Renewables: Additional allocation of Rs195bn for production linked incentives for manufacture of
fully integrated Solar modules from polysilicon to solar PV modules
 Energy storage: Energy Storage Systems like grid-scale battery systems are now included in the
harmonized list of infrastructure. This will facilitate better credit availability

Month Day, Year 30

Consumer : Positive ITC, rural expenditure muted
 No news is good news for ITC, path to re-rating
– No increase in cigarette tax for the second consecutive year which is a positive given
expectation of a hike
– ITC’s cigarette volumes are likely to continue recovering post COVID reopening
leading to more visibility on net income growth
 Muted rural expenditure, relying on economic recovery for FMCG consumption
– Total budgeted expenditure on rural and food subsidy to decline vs FY22BE and RE.
– The spikes due to the COVID relief related direct income transfers and MNREGA are
being rolled back.
– Low income consumption is currently muted; will depend more on broader economic
recovery and return of low income jobs.

(Rs bn) FY20A FY21A FY22BE FY22RE FY23BE

Min of rural developm ent overall 1,221 1,964 1,315 1,536 1,359

- DBT to Women JDY holders - 309 - - -

- MGNREGA 717 1,112 730 980 730

- Others 504 543 585 556 629

Food subsidy 1,087 5,413 2,428 2,865 2,068

Total 2,308 7,377 3,744 4,400 3,428

Feb, 2022 31
Telecom
Budgeted spectrum receipts look more reasonable factoring 700MHz and 3.5GHz bands

800 FY22 Revised ests (Rs bn) 600 FY23 Budget ests (Rs bn)
700
720 704 500
600
308 234
500 400
540

400
155 300
294 528
300
200
200 241

100 100

-
FY22 BE FY22 RE License & Airtel Jio CS ests of -
Spectrum prepayment prepayment telecom License & Spectrum fees 5G auction upfront FY23 BE
fees receipts payment

 FY23BE includes ~Rs230bn of upfront receipts from 2022 spectrum auctions

 If the govt’s est. include only 3.3GHz band (5G) spectrum auction, it implies no reduction in absolute prices vs TRAI’s
recommendation (2018). Although on effective basis there would be a ~33% reduction in spectrum prices for telcos as
spectrum life has been extended from 20 years to 30 years
 However, if the govt’s est. also include some sale of 0.7GHz spectrum band then the pricing appears to be more
reasonable especially given that this spectrum has remained unsold in couple of auctions.

LEGAL ENTITY, department or author (Click Insert | Header & Footer) Month Day, Year 32

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