Macro Implications

June 27, 2011 Empowered Group of Ministers (EGoM) raised the prices of

Diesel by Rs3/litre, LPG by Rs50/cylinder and kerosene by Rs2/ litre

Customs duty reduction: 5% to nil on crude; 7.5% to 2.5% on

petrol and diesel; Excise duty on diesel lowered from Rs4.60 per litre to Rs2 a litre 25-40bps indirect increase through power and freight costs ~Rs222bn or 24bps

We expect a ~85-100bps increase in the inflation including

We expect the move to impact the government finances by

Impact on inflation could be ~85-100bps

We estimate the EGOMs decision to result in 100bps upward pressure on the inflation. Of this ~60bps will be driven by direct impact of these three products on the WPI with weights of 6.4% and another 25-40bps to come from indirect impact due to increase in the power and fuel and freight charges for the manufacturing companies. Table I: Impact on inflation
Direct LPG Kerosene Diesel Total Weights (%) 0.9 0.7 4.8 6.4 Increasse (%) 14.3 16.3 7.1 Wtd avg (bps) 13.1 12.0 34.2 59.2

Source: Office of the Economic Adviser, Emkay Research

Impact of diesel price hike on WPI historically

Date 05.11.04 21.06.05 06.06.06 05.06.08 02.07.09 27.02.10 26.06.10 % increase in Diesel Prices 8.8 7.6 6.6 9.4 6.5 7.7 5.2 Mom change in WPI 0.8 1.1 1.1 2.6 1.1 0.8 0.9 Fuel & power 0.6 0.4 0.3 1.0 0.5 0.3 0.4 WPI Ex fuel 0.2 0.7 0.8 1.6 0.6 0.5 0.4

Negative Impact of 24bps on fiscal finances

The above measures to result in overall revenue loss of Rs490bn to the government

on account of Rs230bn revenue loss in excise duty collections and Rs260 revenue loss in custom revenue collections. As a result the overall revenue collection target for FY12 will fall by 6.2% to Rs7,409bn.
Revenue loss on account of above measures to increase the fiscal deficit target for

FY12 to 5.1% from 4.6% initially targeted in the budget.

However at the same time on account of the above measures, the subsidy burden of

the government will get reduced by Rs268bn for FY12 from Rs897bn. (Assuming 52.4% govt sharing, similar to last year ). Despite that the government will have to bear additional subsidy burden of Rs332 over and above of Rs297bn accounted in the budget. As a result we believe the government will overshoot its revised fiscal deficit target by 14%.

Emkay Global Financial Services Ltd

Economy Update

Economy

Economy Government Accounts (FY12)

Rs bn Revenue receipt Tax (net) Non tax Capital receipt Recovery of loans Others Total receipt Non-plan expenditure Revenue Interest Capital Plan expenditure Revenue Capital Total expenditure Revenue Capital Fiscal surplus/(deficit) As % of GDP Revenue surplus/(deficit) As % of GDP Primary surplus/(deficit) As % of GDP
Source: Controller General of Accounts, Emkay Research

Economy Update

Budgeted 7,899 6,645 1,254 550 150 400 8,449 8,162 7,336 2,680 826 4,415 3,636 779 12,577 10,972 1,606 -4,128 -4.6 -3,073 -3.4 -1,448 -1.6

Now 7,409 6,155 1,254 550 150 400 7,959 8,162 7,336 2,680 826 4,415 3,636 779 12,577 10,972 1,606 -4,618 -5.1 -3,563 -4.0 -1,938 -2.2

% change (6.2) (7.4) (5.8) 11.9 15.9 33.8

Impacts expected fiscal deficit by 24bps to 5.8%

Rs bn FY12 Estimates Earlier Budgeted fiscal deficit target Budgeted subsidies Fuel Fertilisers Total 297 203 500 297 203 500 -4,128 Now -4,618

Expected subsidies Fuel Fertilisers Total 897 500 1,397 629 500 1,129

Extra subsidies needed Likely fiscal deficit As % of GDP

897 -5,025 -5.6

629 -5,247 -5.8

Emkay Research

27 June 2011

Economy

Economy Update

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Emkay Research

27 June 2011

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