. Fiscal deficit reduction to 4.6% of GDP in FY12 driven by expenditure compression esp. in subsidies and non-plan – will be tough to achieve
. Direct and indirect taxes largely unchanged, thus avoiding any additional headwinds to corporate earnings
. Ray of hope on economic reforms, but expectations on delivery are low
. Inclusive growth continues to be in focus

No news is good news. The Budget resisted any major changes to taxation except for minor tweaks on MAT and imposition of the same on SEZs. With investors’ concerns on likely imposition of higher indirect taxes on some segments being belied, we believe the Budget does not create any additional headwinds (inflation, interest rates, commodity prices) to corporate earnings. Impact of government expenditure compression on GDP growth needs to be watched though.

Fiscal deficit target is optimistic. The primary assumptions have been tax revenue growth of c. 18% in FY12 (tax/GDP of 10.4% against 10% in FY11) and expenditure growth of 3.3%
(expenditure/GDP at 14% vs. 15.4%). We think that it will be difficult to meet the expenditure growth targets; with reasonable inflation assumption for FY12 at 6-7%, the government is actually planning to reduce expenditure in real terms. With the inclusive growth agenda still in focus, there is a risk of additional spending over the course of the year pushing up the final fiscal deficit to GDP ratio closer to our estimate of 5.1%.

Attempt to kick-start reforms, though expectations are low. (1) Higher borrowing and FII limits for infrastructure bonds, (2) widening of the service tax net and (3) phased implementation of cash subsidy on LPG/kero/fertiliser are some of the key steps announced apart from the pending financial sector reforms. Though actual delivery will depend upon external factors and the election calendar, expectations are running low thus reducing the chances of a disappointment.