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Weak spectrum auction unlikely to hurt fiscal math
Fiscal deficit could be lower in FY17 on account of higher tax collection
10 October 2016
The Economy Observer
High fiscal deficit in the first five months of FY17 and the just-concluded weak spectrum auctions have raised doubts over
the achievability of budgeted fiscal deficit in 2016-17.
We, however, believe that higher-than-budgeted tax collection should more than offset lower non-tax receipts and
higher spending.
Actual data up to August 2016 and historical trends (average of the past five years) suggest that the government could
overshoot its budget estimate (BE) for tax collection by about INR1,400b, primarily due to higher excise duty collection.
Accordingly, neither high fiscal deficit (up to August 2016) nor the weak spectrum auction worries us.
We believe that higher-
than-BE tax receipts will
offset lower non-tax
receipts (and possible
higher outgo) entirely and
thus help post better-than-
budgeted deficit in 2016-17.
Recent data suggest that fiscal deficit in the first five months of 2016-17 was 76.4%
of the budget estimate (BE), the second highest (barring FY09) since FY01.
Furthermore, with the disappointing spectrum auction last week, there have been
doubts over the achievability of the budgeted fiscal deficit target in 2016-17.
Nevertheless, we believe that higher-than-BE tax receipts will offset lower non-tax
receipts (and possible higher outgo) entirely and thus help post better-than-
budgeted deficit in 2016-17.
Lower non-tax receipts…:
Following the spectrum auctions, the obvious questions
are: what is the likely collection from such auctions in 2016-17 and how does it
compare with the government’s budget estimates. Although the government does
not provide exact details of its BE of receipts from the telecommunications sector,
our telecom analyst, Mr. Aliasgar Shakir, believes that the government is likely to
end up with total collection of about INR660b, as against BE of INR 990b, implying a
shortfall of INR330b (see
Exhibit 1
for brief working on telecom budget estimates
and likely receipts).
…and higher-than-BE spending…:
Notably, the first batch of supplementary demand
for grants for 2016-17 entailed net cash outgo of INR209b over and above BE.
Further, given that 2016-17 budget estimates provided for less than one-third of
total estimated burden on account of the
Seventh Central Pay Commission,
total
spending is likely to be higher than BE.
The government is likely to
end up with total collection
of about INR660b, as
against BE of INR 990b,
implying a shortfall
of INR330b
The first batch of
supplementary demand for
grants for 2016-17 entailed
net cash outgo of INR209b
over and above BE.
Nikhil Gupta
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Even if the government falls
short on its non-tax receipts
by ~INR644b in 2016-17, it
will be more than offset by
higher-than-BE tax
collection.
…are likely to be entirely offset by higher-than-BE tax receipts:
However, the
shortfall in non-tax receipts (including non-debt capital receipts) and higher outgo
are most likely to be more than offset by higher tax collection by the government in
2016-17 (see
Exhibit 2
for detailed estimates – based on actual receipts up to
August 2016 and historical trends— on key budget items). We believe that even if
the government falls short on its non-tax receipts (including non-debt capital
receipts) by ~INR644b in 2016-17, it will be more than offset by higher-than-BE tax
collection.
Notably, net tax receipts – adjusting gross tax receipts for assignment of taxes to
states – are up 33.5% YoY to 26.6% of BE, the highest since FY02
(Exhibit 3).
Our
expectation of higher tax collection in FY17 is on account of higher excise duty
collection and services tax receipts, which may be partly offset by lower corporate
taxes (please note that we have made sufficient adjustments on personal income
tax receipts, for which compliance was changed this year, resulting in higher tax
receipts in June 2016). Overall, our calculations based on actual receipts in the first
five months of 2016-17 and the historical trend (average of the past five years)
suggest that the government tax receipts in FY17 could be higher by about
INR1,262b (~0.8% of GDP). Including another INR150b on account of tax collections
due to disclosures made under the Income Declaration Scheme (IDS) 2016, the tax
kitty could be almost INR1,400b more than budgeted in FY17.
Higher fiscal deficit till August 2016 does not concern us:
Thus, even if non-tax
receipts fall short by INR644b and total spending is higher by INR294b this year,
fiscal deficit could be lower by INR460b in 2016-17. Hence, although fiscal deficit in
the first five months of FY17 has been over INR4,078b or 76.4% of BE – the second
highest (barring FY09) since FY01 – we believe it is not a matter of concern
(Exhibit
4).
Exhibit 1: We expect shortfall of INR330b from telco receipts (INR b)
Government budget estimate
Likely bifurcation:
License fee and SUC
Receipts from deferred payment fee
Litigation and penalty receipts from telcos
Spectrum auction
Our estimate of total collection:
License fee and SUC
Receipts from deferred payment fee
Litigation and penalty receipts from telcos
Spectrum auction
Total shortfall estimated
220-240
100
0
330
330
Source: Union Budget documents, MOSL
660
220-240
100
100-120
510-570
990
990
Our calculations based on
actual receipts in the first
five months of 2016-17 and
the historical trend (average
of the past five years)
suggest that the
government tax receipts in
FY17 could be higher by
about INR1,262b
Although fiscal deficit in the
first five months of FY17 has
been over INR4,078b or
76.4% of BE – the second
highest (barring FY09) since
FY01 – we believe it is not a
matter of concern
10 October 2016
2

Exhibit 2: Government finances seems on strong footing for 2016-17
INR b
Total receipts
Net tax receipts
Corporate tax
Personal income tax@
Customs
Excise
Services tax
Others taxes
Less:
Assignment to states*
Non-tax receipts#
Total spending
Fiscal deficit~
2016-17 BE
14,442
10,541
4,939
3,532
2,300
3,187
2,310
41
5,768
3,901
19,781
5,339
Apr-Aug 2016
3,938
2,803
805
1,099
908
1,209
790
52
2,061
1,136
8,017
4,078
% of BE
27.3
26.6
16.3
31.1
31.1
39.5
34.2
126.8
35.7
29.1
40.5
76.4
2016-17 E
15,064
11,808
4,599
3,664
2,273
4,285
2,612
137
5,768
3,256
20,075
5,010
Change from
2016-17 BE
618
1,262
(340)
132
(27)
1,098
303
96
0
(644)
294
324
@
adjusted for change in compliance
* includes surcharge for financing NCCF
# includes non-debt capital receipts
~ excluding Rs150b on account of tax collection due to IDS 2016
Source: Union Budget documents, Controller General of Accounts (CGA), MOSL
Exhibit 3: Tax receipts (net) have been highest since FY01
(% of BE)
27
24
19
Exhibit 4: Fiscal deficit till Aug-16 second highest since FY01
(% of BE)
48
33
Net tax receipts
25 25 25
21
20
21
26
23
22 23 21
23
19
27
Fiscal deficit
57 61
68
88
45
66 66
40
75 75
66
76
41
28
38
Aug-00 Aug-02 Aug-04 Aug-06 Aug-08 Aug-10 Aug-12 Aug-14 Aug-16
Source: Union Budget documents, CEIC, CGA, MOSL
Source: Union Budget documents, CEIC, CGA, MOSL
10 October 2016
3

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