LAHORE – The financial experts have said that the federal budget may result in increasing inflation in the country.

According to them, few relief measures have been announced while the onus of increasing the tax revenue relies mainly on nominal GDP growth. The budget has not done anything to control energy crisis and to find ways to maintain mounting fiscal deficit, they said.

Subsidy is targeted at Rs 209b in FY13 as against actual subsidy estimated at Rs 512b in FY12. Given 20-25 per cent differential in the electricity tariff and generation, experts estimate subsidy to overshoot this.

FBR revenue is estimated at Rs 2.4tr (up 22 per cent) for FY13 but realization of this target lies on the effectiveness of administrative measures. Experts estimate a shortfall of 5-7 per cent in tax revenue in the absence of any major taxation steps.

Nauman Khan, a financial expert, observed that the consolidated deficit is estimated at Rs1185b (4.9 per cent of GDP) for FY13. Given the election year, higher development and subsidy expenditures coupled with shortfall in revenue, experts foresee this target is not realistic as government in FY12 is expected to post a deficit of close to Rs1.3tn.

Federal government, as expected, has restricted itself from increasing any tax rate on any particular sector. While the government has decided not to raise any tax rates, it has however cut custom duty slabs from a maximum of 35 per cent to 30 per cent and proposed to have a single sales tax rate of 16 per cent across the board. Additionally, the government has also opted to reduce the turnover tax to 0.5 per cent from 1.0 per cent earlier and given relief to commercial importers by reducing the withholding tax to 3.0 per cent from 5.0 per cent earlier. As the government has not imposed any new taxes to replace the relief given to the aforementioned sectors, we believe it would be tough for the government to achieve an ambitious revenue target of Rs2.38trn, up 22 per cent form last year. On the expenditure side, the government has announced a total outlay of Rs3.2trn, up 16 per cent YoY. Majority of the expenditure would be on debt servicing (Rs925bn) followed by defense (Rs525bn). Total subsidy allocated this year stands at Rs208bn compared to 512bn last year. As far as the development expenditure is concerned, total Public Sector Development Program (PSDP) is proposed at Rs873bn up 19 per cent YoY. Importantly, the government is estimating a fiscal deficit of Rs1,185b, majority of which will be financed through domestic borrowings.

Sohail Ahmed, another financial expert, observed that with the reduction in custom duty slabs and sales tax, for the first time post budget inflation number is likely to be on the lower side, in our view. As far as the capital market is concerned, the Presidential Ordinance being made part of the Finance Bill is likely to bode well for the stock market on the whole. While for the sectors, it is believed cement and pharmaceutical sectors to do well post the budget as these sectors have been favoured the most. As far as the banking sector is concerned, contrary to rumours of imposing a 50 per cent tax on income earned from government securities no such move was taken up in the budget. However, experts can see a transfer of funds by banks from money market and income funds as a higher tax rate will be charged on any dividends received from such funds. More importantly, the Gas Development Infrastructure Surcharge (GIDS) on the Fertilizer sector (except for the fertilizer plants having fixed price contracts) has been revised up to Rs300 per mmbtu from Rs197 per mmbtu earlier. They believe this to be negative for the fertilizer sector if the manufacturers are unable to pass on the full impact of the rise in their costs. On the whole, experts believe the stock market will welcome the budget. Nevertheless, financing of the fiscal deficit will remain a concern for the investors.