Budget 2022 focuses on growth boosting high multiplier capital, infra spending

The Union Budget is always eagerly awaited, for the tone it sets for the year ahead. This time was no different, with the third wave of the pandemic underway, albeit appearing under control. Notwithstanding the pandemic-related uncertainty around growth recovery, the Union Budget for FY2023 also faced imminent pressures on account of fiscal consolidation. However, it has chosen to focus on prioritising growth by the way of boosting high-multiplier capital and infra spending.

The Government of India has only pencilled in a modest total spending growth of 4.6 percent for FY2023, over a 7.4 percent growth in FY2022. However, it has budgeted for a much higher capex expansion of 24.5 percent in FY2023, with enlarged allocations for roads and railways, in addition to a sharp increase in assistance to states for capital expenditure.

The augmented allocation towards these heads in FY2023 vis-à-vis other forms of spending is in line with the government’s concerted capex push over the last few years, with the size of its capital spending more than doubling in a span of just four years, from Rs 3.1 trillion in FY2019 to Rs 7.5 trillion in FY2023. While the intention is laudable, it needs to be supplemented with rapid execution of infra projects to boost investment demand, ‘crowd in’ the private sector, and fuel the economic recovery.

Apart from capex, the government has made allocations for the PLI schemes across various sectors including pharmaceuticals, electronics, telecom, food products, textiles, and automobiles. Besides, it has allocated Rs 2.1 trillion for food subsidy and Rs 730 billion for the MNREGA programme. While both these amounts are expectedly lower than the FY2022 levels, we believe that the government will likely raise the allocation on these accounts if warranted during the course of the year in the event that another moderate to severe COVID-19 wave materialises in FY2023.

On the revenue front, growth in gross tax revenues is projected at a realistic 9.6 percent in FY2023, lower than the nominal GDP growth forecast of 11 percent. Growth in indirect taxes is expected to be muted at 4.9 percent ,as excise collections are likely to fall during the fiscal on account of the cut in excise duty on petrol and diesel in November 2021. However, direct tax collections are expected to remain healthy, with a budgeted growth of 13.6 percent for FY2023.

Interestingly, the government has not budgeted for receipts from the National Monetisation Pipeline (NMP), and any proceeds on this account would be a bonus. It had highlighted an aggregate potential of ~Rs 6 trillion through the monetisation of its core assets, over a four-year period, from FY2022-25.

Surprisingly, the budgeted amount for disinvestment receipts for FY2023 is quite moderate at just Rs 650 billion, while that for FY2022 has also been sharply revised downwards to Rs 780 billion from the budgeted amount of Rs 1.75 trillion. This limits the risks to the fiscal targets, and enhances the credibility of the budget math. Aside from the awaited LIC IPO, action on privatisation of multiple PSUs would be necessary to push the disinvestment process in the intended direction, and garner adequate proceeds on a sustained basis.

On the financial sector front, with the gradual recovery in the economy, large infra spending, and extension of credit guarantee schemes (ECLGS, CGTMSE), credit growth should pick up for the banks and NBFCs, which is a positive. Nonetheless, collection efficiencies need to be watched for the NBFCs, especially from the vulnerable section of the borrowers.

The fiscal deficit is budgeted to ease to 6.4 percent of GDP in FY2023 from 6.9 percent projected in FY2022, while remaining well above market expectations. Besides, the quality of the fiscal deficit is expected to improve, with the share of the revenue deficit in the fiscal deficit projected to ease to 59.6 percent in FY2023 from 68.4 percent in FY2022.

While the fiscal deficit to GDP ratio is projected to decline in FY2023, the absolute level of the fiscal deficit is budgeted to rise to Rs 16.6 trillion from Rs 15.9 trillion estimated in FY2022; the budget has clearly prioritised growth over fiscal consolidation.

Further, the government’s gross and net market borrowings are estimated in the Budget to increase quite sharply to Rs 15 trillion and Rs 11.2 trillion, respectively, from Rs 10.5 trillion and Rs 7.8 trillion in FY2022. Borrowings remain sizeable compared to pre-COVID-19 levels, following the non-linear bump up seen in FY2021.

Elevated levels of borrowings along with rate hikes by the US Fed and expectations of imminent monetary policy normalisation in India are expected to put upward pressure on market borrowing costs.

K Ravichandran is Chief Ratings Officer, ICRA. Views are personal, and do not represent the stand of this publication.