Budget 2022 | Government focuses on capex multipliers

The government walked the fiscal middle ground by keeping FY22 deficit (at 6.9 percent of GDP) closer to the initial target, and followed the past template of 0.5 percent of GDP reduction for FY23. This, however, provides for a moderate 4.6 percent increase in total expenditure, roughly similar to the increase in deficit (4.4 percent) itself in Rupee terms.

The continued focus on fiscal correction is, however, evident from a drop in revenue deficit (-9 percent) and primary deficit (-7.3 percent) on top of corrections last year. The improved quality of fiscal reporting and conduct is reflected in various aspects. First, the nominal GDP growth assumption (11.1 percent) is moderate in a year of expected high inflation. Second, disinvestment estimates have been brought down to more realistic levels with a sharp drop of Rs -970 billion for FY22RE, and a continued drop of Rs -130 billion for FY23BE. There is a sharp drop of Rs -2.7 trillion in reliance for off-balance sheet items for funding infrastructure. Finally, shifting expenditure mix in favour of the capital account to 19 percent of total expenditure during FY23 from 16 percent last year also points to improved fiscal expenditure pattern.

The conservative estimates leave headroom for positive surprises, especially on the revenue front, given the buoyancy seen in tax collections in recent times. For example, a 15 percent growth in GDP would lead to fiscal deficit correcting to 6.2 percent of GDP, in place of 6.4 percent as estimated now. A proportionate increase in non-debt revenue receipts would reduce deficit by a whopping 0.7 percent of GDP further.

Alternatively, the space for higher expenditure to that extent may open up and improve the fiscal multipliers further. The expenditure mix has seen a dramatic improvement. Major subsidies have been cut by 43 percent with provisioning for food subsidies nearly halved. Similarly, MGNREGA has seen a sizable cut by 25 percent over FY22RE.

In sharp contrast Budget 2022 sought to give capex a boom through various ways. Included among them are plans to expand the national highway network by 25,000 km, to bring in 38 million households under the tap water scheme, and the construction of 8 million houses. Besides increasing the share of capital expenditure by 3 percent in total, explicit budgetary provisions of Rs 75 billion have been made for the PLI schemes covering three sectors: telecom, electronics, and pharmaceuticals. The fiscal space for states has been enhanced to fund infrastructure too. Apart from the above, the equity market in general is likely to be a beneficiary of inflation on a broad basis.

Further, the heavy borrowing programme would clearly tie the RBI’s hand to raise rates quicker, holding monetary accommodation to continue in some form for longer. Sector-specific incentives provide a scope for emergent winners to consolidate their position. The ongoing structural shift towards the organised sector too is likely to benefit the mid/smaller cap spaces. A stable tax regime, extension of tax cuts for the startups, and benefit to the MSMEs through the ECLGS scheme too helps. Thus, the equity market received a fair boost from the Budget.

The bond market reception of the Budget has been underwhelming as a sharp drop in disinvestments increased the reliance on debt receipts (+17.2 percent growth during FY23). Moreover, recourse to market borrowing increased (+32.3 percent YoY) as the provision for small savings has come down (-28.1 percent). With a repayment due of Rs 4.8 trillion, the gross market borrowing in absolute terms increased to an all-time high of Rs 16 trillion (as against Rs 13.3 trillion during FY22, and Rs 15.3 trillion during FY21). This was the case with the net market borrowing at Rs 11.2 trillion (as against Rs 9.3 trillion during FY22 and Rs 11.5 trillion during FY21).

This leaves the bond market vulnerable to likely tightening of the RBI’s liquidity stance, slowdown in excess capital flows in view of rising trade deficit or an expected pickup in credit growth in view of consolidation in economic recovery led by credit intensive capex sector. However, inflation lends a positive upside to the revenue estimates that do not yet seem to be priced in the yields as yet.

Rajesh Saluja is CEO & MD, ASK Wealth Advisors. Views are personal, and do not represent the stand of this publication.