Budget 2023: With capex thrust and fiscal shield, the budget tells India's growth story loud and clear

The Union Budget saw a fourth consecutive large increase in outlays on capex even as total expenditure for FY24 increased slowly by 18.7 percent to Rs 45 lakh crore.

Two features stand out in the Union Budget 2023-24. First, the emphasis on fiscal prudence, with further progress on a commitment to the Fiscal Responsibility and Budget Management (FRBM) Act glidepath of a steady reduction in the fiscal deficit to 4.5 percent of GDP by FY26. The Budget targets a fiscal deficit of 5.9 percent in FY24, down from 6.4 percent retained for FY23.

Second, a continuing re-orientation away from revenue spending to capital expenditure on infrastructure and other projects. This involves an effective outlay of Rs 13.7 lakh crore, which is a boost to economic activity and crowd-in of private investment. The Budget had the option of spending more on revenue heads, with a consequently higher fiscal deficit, but chose fiscal discipline instead.

Fiscal Prudence

Given the large uncertainties surrounding the global economic environment, it was wise to retain a fiscal buffer for any financial or other exogenous shocks that might lead to a spillover of global volatility to Indian shores. Fortunately, the odds of the G10 central banks engineering a “softish” landing of the developed markets are improving.

This might gradually improve financial conditions and result in an eventual resumption of capital flows into India. Inflation seems to have peaked, and the central banks are reverting to the conventional, steady 25-basis-points (bps) rate hikes. This also indicates a return to a semblance of “normalcy” in the monetary policy response functions.

The underlying assumptions of growth and revenue receipts seem realistic and leaves room to absorb effects of any adverse developments. Nominal GDP growth assumed at 10.5 percent (down from 15.4 percent in FY23) is assumed to be the sum of a 6.5 percent real GDP growth (forecast in the Economic Survey) and a 4 percent composite inflation.

Growth Sans Stimulus

Did the Centre even need to contemplate a stimulus, however modest? In our opinion: No. Demand remains (surprisingly) robust, despite the aggressive 225 bps hike in the policy repo rate by the Monetary Policy Committee (MPC), accompanied by a squeeze in system liquidity. GST collections in January 2023 were Rs 1.56 lakh crore, one of the highest.

The eight core sectors’ growth, which shadows manufacturing activity, rose 7.4 percent in December. Deceleration of activity momentum, while becoming more evident, is still at the margins. Although the S&P Global January Manufacturing Purchasing Managers Index (PMI-M) was at 55.4 against 57.8 in December, it still suggests resilience in demand.

On the second point of capital expenditure, the FY23-24 Union Budget saw a fourth consecutive large increase in outlays on capex, a 33 percent rise to Rs 10.1 lakh crore, even as total expenditure for FY24 increased slowly by 18.7 percent to Rs 45 lakh crore. Support to states in its capex outlay, as grants-in-aid for various central schemes also went up 37 percent.

Investment And Consumption

Various studies have shown that growth multipliers from investment are significantly higher than they are from consumption. However, according to available data, investments as a share of nominal GDP have tapered steadily to less than 30 percent in FY23 (versus 34 percent in FY12, the new GDP series), after hitting a peak close to 40 percent just before the 2008 global financial crisis. In contrast, household consumption has gone up from 55 percent in 2010-11 to 60 percent. This mix, therefore, needs to revert to about 35 percent and 55 percent, respectively, to make it an optimal demand-supply mix.

Conditions are now ripe for a gradual increase in private sector capex. As the Economic Survey reported, private sector capital investments rose sharply from Rs 2.6 lakh crore in H1 FY22 to Rs 3.3 lakh crore in H1FY23. RBI surveys noted a steady rise of close to 75 percent in manufacturing sector capacity utilisation (CU) in the April-June quarter of FY23. We presume this has risen even higher over the following months and is currently close to levels that are thresholds for sustained private sector capex planning and implementation.

The MSME sector, which holds the key to sustained investment-led growth over the medium term and contributes over 30 percent to economic growth, has received budgetary support through added infusion.  An additional Rs. 9,000 crore for the Credit Guarantee Scheme designed to attract Rs 2 lakh crore of collateral-free credit, and reduction of interest rates by one percentage point will augur well for the sector.

Revamped Growth Model

Merging the cumulative impacts of the two broad features noted above, the following are some of the major takeaways. First, the Government’s fiscal rectitude will be recognised by global rating agencies for a ratings upgrade – a recognition that is now past due. It will then lead to a broad-based lowering of interest rates, which is a positive for borrowers.  Second, the focus on capex in specific sectors will shift the fulcrum to a productivity and investment efficiency-led growth model, thus, helping India conserve capital.

In addition to these macro-fiscal measures, one of the Saptarishi priorities for achieving the vision of Amrit Kaal is a robust financial sector.  To sustain overall credit flows, there were other specific process measures to facilitate credit delivery to under-served borrower segments as well as enhancement of financial stability.

The proposed National Financial Information Registry, which adds to the framework designed to facilitate efficient flow of credit, is one of them.  Besides, the simplified KYC process, using a “risk based” approach, is a step ahead towards a broader regulatory transition to a more principles-based approach. The need for a comprehensive review of regulations across financial sector regulators, again, takes forward the establishment of the Regulatory Review Authority 2.0 of the RBI and its recommendations.

This budget exercise is as much about creating an environment for the transition path to India’s economy reaching the $7 trillion milestone by 2030, by boosting private sector investment. Significant institutional changes, rationalisation of input markets, R&D outlays in priority sectors and diffusion of the digital public goods infrastructure to reach the last mile will be needed to complement the initiatives of the budget exercise.

Rajiv Anand is deputy managing director of Axis Bank. Views are personal and do not represent the stand of this publication.