Highlight of Budget 2022 is focus on capex

The big headline from Budget FY2023 has been the 25 percent rise in the outlay for capital spending. This should be viewed with two caveats; one, the estimate of internal extra budgetary resources has been pared, and two, a large part of the incremental capex is effectively to be undertaken by the state governments, shifting the execution risk to them.

At the outset, much of the FY2023 Budget math seems reasonably credible. The nominal GDP growth assumption of 11.1 percent seems to have been made when Omicron had pushed down commodity prices. Following the subsequent rebound, we now expect the FY2023 nominal GDP growth to be closer to 13-14 percent.

Nevertheless, the growth assumed in direct and indirect taxes in FY2023 appears to be broadly appropriate, given the high base and overhang of the November 2021 excise duty cuts. There may be a mild upside to GST collections, going by the recent trend.

More importantly, the budgeted numbers for receipts on account of disinvestment at Rs 650 billion for FY2023, appear achievable with the possibility of some spill over from the stake sale in LIC. Besides, the Government of India (GoI) has not budgeted for receipts from the National Monetisation Pipeline (NMP), and any proceeds thereof could buffer the shortfall on other receipts, whether revenue or capital, or higher than budgeted spending.

For instance, higher welfare spending on free foodgrains and MGNREGA, in case India witnesses another moderate to severe COVID-19 wave in FY2023, can’t be ruled out. However, we are in agreement with the view taken by the Union Budget that such higher spending should not be built into the Budget Estimates. Such allocations can always be enhanced through supplementary budgets over the course of the year.

The highlight of Budget 2022 has been the GoI’s focus on capex with a 25 percent enhancement in the budgeted allocation to Rs 7.5 trillion. This entails an average monthly spending of Rs 625 billion through FY2023, a sharp step up from the average ~Rs 435 billion outgo during April-December 2021. While the concerted push on capex is commendable, we believe that this number must be interpreted judiciously on a few counts.

Firstly, the GoI has enhanced the capex for the Ministry of Road Transport and Highways quite sharply to Rs 1.9 trillion in FY2023 from Rs 1.2 trillion in FY2022. This is entirely on account of a higher budgetary support to the NHAI, even as the Budget documents indicate that its projected fund raising has been cut by an equivalent amount. Thus, the GoI has shifted a part of the capex onto its books, in order to prevent a further build-up of debt at the NHAI. The overall increase in the capital outlay for the roads sector, including the GoI’s direct spending and budgetary support and the NHAI’s Own and Extra Budgetary resources, is limited.

This assessment then raises the need to look at the capex of the GoI along with that of the central public sector enterprises (CPSEs), to paint a more complete picture of the overall capex situation. The Budget documents reveal that the CPSEs’ capital outlay is projected to decline by 1.2 percent in FY2023. Moreover, the CPSEs’ internal and extra budgetary resource (IEBR) is projected to contract by 6.6 percent in the year. Adding this to the GoI’s capex, the total capex of the Centre and the CPSEs (IEBR) is expected to rise by 10.4 percent to Rs 12.2 trillion in FY2023.

Secondly, the Budget has allocated ~Rs 450 billion for capital infusion in BSNL, akin to the GoI’s Rs 600 billion equity infusion in Air India as a part of the second supplementary demand for grants earlier in the current fiscal, which led to an increase in the capex estimates for FY2022. These amounts are quite large, and should ideally be excluded while assessing the growth impulse of the GoI’s capex.

Lastly, a large part of the rise in capex is on account of a multi-fold increase in the special assistance loan to the states to Rs 1 trillion from Rs 0.15 trillion in FY2022. This will help states prioritise capex even as they traverse the challenges posed by the ending of the transition period of five years for which they are to receive GST compensation.

However, these loans would entail a shift in the execution risks from the Centre to the state governments. An early start to such spending will be crucial to maximise the growth impulse of this capex, and will remain a key monitorable as the year progresses.

Aditi Nayar is Chief Economist, ICRA Limited. Views are personal, and do not represent the stand of this publication.