Contrary to expectations, the much-anticipated budget of FY23 was bold and made a statement aiming at a structural foothold for long-term, high, single-digit growth rather than a financial presentation for just one year.
The headline deficit is higher than expected for both FY22 at 6.9 per cent and FY23 at 6.4 per cent. However, the deficit being directed towards capital spending while pruning revenue spending is a positive.
With a clear focus on low-hanging fruits such as roads, railways, defence, communication and increased allocation in the hands of states, the intent of a structural revival in growth is set. The Government is not shy of spending and allocating to develop the core infrastructure of the economy while simultaneously pruning revenue expenditure and subsidies.
Contrary to expectations, the much-anticipated budget of FY23 was bold and made a statement aiming at a structural foothold for long-term, high, single-digit growth rather than a financial presentation for just one year. The headline deficit is higher than expected for both FY22 at 6.9 per cent and FY23 at 6.4 per cent. However, the deficit being directed towards capital spending while pruning revenue spending is a positive. With a clear focus on low-hanging fruits such as roads, railways, defence, communication and increased allocation in the hands of states, the intent of a structural revival in growth is set. The Government is not shy of spending and allocating to develop the core infrastructure of the economy while simultaneously pruning revenue expenditure and subsidies. Revenue expenditure excluding interest is budgeted for a decline as most expenditure is projected to reduce or stay flat with the exception of allocation to states.The highlightsWhile the headline capex is ~24 per cent year on year (y-o-y), within the detail there is significantly higher allocation for roads (58 per cent) and communication and loans to states (4x). Defence and rail capex is also a healthy double digit. Under the larger umbrella of PM Gati Shakti, there is a layout for a multiyear capex pipeline. Capex/GDP grows to 2.9 per cent versus 2.6 per cent. Note that earlier in the years between FY2002 and 2005, average capex to GDP was 3.2 per cent, which led to strong GDP growth in the years ahead.PM Gati Shakti with its focus on seven core sectors is clearly positioned as the engine for growth. And this time around, the Government has backed up the schemes with visible allocations in each of the core areas. In its inclusive development agenda, the emphasis is on farmers and food grains complemented with river-linking projects to support irrigation, strengthening the food processing chain and continuing the financial assistance to MSMEs. Skill development and use of digital infrastructure in education is a targeted long-term vision to improve the education ecosystem. Productivity and enhancement initiatives, including climate action, aim to promote a sustainable environment not just for business but overall quality of living. In particular, reduction in regulatory compliances, focus on the electric vehicle (EV) ecosystem, accelerating the voluntary corporate exit process, improving the cross-border insolvency resolution process and incentivising sunrise sectors are all aimed at setting the stage for a structural long-term growth.The goals While capex will directly kickstart the growth engine, the Government has not left behind its socialist goals in needed sectors. Extension of the emergency credit line guarantee scheme (ECLGS) and sectors like education, water, electricity, health, housing and urban planning are getting their due. In terms of ease of doing business and governance, in line with the motto of minimum government and maximum governance, acceleration of voluntary corporate exit, revamping the SEZ Act, making states a partner for ease of clearances and light touch regulations in new investment areas are steps in the right direction.Doing the mathIf one were to just look at the budget math, the fiscal deficit and its funding do seem daunting because it is not just for this year but likely a multi-year high borrowing period to fund the deficit. It may appear that government borrowing will crowd out private capex. However, that need not be the case. Why? First, credit growth is still nascent and picking up and in the near term, traditional bank, pension and insurance sources may be able to manage the funding. Next, there are potential sources such as retail participation, FII participation and flows if Indian bonds are included in overseas indices. Third, while RBI may not manage via outright purchases, it could undertake twist operations to smoothen the yields or temper the refinancing of maturities. Last, the allocation for states from the Centre is large and increased from last year. If the intent of the Centre is to take on a part of the funding for state capex as well, states may borrow less and therefore open up that space for the Centre to absorb.Over the medium term, capex spending will fuel growth and that in itself will provide much needed revenues to fund further capex – not to forget asset monetisation from the government side. While divestment targets have been kept modest in this Budget, there is always potential to scale that further. Let us not forget the Rs 6 trillion National Monetisation Pipeline that is waiting.States to benefit?Overall, there seems to be a larger allocation towards the states. In addition to a natural higher devolvement from overall revenues, there is higher grant from the revenue expenditure. Further, higher capex allocation of Rs 1 trillion perhaps suggests that the Centre is attempting to fund the states to a larger context and reduce their market dependency. Given the higher funding cost for state borrowing, the Centre is perhaps looking to substitute it, to lower overall borrowing cost.Yes, there is a demand-supply mismatch in the near term and one cannot ignore that. But this Budget is more than supply and finances. It has made a strong promise and a structural shift. It is a spending programme. The stage is set and India and the world are waiting for the promises to be delivered!About the author: Anitha Rangan is an economist with Equirus. She has around 16 years of work experience in the financial services industry in the areas of fund management, economic research and credit research across domestic and global markets. She has spent around nine years in HSBC Mutual Fund in India in fund management, economic and credit research on the fixed income side and around two years in the research division of CRISIL. Prior to this, she has spent around five years in Nomura and Lehman Brothers tracking global fixed income markets on the sell side. An MBA degree holder from the SP Jain Institute of Management and Research, Mumbai, she is also a qualified chartered accountant and has completed a master’s in commerce from the University of Madras.