Budget 2022: Higher capital spending, modest fiscal consolidation

With an eye on job creation, the Government has focused on the Gatishakti projects that would be driven by investments in core economic sectoral engines – roads, railways, airports, ports, mass transport, waterways and logistics.

Some of the fresh ideas announced included 400 new Vande Bharat Trains, Ropeways (60 kms), River-linking & irrigation (5 projects to start with), Special North East Development Fund, Battery swapping & interoperability, Surety Bonds, Stubble for power and Green Bonds. A strong pipeline of projects was announced, such as 25,000 km of national highways, 100 cargo terminals for multimodal logistics, 2000 km route km of railways, etc. Moreover, the financial assistance to states towards capex (Rs.1 trn) will support order activity from the State Governments. Overall, the thrust on infrastructure appears positive for construction, cement, steel and housing finance sectors.

The budget speech reiterated government’s commitment to COP26 goals, reinforcing the emergence of a new investment theme that could create an additional pool of multi sectoral investment potential (green investments) with potential for additional job creation (green jobs). The Government announced various initiatives such as a) sovereign green bonds for funding public sector green projects, b) pilot projects on coal gasification, c) Rs195 bn additional allocation for manufacturing of solar modules,d) Battery swapping policy for EV charging stations and overall thrust on EV ecosystem in urban areas. This is in line with our expectations, as highlighted in ICRA’s recent report

To support MSMEs, the Government extended the ECLGS scheme till Mar’23, as India recovers from the third wave of COVID pandemic, although its impact seems mild at present. This would primarily support the ailing hospitality sector, that has particularly been battered over the last two years.

For the farm sector, Rs. 2.37 trillion was allotted towards procurement of wheat and paddy under MSP. This is favourable for rural cash flows and in turn, the farming equipment sector. Additionally, the Government continued its impetus on housing and urban planning with allocations for the PM Awaas Yojana (Rs. 480 billion for 8 million houses), tap water access for additional 380 million households (Rs. 600 bn) and more impetus on urban planning initiatives.

In a big impetus to investments in startups, LTCG across all asset classes has been bought at par with listed equities (@15%). The Government also raised the local procurement to 68% (from 58% YoY) for all defence procurement in the Budget for FY2023.

Overall, the Union Budget FY2023 has clearly prioritised a more structural impetus to economic growth, while attempting a modest fiscal consolidation. The fiscal deficit is set to widen to Rs. 16.6 trillion in the FY2023 budget estimates (BE) from Rs. 15.9 trillion in the revised estimates (RE) for FY2022. As a percentage of GDP, the fiscal consolidation being targeted is a modest 0.5%, to 6.4% of GDP from 6.9% of GDP.

The Budget has forecast a modest 6.0% growth in revenue receipts, weighed down by a contraction in non-tax revenues. It has projected a moderate tax revenue growth of 9.6%, which appears realistic given an impending contraction in excise flows. The disinvestment flows have been budgeted to decline to Rs. 0.65 trillion in FY2023, and appear achievable.

With a higher than anticipated fiscal deficit and the conspicuous absence of an update on measures to facilitate the awaited bond index inclusion, the 10-year G-sec yield surged. With 50 bps of repo rate hikes expected in June-August 2022, the 10-year yield is likely to harden further to 7.0% within the next few months, which will set the stage for an upward shift in the entire yield curve. Given the challenge posed by rising interest rates, an early kick-off of Central and state government capex is essential to cement India’s growth recovery in FY2023.