Greater capital expenditure is the highlight of the Budget

This Budget has made some very effective announcements to accelerate growth as we come out of a prolonged pandemic which has weighed on growth significantly.

We have seen GDP growth rate at above 9% and need to sustain that momentum. Then, it will result in higher income for everyone, higher consumption leading to higher earnings growth as well. The higher-than-expected capital expenditure (capex) is the highlight of the Budget. Also, there is no bad news as such, which is a positive. Here are some takeaways:

Capex and deficits

For FY22, the revised estimate for capex stood at ₹6 trillion, but excluding the one-time Air India charge, it would have been closer to ₹5.5 trillion. Against that, the capex is slated to rise almost 35% to ₹7.5 trillion in FY23. This is the major theme of the Budget.

In terms of deficits, it is not just the fiscal deficit that is being cut from 6.9% in FY22 to 6.4% in FY23. This will be supported by revenue deficit tapering from 5.1% budgeted for in FY22 to 3.8% in FY23. The Centre wants to borrow less to fund revenue spending, which is a good signal.

Primary deficit (excluding interest) was 20 basis points (bps) higher than budget estimates for FY22 at 3.3%, but is estimated to dip to 2.8% in FY23. The path appears to be towards a gradual taper of deficits.

It is not that central fiscal deficit is being replaced with State fiscal deficits. The consolidated deficit is expected to come down to 10.4% in FY23 from 10.9% in FY22. In addition, States have leeway to expand their deficit to 4% of GSDP compared with 3% stipulated by the Finance Commission. States also get ₹1 trillion as interest-free, 50-year loans. In a nutshell, there will be a lot more onus of deficit creation in the hands of the States.

Despite the projected reduction in fiscal deficit to 6.4%, borrowings are going to be higher. In fact, from ₹12.1 trillion in FY22, borrowings are expected to rise to ₹14.95 trillion in FY23. This was one reason why bond yields on the 10-year benchmark rallied to above 6.8% post the Budget announcement. Pressure on long-term yields will stay and it must be ensured that not too much devolves on the Reserve Bank.

While the gross market borrowing is higher than expectations, there is a trade off. We got a higher GDP print of 9.2%. So, maintaining the momentum has a positive impact on jobs and cascading impact on many other sectors. At any point, a Finance Minister will have a trade-off between maintaining higher economic growth and worrying about inflation. The current bond yields, though inching up, are in a comfortable range. If we go back to the earlier crisis of 2008 or the taper tantrum of 2011, bond yields were hovering much higher at about 8%.

Muted disinvestments

Unlike the last two years when disinvestment revenues were the theme of the Budget, FY23 has underplayed this theme altogether. For example, against the ₹1,75,000 crore estimate for disinvestment in FY22, the revised estimate is ₹78,000 crore and has been further scaled down to ₹65,000 crore for FY23.

What can be inferred is that the Centre may push through a much smaller LIC IPO this year and BPCL may be just about the only big highlight in FY23.

(The writer is founder and chairman, IIFL Group)