Budget 2022: Emphasis on asset creation over direct income enhancements

Beyond the detailed analysis of Budget numbers, it is probably more important to look at the intent and priorities of the government. In a world where pandemic swings, commodity price gyrations and inflation-led tightening are large unknowns, the Budget should also be analysed from two primary perspectives of credibility and intent.

There is a broad agreement that the Budget numbers are credible as revenue assumptions are not too optimistic; indeed, there are suggestions that the government has been a bit conservative in its estimates.

The more important intent question can be answered by looking at areas where the government intends to accelerate spending and/or incentivising expenditure via fiscal or tax concessions. Overall, from financial markets’ perspective, the heart of the Budget seems to be oriented towards investment-driven economic growth.

The government has enhanced its capital expenditure significantly with specific focus on infrastructure in areas of railways, roads, and logistics. The outlays for affordable housing schemes have been hiked sharply, again pushing the asset creation agenda. This is clearly a positive as the quality of expenditure is possibly more important given the fact that India is in the midst of some really important state elections.

While the government has continued to support the MSME sector by extending debt relief programmes, it has also pushed the date for tax concessions for new manufacturing units by a year. At the same time, lower subsidy outlays suggest that the pandemic-led relief expenditure is on the wane.

Thus, the government is clearly signalling an emphasis on asset creation over direct income enhancements to push its growth agenda. It continues to push its expenditure in infrastructure, which would hopefully create further growth impulse and spur the private sector to enhance its risk taking in response.

The other two areas of emphasis are digital and green economies. The nod to issue sovereign green bonds and general measures towards a digital economy are a continuation of previously stated priorities. The primary disappointment in the Budget was fiscal deficit numbers, which were expected to be lower than budgeted and consequently, borrowings are higher than street expectations. This was a Budget liked by the equity markets due to the growth push even as bonds sold off due to the size of government borrowings.

So, is there any catch in this generally positive picture? We think that key risks are from the external environment, which could spill into the domestic dynamics given the large government borrowing programme. Even before going into the Budget, India’s trade deficit had risen rapidly, and accretion of forex reserves, a constant feature of the pandemic economy, had stalled. With the push to government expenditure and a growth fillip, this trade deficit could grow larger, without even accounting for rising oil prices. In general, growth tends to attract capital and rising trade deficits are tolerated. However, if the global capital markets become skittish due to global tightening on account of rising inflation scare, the balance of payments (BoP) could become an issue at times, leading to unwelcome domestic liquidity gyrations and interest rate spikes.

The writer is Managing Director & Country Head, India at Nomura