Union Budget 2022 is a very positive and growth-oriented

In its Union Budget for FY23, the government has made a decisive move towards significantly bolstering the public capital expenditure. The government’s capex over the past few years had seen limited growth, given the fiscal constraints. The Budget has not only provided for a disproportionate increase in capex for FY22, there is also a sizable increase planned for FY23 on a higher base. Effectively, the Budget estimates for capital expenditure in FY23 to be 62 per cent higher than FY21, and it’s an over 200 per cent increase compared to the FY19 spend. In comparison, nominal GDP as used for the Budget is just 36 per cent higher than FY19 levels. The increase in capex is planned against the backdrop of relatively muted increases in revenue expenditure, which includes spending on salaries, pensions, interest, subsidies, and several welfare schemes. 

This has led the fiscal deficit for FY22 to rise to 6.9 per cent of GDP as opposed to 6.8 per cent Budget Estimate. The increase is much larger in absolute terms, given the much-stronger increase in the nominal income base than anticipated. The fiscal deficit for FY23 has been projected at 6.4 per cent of GDP — a consolidation — but in absolute terms, the deficit is higher than FY22.

While this may have not been liked by the purists and the bond markets, this level of public expenditure is quite crucial to crowd-in private sector investments.  The government has, rightly, virtually touched all important sectors of the economy in its wide sweep. The PM Gati Shakti programme and the thrust on infrastructure is quite clear as is the focus on urbanisation and the use of cleantech for urban infrastructure. Inclusive development through enhancement of agricultural sector productivity and support for rural livelihoods, and help for the MSME sector in the form of enhanced ECLGS schemes are the other cornerstones of this Budget.

The digital financial system is another thrust area that the government is focused on. Financial inclusion through a fully digitised post office system is a key initiative in this regard. Similarly, in a significant first, India has become perhaps the only large economy in the world to formally announce the adoption of Central Bank Digital Currency. Formalisation of taxation for virtual currencies and digital assets is another important milestone and this should also propel India into becoming the hot-bed for innovation in this space.   

All in all, these are very important initiatives that clearly set out the government’s intent to drive growth. However, given the wide sweep of the sector and programmes involved and the number of new initiatives, execution will remain the key determinant of its final impact on the economy. We also feel that this push on public capex should spur private spending and hence, there is likely to be a positive spin-off for both consumption and investment in the years to come. Demand for credit from the private sector should also benefit. 

The bond market is rightly concerned about the demand for increased government paper due to the higher fiscal deficit. However, if you look a little deeper, there are several buffers in the fiscal math that should provide some comfort. One is the relatively low level of tax revenues projected for FY22 and FY23, as well as limited disinvestment targets. Additionally, dividend income is also on the lower side, with the RBI dividend likely to be larger, given earnings on a full-year basis. There are also arguments to be made for more limited use of small savings or cash balances this year, allowing for greater use in the coming year. These indicate that the government and the RBI will have some flexibility in manoeuvring the borrowing programme to ensure that bond yields are well managed. 

The Budget is also the final macro input ahead of the last MPC meet of the year. The MPC has, so far, continued with its accommodative policy stance, though some shift in the operating approach on the ground is visible, which has had the effect of nudging market interest rates higher. We need to see if the growth impulse is sufficient for the MPC to start the policy normalisation process as is being seen in many developed economies. 

In conclusion, this is a very positive and growth-oriented Budget. The government has decided to use its balance sheet to provide the fillip to the economy through enhanced focus on public sector capex. This in the longer run should help address inflationary concerns, while the fiscal deficit has continued to be on the higher side. The efficient and timely execution of the budget initiatives will continue to be an important driver of the full impact on the economy.  

The writer is MD & CEO of Axis Bank