Investment-oriented Budget 2022 will put strain on liquidity for sure

RBI has a task on hands, and this time it will be different as private credit demand is likely to pick up. Hence liquidity management will need a different approach

The Union Budget is always the big policy announcement and the first for the year. In fact, it lays down the path for all players as the tax laws and expenditure patterns are revealed. Doing it in February has the advantage of the government being in a better position to execute the expenditure plans, especially capex. This Budget will go down as one which does a little of everything, which is a good way to go about it.

First, the deficit number is critical because as has been seen in the past that the government has stuck to the FRBM rules even during the pandemic times, and has been complimented by overseas agencies for not going in for rapid fiscal expansion. At 6.4 per cent, the fiscal deficit is on track to the 4.5 per cent mark to be reached by FY26. The borrowing this year will continue to be high at Rs 14.95 trillion (net of Rs 11.18 trillion) and put pressure on the market. The Reserve Bank of India (RBI) has a task on hands, and this time it will be different as we can expect private credit demand to pick up. Hence liquidity management will need a different approach as this is the time when we are talking of rewinding.

The main area of interest after the deficit is the capex part. Agreed, capex has to be driven by the private sector and states also have to pitch in to make the investment wheel turn. The government has provided for an aggressive Rs 7.5 trillion, which is a good number from its side and keeps to its commitment which is now taken to be axiomatic. This is good news again for the cement and metals sector in particular, with roads and railways to dominate. The challenge is to ensure that this amount is spent on time and that the government does not wait till the last quarter of the fiscal (Q4) for implementation.

The tax front is revealing. Quite clearly, the government does not see any merit right now to provide any major sops and what has been provided is just about at the periphery. In fact, it may be argued that the government has not brought in any new tax that could have meant higher outflows from the upper sections. The assumption here appears to be that growth would be robust enough to garner the revenue that would be earned this year. It is a fairly good assumption and should be backed by a more nuanced approach to lockdowns in case of any new wave of Covid. One can be sure that there will be more waves though the exact timing and intensity will be a guessing game.

This time one can say that the government is focusing more specifically on SMEs, hospitality, digital oriented industries, telecom, housing in particular. The disinvestment piece will require some comment. The FM did mention that the disinvestment of LIC will happen. However, credit is not taken for these receipts in the revised estimates nor is it included in the FY23 projections. Quite clearly out of prudence the government has kept it out of the calculations. The divestment target for FY23 is Rs 65,000 crore, which is reasonable. The government will, however, have to take a critical decision on which units would qualify for the same.

The interesting thing here is that the food subsidy level is down – meaning no more free food and the allocation for agriculture is marginally higher. There has, hence, been no attempt at populism given the Elections coming up, which is a good sign.

On the whole it can be said that the FM has managed all the aspirations creditably given that there were too many demands and an equal number of constraints.

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Madan Sabnavis is the chief economist at Bank of Baroda and author of "Hits & Misses: the Indian Banking Story". The views expressed here are his own.