Capital investment holds the key to speedy and sustained economic revival and consolidation through its multiplier effect,” said Finance Minister Nirmala Sitharaman during the budget speech. And she remained true to her word, increasing capital expenditure by 35.4 per cent to Rs7.50 lakh crore for the year ending March 2023. The government has also proposed to give Rs1 lakh crore in 50-year interest-free loans to states for capital investment. According to Sitharaman, the effective capital expenditure of the Central government is estimated at Rs10.68 lakh crore next year, about 4.1 per cent of the GDP.
“The underlying macroeconomic strategy behind this budget is one of pump-priming the economy through public investments, hoping that economic buoyancy would crowd in private sector capex,” said Abheek Barua, chief economist at HDFC Bank. The overall expenditure of the government has been estimated at Rs39.45 lakh crore, which is about 13 per cent more than the previous budget estimate and 4.6 per cent more than the revised expenditure estimate.
Capital investment helps create jobs, inducing demand for goods and services. “Instead of redistributive direct fiscal support, an investment-led growth remains the government’s economic management mantra,” said Barua.
The government is betting on the PM GatiShakti Master plan, planning huge investments in roads, railways, logistics parks and ropeways. The national highways network will be expanded by 25,000km in 2022-23. The railways will make 400 new-generation Vande Bharat trains, and 100 cargo terminals for multi-modal logistics facilities will be developed in three years. Contracts for eight ropeway projects are to be awarded next year. Under the PM Awas Yojana, 80 lakh houses will be built and Rs48,000 crore has been allocated for this. And Rs60,000 crore has been allocated for the ‘Har ghar nal se jal’ (tap water in every household) programme.
The finance minister announced an additional Rs19,500 crore allocation for production linked incentive for manufacturing solar modules. The government also plans to launch a scheme for design-led manufacturing to build a strong ecosystem for 5G as a part of the PLI scheme.
“The budget is unambiguously focused on reviving growth, via higher public capex,” said Sonal Varma, MD and chief economist, India and Asia ex-Japan, Nomura. “Capital expenditure generally results in a higher growth multiplier, so the continued focus on infrastructure spending, including support to states to spend on capex, is important at a time when private capex is sluggish.”
There are, however, demand related problems. “Now the lift in consumption cycle is going to be tied to a broad-based pickup in economic activity and not to a specific government support that is coming in,” said Dipti Deshpande, principal economist at CRISIL. “A policy support to ensure revival in consumption in this budget would also have incentivised manufacturers to invest in expanding capacities to meet what they perceive as rising demand.”
The government, for instance, could have looked at expanding the NREGA, which would have generated more rural jobs and helped revive consumption. Rs73,000 crore has been allocated for the rural jobs guarantee programme in 2022-23, which is 25 per cent lower than the revised budget estimates of Rs98,000 crore for 2021-22. Deshpande said frontloading some of the planned capex investments could usher in a faster economic recovery.
However, the government already runs a large fiscal deficit. In the last budget, it had estimated the fiscal deficit at 6.8 per cent of the GDP, which has now been revised to 6.9 per cent. The fiscal deficit in 2022-23 is estimated at 6.4 per cent.
Buoyant tax collections should help in driving the higher capex. The government has revised the tax revenue collection upwards from the estimated Rs15.45 lakh crore to Rs17.65 lakh crore in the current financial year. For 2022-23, the budget estimates tax revenue at Rs19.34 lakh crore.
At the same time, however, the government is expected to fall significantly short of its disinvestment targets. It had earlier targeted earning Rs1.75 lakh crore from selling its stakes in public sector compnaies. But, this has now been revised down to Rs78,000 crore. While Sitharaman said that the initial public offering of LIC is expected soon, most other planned share sales, including BPCL and two state-owned banks, seem to be delayed. Disinvestment targets for 2022-23 are even lower at Rs65,000 crore. The speculation now is that the government may offer to sell only 5 per cent stake of LIC.
Deshpande said the disinvestment target for the next year was realistic but market conditions next year would not be as buoyant as they were in the last two years. “The tightening of financial conditions amid monetary policy normalisation could further add challenges in raising capital by divestment in the coming fiscal,” she said.
Government borrowing is expected to remain high to meet the requirements. According to budget documents, total market borrowings in 2022-23 are estimated to be around Rs11.59 lakh crore. In the previous budget, the market borrowings were estimated at Rs9.68 lakh crore, which have been revised down to Rs8.76 lakh crore. The gross borrowing next year is pegged at Rs14.95 lakh crore.
In the bond market, “a significantly higher than expected borrowing” would put further pressure on yields at a time when interest rate cycles were at the cusp of turning, said Barua. He expects the 10-year bond yields to touch 6.9-7.0 per cent by the first half of FY23, with a possibility of it breaching 7 per cent.
The Reserve Bank’s monetary policy committee is meeting soon. So far it has maintained an accommodative stance, but analysts expect it to harden its stance this year, more so given an expansionary fiscal policy and rising rates internationally.
While Barua sees the RBI raising the repo rate by 50 basis points (25 bps each in August and December 2022), Nomura Securities expects repo rate to go up 100 bps in 2022. With the government now showing its cards, all eyes will now be on the RBI.