Pro-growth Budget is good for jobs, investments, and elevating income levels
India is well over the mid-point in the journey to becoming a $5trillion economy crossing the $3 trillion mark in GDP. The recovery in growth in the face of the global covid-19 pandemic shows the resilience of the Indian economy. But it was still imperative for the government to consolidate the foundations with a major thrust on structural growth.
The economy has challenged the resources available, and the country needs to do more with less. The demands of putting together the finances for a strong growth push balanced with fiscal prudence was equally no less challenging.
In that context, Finance Minister Nirmala Sitharaman has pulled the right levers to spur growth and regain the mantle of one of the fastest-growing economies. Budget 2022-23 is an investment-oriented budget focussing on capex driven growth, and rightly so. The government has shied away from announcing monetary stimulus despite the fact that a few major States are due for elections.
Budget 2023 continues to tread on the path that growth will be revived by capital expenditures, which has been the central focus of the government in the last few years. The government’s focus on schemes such as the Production-Linked Incentive (PLI), green energy with a focus on fiscal expansion is on the right track as opposed to monetary expansion.
The government has emphasised that a strategic push had to come from the infrastructure sector which required a larger spend in order to raise growth rates. The need of the hour was to match resources with strategic initiatives that would spur the economy and pace the recent momentum.
Venture capital in focus
On the venture capital front, the Budget rightly recognises the contribution the industry has put in facilitating start-ups, boosting employment and reviving economic growth. The Finance Minister mentioned that more than Rs 5.5 lakh crore was invested last year ‘facilitating one of the largest start-up and growth ecosystem.’
Even so, the Budget has seen the need to scale up these investments requiring a holistic examination of regulatory and other frictions. In this regard, the government will set up an ‘expert committee’ to examine and suggest appropriate measures to scale up investments. It signals the government’s clear intention of clearing the roadblocks for further investments in start-ups.
The stance further corroborates the growing influence of venture capital in raising vital capital and complements the infra-led push in capital expenditures the government has outlined in Budget 2022-23 and is a good and welcome initiative to support investments through the private equity and venture capital vehicles.
In addition, the government has also made a small change to the tax structure. The surcharge on long-term capital gains tax has been capped at 15% for all listed and unlisted companies. While this is short of the long-standing demand for tax parity for unlisted firms, it’s a small step in the right direction.
Another major announcement is to create Thematic Fund-of-Funds, in areas like Climate change, deep tech etc., with Private Public partnerships, to create 2-3x multiplier effect like SIDBI NIIF Fof. The ask included creating Fund by NABARD for promoting Agritech start-ups which has also been acceded to
Capex thrust
On the economic front, the government continues to do the heavy lifting. On that count, Budget 2022-23 announced the much-needed increase in capital expenditures to Rs 7.5 trillion rupees. With this strong push, an increase of 35% over the last fiscal, there will be more opportunities, jobs, and growth in the economy.
The government aims capital outlays in the region of 2.9% of GDP showing that it is intent on putting infra-led growth at the heart of the recovery.
In these engines of growth, the government will focus on developing roads, ports, railways, mass transportation systems, airports, and other transportation infrastructure across the country. The Budget has also envisaged an addition of 25000 kilometres of new roads by 2023. Indeed, the government has put an added impetus on infrastructure spending under the Prime Minister’s Gati Shakti Yojana.
Budget 2022-23 announced a spending of Rs 200 billion to expand highways and also said that 200 new trains will be manufactured over the next three years. The railway has also seen an increase of 14% in capital expenditures in FY23, led by new lines and doubling investments in public sector undertakings. The government will also add 100 new cargo terminals to speed up the movement of goods.
The focus on infrastructure and transportation networks clearly has the propensity to be a catalyst to drive India’s GDP growth significantly over the next decade, and we have seen many countries progress greatly as transport networks improved. These initiatives will go a long way in addressing the supply-side constraints and propel the Indian economy forward on a multi-year growth path.
In addition, the government extended the PLI schemes to domestic manufacturing in the alternate energy sectors such as the manufacture of solar panels. The PLI scheme has also been extended to the 5G ecosystem to enable the penetration of high-speed broadband and increase rural and remote area connectivity.
Conservative yet decisive
The Budget has an expansionary element on the fiscal front, but the increase in expenditures has been rightly channelised on capital expenditures rather than monetary stimulus. The fiscal deficit for FY22 is expected to marginally increase to 6.9% of GDP, which given the second covid-19 wave pandemic and the slowdown in growth is acceptable.
For FY23, the fiscal deficit is estimated at 6.4% of GDP, which is moderately above the consensus estimates of 6-6.3%. Considering that the Indian economy needs the infrastructure push and the additional expenditures to drive jobs and increase growth opportunities. But in all likelihood, the government is expected to meet its target the next year given the nominal growth in GDP is on expected lines, and the tax assumptions are quite realistic and achievable.
The government’s focus this year has been conservative on tax receipts, but firm on the growth agenda. The disinvestment figures have been whittled down to about Rs 65,000 crore against last year’s target of Rs 1.5 trillion, which was revised lower to Rs 78,000 crore.
Although some expenditures such as subsidies and welfare expenditures may overshoot the targets, the fiscal deficit for FY23 could still come under 6.4% emphasising the push in the government’s ‘growth agenda’ will pay off.
Financial implications
Budget 2022-23 has envisaged a sharp increase in gross borrowings, however. Borrowings are expected to jump to Rs 14.95 trillion in FY23, as per budget estimates, from the Rs 10.47 trillion in FY22 revised estimates. This is quite a huge increase and it is intended to meet the higher spending targets.
While the Reserve Bank of India has kept the policy rates unchanged, in its policy release on 10th January 2022, the higher borrowing program could thwart the liquidity normalisation efforts unleashed post the pandemic. Given the underlying inflation pressures in the domestic market, there could be a hardening of bond yields in the coming quarters.
The government’s higher borrowing requirements could limit private investment in capital expenditures. All this could result in heightened volatility in financial assets. Higher priced assets and valuations models could be pruned given the rising bond yields. Clearly, the investor focus will be trained on high return on equity and good cash flow generating companies in the coming quarters.
Budget – from TVS Fund perspective:
Our Fund’s focus on evolving themes have been reinforced through the Budget be it digital lending and financial inclusion especially the large SME market, and the growth in logistics space.
- Lending space
- Revamped CGTMSE scheme to create additional credit of ₹ 2L Cr.
- ECLGS scheme expanded to ₹ 5 lakh cr. to include services sector
- 75 digital banking units – immense opportunity for neo banks and fintechs.
- Logistics space
- 25K new Highways, GATI SHAKTI masterplan for express ways, 100 new cargo terminals with 4 multi modal logistic parks, to connect urban transport to Railways with 100 new railway logistics hubs and Unified logistics interface platform to be created for data transfer between diff modes of logistics for reduced documentation and seamless transportation.
- Compared to the global average of approximately 8 percent, the logistics cost in India stands at about 14 percent of GDP (about $400 billion).
- initiatives provide a massive opportunity to address the competitiveness gap of about $180 billion (about $500 billion by 2030). After having seen early adoption of RFIDs, GPS and IoT devices, Indian players are now transforming in line with global peers to adopt Industry 4.0 trends, based on artificial intelligence (AI), robotics and blockchain to build agile, high-visibility, resilient and green networks. Close to $6-7 billion of investment opportunity in the warehousing/logistics therefore looks bright.
We are more bullish now and thus focus on tech adjacencies in financial services and logistics space.
FY22 to end on a good note
Nevertheless, FY22 is set to end on a good note, despite the setbacks due to the second wave. Higher corporate tax collections, a robust increase in income tax, an increase in indirect taxes and other excise duties have reflected in the strong increase in revenue collections as per revised estimates for FY22. Some of these are being offset by additional spending due to the second wave and also the lower re-calibration of the disinvestment target.
One sour point in the outlook, though, is rising global inflation, which is causing a great deal of discomfort in the global market. The US Fed may get aggressive in controlling inflation which could mean a tighter monetary policy. Further, global geopolitics has elevated the risk of oil prices rising higher, which till recently has been arguably tilting the scales in favour of India.
Within these constraints, however, the evolving dynamics required the pro-growth agenda that the government is pursuing through increased capital spending. Over time, this stance will propel the economy towards higher GDP growth, increase jobs and raise income levels.