3 min read.Updated: 02 Feb 2022, 12:19 AM ISTVetri Subramaniam
We must separate the intention and tenor of the budget from execution
Listen to this article
In the run-up to the budget, discussions centered around the swift V-shaped recovery in the growth trajectory of India and the need to convert this into a self-sustaining growth upcycle. Below the surface of the V-shaped recovery lies the unevenness of the recovery which has been aptly described as a ‘K-shaped’ recovery.
We must separate the intention and tenor of the budget from execution. India’s ability to address the imbalance can be served by growing the size of the pie rather a sole focus on correcting the imbalance. In that context, the budget’s focus is on disciplined spending, with a focus on capital expenditure which has a multiplier effect to support growth.
The finance minister has announced an increase in the capital expenditure for FY23 by a sharp 35.4% to a record ₹7.50 trillion from ₹5.54 trillion in FY22. The capex in FY23 is 2.2 times the amount spent during the pre-pandemic levels (2019-20). However, effective capex, as per our calculations, including the spend through extra budgetary resources, is likely to grow in low teens, less than the headline but a healthy outcome all the same.
This ‘C’—i.e. capex—is the government’s choice of policy measure to tackle the unevenness of the recovery by targeting growth. This linkage is also visible in the FM’s speech which says the PLI scheme and vision of an AtmaNirbhar Bharat have the potential to create six million jobs and additional production of ₹30 trillion in the next five years. This is being carried forward in this budget—the intention is to address problems faced by domestic industry and help create production capacity and widen the domestic industrial base. In a similar manner, the government has furthered its support to domestic industry by targeting 68% of the defence procurement expenditure to domestic industry, up from 58% last year. Enhanced capital spending on housing and water through the government’s flagship programmes also bring about welcome social benefits.
The other option with the government was to increase social security programmes and spending via employment schemes and food programmes. The government has chosen to retain support to such programmes but not expand their scope or introduce new programmes. Any new government scheme has significant design issues and invariably involves long lag time to implement. There is a logic and soundness to the government increasing capex rather than designing and implementing a new programme. The MSME sector and high-contact sectors, particularly hospitality, are among the areas which are in the vulnerable part of the K-shaped recovery. To address the needs of these areas, the government has chosen to extend the timeline for the Emergency Credit Line Guarantee Scheme (ECLGS) scheme to March 2023 and expand the support by a further ₹ 50,000 crore to ₹5 trillion. This fiscal programme supports businesses via increased credit availability to enable them to overcome the challenges posed by the pandemic.
A budget must balance income and expenditure, and the gap must be financed by borrowings. Here, we find ourselves more challenged. Fiscal consolidation in FY23 is lower than what the market was hoping for. The deficit is estimated at 6.4% for FY23 against a revised 6.9% for FY22. The good news is that the mathematics appears credible, but the size of the government borrowing programme was a negative surprise – the effective borrowing programme at ₹14.3 trillion is significantly higher than last year. This has caused the bond market to worry, with yields on the benchmark 10-year sovereign bond spiking higher by nearly 16 basis points. The budget is an annual exercise, but should follow a medium-term plan and minimize disruptions to citizens and businesses on account of frequent tax changes and fiddles. This stability in tax policies that we have witnessed recently is a very welcome development. The government has taken a calculated risk and gone for growth over fiscal consolidation. If we can execute as well as we have our covid-19 vaccine programme, then the upturn in growth may well prove to be self-sustaining and address the imbalances.
Vetri Subramaniam is Chief Investment Officer, UTI Asset Management LTD