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MUMBAI : Union budget proposals have fallen short of providing enough impetus to lift the economy out of its pandemic-induced slump, analysts said, even as markets rose more than 1% in a volatile session on budget day driven by the government’s proposed infra spending and increase in overall capex.

Analysts and investors cheered the government’s focus on growth but lack of direct stimulus to spur private consumption, low divestment targets (for FY22 and FY23) and higher borrowings left them worried in an environment of steep inflation of commodity and crude prices. However, no change in direct taxes or any incremental taxes on capital gains supported market sentiments.

On Tuesday, the BSE Sensex closed 848.40 points or 1.46% higher at 58,862.57, while the 50-share index Nifty gained 237 points or 1.37% at 17,576.85.

“This budget is focused on supporting growth through encouraging investments, entrepreneurs, startups, and tax payers by creating trust. Capital expenditure has moved from 12% of the budget in FY15 to 19% of budget in FY23. Revenue receipt growth at 6% is significantly lower than 27% last year. This is driven by significantly lower divestment and asset monetization target. Hopefully, there is an upside on revenue receipts," said Nilesh Shah, group president and managing director, Kotak Mahindra Asset Management Co. Ltd.

“This budget is about laying the foundation for the positioning of the centenary of India. The 68% of defence capital allocation to local manufacturers, launch of CBDC, focus on organic farming and environmental issues/climate change, developing logistics in India, digital banks and futuristic policies such as battery swapping or inter-operatibility standards will be the building blocks on which India will march in its amrut kaal," Shah said.

A key area of concern could be macro sources as the fiscal deficit is higher than expected, according to Prabhat Awasthi, managing director, Nomura.

“Second, there were expectations of capital gains related changes, which would have allowed Indian bonds to be included in global bond indices. This has not happened and consequently there has been a sell-off in the bond market. Given India’s heightened trade deficit and a strong push in borrowing, the macro risks from a global tightening cycle would be a key concern and needs to be watched carefully," he said. However, Awasthi feels that with no major populist sops, the budget seems to be giving economic growth precedence over political expediency, despite the forthcoming Assembly elections.

Finance minister Nirmala Sitharaman projected a fiscal deficit of 6.4% of gross domestic product (GDP) in 2022-23 while the government has massively increased the capital expenditure target by 35.4% to 7.5 trillion for the next fiscal. For 2022-23, the disinvestment target has been set at 65,000 crore, while for FY22, it has been revised to 78,000 crore.

The budget is missing some balancing measures in the context of the current inflationary and slowing economy, market analysts said. Supportive measures were needed for rural, agriculture, low taxpayers, and for sectors impacted by the pandemic. High capex, fiscal deficit and borrowing plans in the background of a high inflation, commodity and oil prices, and rising interest rates will be challenges in the short to medium-term, they said.

The fiscal math does not add up, according to Gaurav Dua, head, capital market strategy, Sharekhan by BNP Paribas. “Some of the budgetary estimates are quite intriguing to us. Given the expectation of 8-8.5% growth in real GDP in FY2023, the nominal GDP growth of 11.1% seems to be far below the expectation of 13-14% assuming average inflation of 5%-6% in FY2023. Also, the surge in capital expenditure allocation seems to have come at the expense of revenue expenditure. Adjusting for interest payments, the revenue expenditure is estimated to decline by 4% in FY2023 compared to FY2022. So, essentially the fiscal math does not add up though the higher than expected economic growth could make up for the gap in budgetary estimates," Dua said.

Higher borrowing requirements of the government are likely to put pressure on the bond markets while the higher-than-expected fiscal deficit and the absence of any announcement on global bond index inclusion are also negative for the bond markets.

“This budget is an investment-oriented budget that has banked on growth buoyancy to garner revenue. Expenditure is focused on investments while there is nothing direct for consumption. One can assume that as investment takes place and jobs are created with rising income, consumption will increase. The disinvestment proceeds have been moderated and LIC has been kept out of both the FY22 and FY23 calculations. The worry is the large borrowing programme of Rs14.95 trillion, which will put pressure on interest rates. This will be the main challenge for the financial system," said Madan Sabnavis, chief economist, Bank of Baroda.

Yield on the 10-year government bond hardened to 6.85% while the rupee weakened to 74.8 against the dollar. Analysts expect the Reserve Bank of India to adjust monetary policy to factor the pro-growth budget and turn hawkish to counter the effects of anticipated inflation and the higher borrowing.

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