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The key focus of Budget 2022 was for the government to undertake pro-economy spending while not losing focus on the fiscal consolidation agenda, long-term economic revival, and employment generation. With this in mind, finance minister Nirmala Sitharaman outlined the priorities for this year’s budget, that is, financing of investments, better productivity, climate action, inclusive development, and Prime Minister (PM) Gati Shakti scheme.

Long-term focused initiatives such as PM Gati Shaki for roads, railways, airports, waterways, mass transport, ports, and logistics aim to boost infrastructure spending. Further, measures such as the extension of production-linked Incentive (PLI) schemes for domestic solar cells, module manufacturing, data centres and warehousing will bolster domestic manufacturing and lead to employment generation.

The fiscal deficit projection for FY23 is higher than market expectation at 6.4% of GDP on account of higher capital expenditure (35.4% from the previous year) in a bid to push up capital spending, which could have significant multiplier effects on economic growth. Tax revenue assumptions appear to be conservative for FY22 and FY23. Regarding the fiscal consolidation path, the government has indicated a target fiscal deficit of 4.5% of GDP by FY26.

Within the realm of the financial sector, the announcement of digital integration of post offices with the core banking system will enable financial inclusion and allow online transfer of funds between post office accounts and bank accounts. Other landmark announcements in the digital space were the proposal to introduce the digital rupee and the decision to tax gains (at 30%) from transactions in digital assets. This points to the government is taking cognizance of digital currencies and assets.

Besides all this, the government also emphasized climate change by announcing measures to support the renewable energy sector. Furthermore, the announcement of sovereign green bonds highlights that the government is looking at a more sustainable long-term economic development.

Overall, inclusive development for all sections of the population while striving for growth at the macro-economic level continues to be the government’s focus. With the capex announcement including the provision for creating capital assets via grants-in-aid to the states, the government is reiterating its commitment towards stimulating economic growth through both central and state governments’ efforts.

The blueprint for the ‘Amrit Kaal’, the 25-year long leadup to India@100 are visionary initiatives aimed at taking us into the next phase of growth through digital transformation of all sections of the economy, transition to clean energy, adoption of climate action, encouraging private investment, building modern infrastructure funded by massive public investment, among others.

From a market perspective, a higher borrowing plan and lack of tax measures to enable India’s bond inclusion in Emerging Market bond indices weren’t perceived well by the fixed income market.

A higher supply of government bonds amid the reducing appetite of domestic investors adds to existing concerns leading to an increase in bond yields.

Equity markets, on the other hand, cheered the budget. The continued push towards public capex is probably the biggest takeaway for the markets.

Higher allocation to PLI schemes, especially solar PV modules, could be interesting for domestic equipment makers. Some of the changes in customs duties announced could benefit local capital goods makers and the chemicals sector while potentially hurting domestic steel companies.

As a caveat, though, the feedthrough of fiscal math into bond yields could weigh on equity valuations (which remain expensive) and hence needs to be watched out.

Views are personal.

Vinay Tonse, MD & CEO, SBI MF

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