FM deftly balances social equity with investment growth
3 min read . Updated: 04 Feb 2023, 06:17 PM IST
Premium- In a period of economic uncertainty, a recessionary outlook and continued geo-political turmoil, the Government of India has established its intention to continue on its steady path
For this budget proposal, there was an apprehension that the growth agenda would be traded for social redistribution. However, the FM has sent a strong signal of consistency and discipline to the investor community. In a period of economic uncertainty, a recessionary outlook and continued geo-political turmoil, the Government of India has established its intention to continue on its steady path. A focus on building a self-reliant India, boosting domestic manufacturing capacity, promoting exports and attracting foreign capital.
First, continued macroeconomic stability.
The focus on prudent fiscal management is the most confidence-inspiring aspect of the budget proposal. Adherence to the 6.4% fiscal deficit target in FY23 and a 50bps reduction in FY24 sets out a credible target of 4.5% in FY26. This should have a salutary impact on the broader economy as it suggests that money will be available for private entrepreneurs. While the last year’s budget took steps to enhance India's digital and technology initiatives, this year the government has taken a step further to encourage more investment and employment in the space. The reported 90%+ growth in digital payment also means better tax compliance. Also, a stable fiscal regime should support currency stability. These factors support a greater formalization of the economy.
Second, growth driven by capital expenditure
The principal highlight of this year’s budget is the consistency in policymaking. For the third time in a row, the government has increased capital expenditure. This continues with a 33% increase in capex outlay to INR 10 trillion, or about 3.3% of the GDP. This will likely enable a robust infra-led economy in the long term.
The budget will also be remembered for paying attention to Bharat’s Tier II/III cities that get 50 new airports which would enable a growth multiplier effect. Further, the move to extend interest-free loans for another year to the states is a strong signal of consistency and discipline with an eye on long-term benefit rather than short-term SOPs. This will be financed by an Urban Infra Fund of INR 100 bn using priority sector lending shortfalls.
Third, recognition of entrepreneurship as a growth driver.
The budget appreciates and recognises that the startup ecosystem is a crucial high-value job creator in the country. The major announcement on extending the income tax benefit date to start-ups has brought a reprieve to the sector. The budget announcement also shows some fresh thinking in initiatives such as the Agri Accelerator fund, public credit infrastructure for credit and the National Data Governance Policy. As India inches up on Ease of Doing Business rankings to become the third largest start-up eco-system, there are further steps that need to be addressed. This is illustrated in reduced compliances (some 39,000!), enhanced credit guarantees, nimbler KYC using only the PAN, and faster dispute resolution. Finally, in rationalizing duties for handset components, there is something for India’s nascent manufacturing
Fourth, a voice to the middle class
As a contributor to Indian growth, there is finally a recognition that policy needs to attend to the middle class, not just the base of the pyramid. On one end of the spectrum, for the emerging middle classes there is a 66% growth in PMAY provides impetus to the affordable housing sector. At the other end, the reduction in top-tier marginal tax in line with global benchmarks suggests the maturing of India’s taxation. Through such changes we believe, domestic consumption which makes for almost two-thirds of India’s GDP should see a long-awaited demand revival.
Fifth, action on sustainability
Climate change and sustainability have become the centrepiece for businesses and governments alike. In the year of our G20 leadership, the government’s announcement for a Green Hydrogen Mission, 4,000 MWh battery energy storage is appreciated. And this agenda is not just top-down but percolates deeply with the announced support to 10 million farmers for natural farming.
With this budget, India should be on track for its forecast GDP range of 6.9%, and will likely be at the forefront of economic growth and innovation. The 7% delivered economic growth of FY23 only creates more optimism for FY24 because each of these initiatives converges to greater economic stability. Throughout the last year, we saw inflation, rising rates, and currency volatility. In a steady, mature policymaking that eschews abrupt changes, this budget clearly consolidates India’s positive economic momentum.
By Gaurav Sharma, India Private Equity Head, Investcorp and Anshuman Goenka, Partner, India Private Equity, Investcorp
