By Aashish Somaiyaa
Given that we are on the cusp of election season, the Union Budget for FY23 doesn’t seem to pander to any instinctual populism or tactical dole-outs to any target audience. Instead, we have a solid workman-like budget announcement with a singular focus seemingly on government spending to boost the supply side of the economy namely an investment and capital expenditure push. Growth has been prioritized with realistic fiscal deficit targets. The last one year has been a demonstration of the fact that buoyancy in growth and hence tax collections are a better solution to get a hold on fiscal deficit rather than to target the deficit itself for what it is. From that perspective prioritizing growth and recalibrating the glide path of fiscal deficit is not only likely to energize some so-called “old economy” sectors engendering tag-along private sector Capex but also likely to find favor with the equity markets; even as bond markets might witness some uptick in yields.
All the same, the budget surely must be informed by the “agile” framework and “nowcasts” over the forecasts approach supported by real-time data and economic proxy indicators detailed in the Economic Survey. One must assume that in the context of the evolving macroeconomic scenario and the global backdrop there is a willingness to calibrate in real-time as we go along; this is what was also cited as the basis for the response to the COVID-19 emergency.
While the budget signals policy continuity with thrust on Capex, announcements towards enhancing the ease of doing business and boosting exports and manufacturing, there is an emphasis on new areas such as sustaining digital ecosystems and urbanization. Adjusted for one-offs, the budgetary outlay on capital expenditure has been increased by 35% YoY, focusing on the supply side to drive growth. Integrating the higher allocation towards national highways and railways with the ‘PM Gati Shakti Master Plan’ for other infra-related sectors provides visibility to overall capex even beyond FY23. While previous budgets have focused on building road and railway infrastructure, there is a significant focus in this budget on improving logistics to enhance productivity. Apart from the thrust on multimodal connectivity, the proposal to develop multimodal parks and terminals along with a Unified Logistics Interface Framework to enable efficient movement of goods is likely to boost the competitiveness of the manufacturing sector in India.
There is a thrust on clean energy as manifested in the push for solar power where an additional allocation was made towards the existing production linked incentive (PLI) scheme for the manufacture of high-efficiency modules. The budget is also supportive of sunrise opportunities in sectors such as Geospatial Systems and Drones, Semiconductors, and Green Energy. Market borrowing through green bonds for mobilizing resources for green Infrastructure is also a welcome step. The decision to include dense charging infrastructure and grid-scale battery systems in harmonised list of infrastructure will help drive growth in data centers and energy storage systems. A PLI for design-led manufacturing to build a strong ecosystem for 5G networks has also been proposed.
On the other hand, higher allocation towards social infrastructure continues under the flagship “Har Ghar, Nal Se Jal” program and the PM Awas Yojana. The financial assistance to states related to the funding of the infra investments has been expanded significantly. The budget was also pragmatic in extending measures such as the ECLGS for contact intensive sectors like hospitality which were severely affected in the pandemic.
One source of concern is the lower disinvestment projection. However, given that governments in the past have consistently missed their disinvestment targets, we believe the lower target this year is indicative of a calibrated approach designed to deliver on the promised number. In any case, we believe the numbers should not undermine the process for strategic disinvestments which have been underway for the last two years for many CPSEs.
There were few other underappreciated but impactful announcements. For instance, the setting up of universities and colleges in GIFT city to create an internationally trained cadre of financial services is a great move. The ability to update tax filings and regularise compliance up to two years is an excellent move and may probably even result in slightly better collections without fear of punishment. Digitization of land records and national standard for registration of documents and anywhere registration are welcome moves for tax compliance and transparency in real estate markets. Similarly, the linking of post offices across India onto a core banking platform with the ability to transact with the wider banking system is an excellent move to integrate and make financial resources more productive.
India is expected to be the fastest-growing major economy in FY23. The emphasis on improving logistics efficiency and ease of doing business apart from the thrust on Capex is likely to provide support to the sharp rebound in growth post the pandemic. Now to watch for the execution, which as always, is the key.
(Aashish Somaiyaa is the CEO of WhiteOak Capital Asset Management. Views expressed are the author’s own.)