By Sanjay Mookim
A clear statement of intent is a salient feature of this Union Budget. Both external and internal conditions are likely to be challenging through 2022. The US Fed is expected to tighten monetary policy which can affect EMEs adversely. Domestic consumption, especially in rural areas, is currently weaker than expected. There were simultaneous calls on the government to be both fiscally conservative and to step up direct income support to drive local demand, ahead of the budget.
The government, however, chose to focus on driving growth through increased capex, even while printing fiscal deficit forecasts higher than expected. The latter are an implicit acknowledgement that fiscal policy needs to be growth supportive. The focus on infrastructure and capex does this in a manner that augments national capacity and which is generally assumed to have higher multipliers.
With this backdrop, a more detailed examination of budget numbers is warranted. On balance, the budget projections are conservative, especially those for tax collections. We estimate that if 4QFY22 collections remain flat year-on-year (y-o-y), the Centre’s taxes for FY22 would exceed the new revised forecasts by close to Rs 1.7 lakh crore. This is a significant 75 bps of GDP. Adjusted for this, FY23 tax forecasts imply barely any growth at all. This is unlikely when nominal GDP is conservatively forecast to grow 11-12% next year. Revenues from disinvestment have been uncertain and present risks to assumptions each year, but the Centre’s receipts are likely to exceed forecasts for both FY22 and FY23. This cautious approach to revenue projections creates room for the government to under-promise and over-deliver, on deficits and potentially on spending as well.
The budget has also used the opportunity to effect another round of spending ‘clean up’ near term, with deficits currently unbound from FRBM targets. A large, one-time equity injection into the Air India holding company would help release cash to Indian banks, which can now be gainfully redeployed. A similarly large, one-time payment is proposed to clear arrears for various government schemes by March, helping improve working capital for Indian businesses.
Total expenditure projections for FY23 are also relatively conservative, despite the headline emphasis on capex. Government expenditure is projected to grow a modest 5% y-o-y next year, again meaningfully lower than expected nominal GDP growth; 73% of the total projected spending growth of Rs 1.75 trillion is on account of higher interest costs. The government has found room to grow capital expenditure in its projections by curtailing revenue spending, which are expected to decline 4% y-o-y ex-interest next year. Some portions of revenue spend, such as those on subsidies, are likely to exceed budgeted amounts, but these increases can be accommodated by the expected revenue upsides.
Capex has been stepped up in the FY23 budget, with a sharp increase in support to states. This is up from Rs 20,800 crore in FY22 to over Rs 1.1 lakh crore next year. There are merits to taking this approach to spending. Almost every project will require cooperation from state and local governments. Making them a larger part of execution could drive faster outcomes. Capex allocations for railways, defense and roads have also been increased, but some of this is compensated for by lower projections for extra-budgetary funding at these agencies. The total budgetary and extra budgetary allocation for capex is expected to grow 10% y-o-y in FY23.
It is appealing from an engineering mindset to dissect numbers on an excel sheet and highlight nuanced conclusions. Having satisfied that urge, we must step back and examine the key messages from the budget exercise. The policy intent is clearly to prefer capital spending over fiscal handouts. The government is likely to prefer capex should opportunities to increase spending arise over the next few quarters. This can be supportive of infrastructure related sectors of the economy near term
Secondly, the conservative approach to forecasts creates a useful optionality. The government can use expected revenue upside to spend more than forecast if external conditions remain benign without surprising on published deficit numbers. If global macro conditions tighten, the additional revenue can be used to deliver lower than forecast deficits, partly assuaging concerns in fixed income markets.
There are two key conclusions from the budget for equity markets. First, there is no immediate kes to the ongoing demand weakness. The expected increases in spending and activity will have to flow through to the economy, driving up incomes and more importantly reduce income uncertainties. The subsequent increase in consumer confidence can eventually drive demand up. Equity market investors may have to live through a period where consumer businesses deliver weaker than expected volume growth. Second, the budget is unlikely to change the near-term trajectory of the economy despite its preference for capital spending. Indian equity indices are likely to move with the global tide incrementally. Changes in expectations for global central bank liquidity and the prospects for rate increases can be dominant index drivers.
On a longer term view, there are significant reasons to be optimistic on the Indian economy. The country is industrialising and urbanising. The use of technology is helping accelerate some of these processes. Rising per capita incomes will drive sharp growth in several consumer categories over time. Patient capital can look to make compounding equity returns.
The author is Strategist and India head of equity research, JP Morgan
