Govt has pruned the budgeted fiscal deficit to 6.4% of GDP for FY23. Yet, it is interesting to note that it is extremely conservative on receipts

At the outset, the Union Budget 2022 was termed as ‘the growth Blueprint for the next 25 years’ by the government of India (GoI). The GoI’s intensified focus on urban planning, transportation, logistics, solar projects etc., has corroborated its aforementioned agenda on long-term growth. The extension of tax concessions to the start-ups and new manufacturing companies by one year – to March 2023 and March 2024, respectively – was also pointing in the same direction.

The fiscal deficit has been revised up slightly to 6.9% of GDP, compared with the budgeted estimate of 6.8% but much lower than 9.2% in FY21. The GOI has pruned the budgeted fiscal deficit to 6.4% of GDP for FY23. However, it is interesting to note that the government is extremely conservative on receipts. As against the 11.1% nominal GDP growth for FY23, gross taxes are expected to grow 9.6%, implying a tax buoyancy ratio of less than 0.9x, vis-à-vis 1.1x in the pre-COVID period (3-year /5-year average). There has been a precedent of overshooting the tax collection as observed in FY22RE, which would provide further fiscal space capex headroom. Further, the government has budgeted divestment proceeds of `65000 crore for FY23.

Just like last year, the Union Budget 2022 appears conservative on the receipts front, while the expenditure (FY22RE over FY22BE) target appears largely in line with expectations. Considering that 89% of budgeted receipts (FY22BE worth Rs 19.8 lakh crore) had already been achieved in 9MFY22, it was expected that the FY22 revised receipts estimate would be higher at Rs 23 lakh crore. However, the government raised its receipts estimate to only Rs 21.8 lakh crore in FY22RE. On the contrary, expenditure target has been revised up to Rs 37.7 lakh crore in FY22RE (from Rs 34.8 lakh crore in FY22BE) – largely in line with expectations.

These numbers now suggest that the government anticipates a fiscal deficit of Rs 15.9 lakh crore, which is 6.9% of GDP (assuming a nominal GDP growth of 17.6% y-o-y), higher than the FY22BE of Rs 15 lakh crore (6.8% of GDP). Moreover, in line with its target of reducing fiscal deficit to below 4.5% of GDP by FY26, the government pegged FY23 fiscal deficit at 6.4% of GDP (effectively assuming nominal GDP growth of 12% y-o-y over FY22).

Consequently, it is likely that gross taxes could grow faster, leading to higher receipts and rendering the government an option to grow its spending.

Contrary to the prior expectations of a budget towards improving consumption, revival of rural demand, cut in income taxes to benefit consumption as well as benefits for the real estate sector, the government has focused on increasing gross budgetary support towards capital expenditure that would benefit the railways/defence sector, specifically which has seen an increase of 14%/10% y-o-y.

From a sectoral point of view, the Union Budget has intensified focus on capital expenditure on newer sectors such as EV’s (battery swapping policy), PLI for manufacturing of high-tech solar modules, and digital rupee, which are some of the key initiatives of the government to catalyse the economy towards the new sectors. Jal Jivan mission allocation of `60000 crore would remain a positive for the pipe sector. Overall with the Budget, the government continues to focus on increasing public capital expenditure as private capex remains subdued.

This is a budget which indicates continuity in policy decision making, while focus remains on manufacturing and increase in capex spend. There has been no major tinkering in tax rates indicative of stability in tax regime. Moreover, with improvement in corporate profitability in FY21/FY22E, there remains a scope for private capex to pick up in FY23 that would add further legs to the recovery. From a markets point of view, the Union Budget showcases the trend of continuity in decision making, focus on capex and growth, transparency in numbers while there being no negative surprises. The Budget provides further direction towards the government’s focus on capex and infra-led spending for sustainable long-term growth.

https://www.financialexpress.com/budget/industry-speak-budget-2022-continuity-in-policymaking/2424410/