Budget 2022 | Focus will be on double engine – strong growth and balanced fiscal

Ajay Garg, Managing Director at Equirus and Anitha Rangan, Economist at Equirus

India Budget 2022 is perhaps one of the most anticipated budgets of the decade, coming after two years of pandemic disruption. This budget will likely put the interruption behind and focus on growth. What can we expect here?

First, there will be no hurry to bring down the fiscal deficit sharply. We expect the fiscal deficit to GDP ratio to come down gradually, with the emphasis on quality spending, especially towards capital expenditure. This year could come within budget expectations, while next year will come around 5.7 percent. Glide path will be a gradual reduction of 50 -75 bp each year.

Next, on the revenue side, expect tax buoyancy to continue. One can expect mid double-digit growth on tax revenues. On the non-tax side, while one cannot expect any surge in dividends or spectrum collections, the much-anticipated divestment program will kick start this year. In the recent past, large disinvestment proceeds were driven by PSU entities buying the assets or ETF (exchange traded funds) sales while actual IPOs in the PSU space have been few. LIC IPO will be a gamechanger which should pave the way for future divestments and asset monetization to provide much needed capital to spend.

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That brings us to the spending. After more than a decade of low double-digit capex to total expenditure, saddled with high subsidies we are seeing a shift towards mid double-digit capex spend and expect it to go towards high double digit. Subsidy backlog has cleared, and improved revenue side will give government an opportunity to spend on capex along with maintaining its revenue spending.

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Central government capex took almost 8 years (FY11 to FY19) to double, but will now double in two years (FY20 to FY23). Capex share of total expenditure is all set to grow.

India’s capex spending, especially centre’s capex, has had a strong bearing on its growth. Years of higher capex spending were followed by years of strong growth. The period of softening of growth since FY17, has particularly seen an era of declining centre’s capex while states in aggregate and capex by public sector enterprises have become more dominant. This trend is, however, expected to reverse in near to medium term, which will be the engine to drive structural growth in future.

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Centre’s capex spend is expected to focus on strengthening the core infrastructure viz. roads, railways and ports, green energy and defence. In addition, capital support for key infrastructure financial institutions, manufacturing incentives (PLI schemes) and offer much needed regulatory support for project execution is also expected. This will be supported by states in areas such as irrigation, state transport, health, education, water and santitation. The Centre has ambitious targets under the National Infrastructure Pipeline of over $2 trillion across sectors. Export push, increasing indigenisation and ‘Make In India’ will remain the key drivers of private capex alongside.

Who will bring the money? Centre and state deficits get funded via traditional sources viz. banks, insurance companies and pension funds. Mutual funds, retail participation of G-Secs can provide funding at the margin. Inflows from bond inclusion and FIIs will be supportive. While supply pressures will remain given the large size of overall borrowing, RBI’s support in the form of Twist operations can manage the volatility in yields. Direct open market operations is likely to be low amidst high liquidity.

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Will this crowd out capital for capex? Not really, if we delve into non-traditional sources. While twin-balance sheet problems, corporate distress and pandemic has played its part one after the other, the course is now set to reverse. Funding from non-traditional sources like Real Estate Investment Trusts (ReITs), Infrastructure Investment Trusts (InvITs), Infrastructure Debt funds (IDFs), Municipal Bonds, Credit Enhancements, Private Equity in addition to external debt funding could act a gamechanger for the sector. Asset monetisation could release much needed capital which is currently locked in performing assets.

In summary, we can say that it is now the time to execute. One of the key pillars to execution will include faster clearances of payments by government. While government has taken the lead in the last two budget in clearing all overdue subsidies and payments, they should move towards the path of on-time payment, which will not only enable project competition but deliver the promised return to the stakeholders.

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While the pandemic has put a break on the execution, intent of the government in terms of easing regulations, revitalising the discom chain, taking initiative on capex and showing intent to raising capital via monetisation & privatisation is positive for the longer term. There is huge pile of projects waiting to be executed both on the private and government front. As per CMIE, there is over Rs 130 trillion of government projects (Center and state) and over Rs 80 trillion of private projects which are waiting to be completed. While private sector, may have executed faster in the past, this time around government should perhaps put its foot on the accelerator and execute. (Exhibit -4)

Budget will have to play the fine balance of spending in areas where it matters most which will fuel the growth. The focus of the budget will be on the ‘Double Engine’ – Strong growth and Balanced Fiscal!

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