union budget: Budget 2022: higher capital expenditure, modest fiscal consolidation

The Union budget for the financial year 2023 has prioritized capital formation, guided by five general themes (1) 25% increase in capital expenditure, (2) improvement of PPP structures (3) strengthening of urban rejuvenation capacities (4) public procurement reform and timely payments and (5) support to states for public works and electricity sector reforms. At the same time, the attempted fiscal consolidation is modest and the high borrowing figure has clearly confused the bond market.

Keeping an eye on job creation, the government focused on Gatishakti projects that would be boosted by investments in key sectoral economic drivers – roads, railways, airports, ports, public transport, waterways and logistics.

Some of the new ideas announced included 400 new Vande Bharat trains, cable cars (60 km), river link and irrigation (5 projects to start), North East Special Development Fund, battery exchange and l interoperability, surety bonds, thatch for electricity and Green Bonds. A strong pipeline of projects has been announced, such as 25,000 km of national highways, 100 freight terminals for multimodal logistics, 2,000 km of railways, etc. activity of state governments. Overall, the push on infrastructure looks positive for the construction, cement, steel and housing finance sectors.

The budget speech reiterated the government’s commitment to the objectives of COP26, reinforcing the emergence of a new investment theme that could create an additional pool of multi-sectoral investment potential (green investments) with potential for creation of additional jobs (green jobs). The government has announced various initiatives such as a) Sovereign Green Bonds for financing public sector green projects, b) Pilot projects on coal gasification, c) Additional allocation of Rs 195 billion for manufacturing modules d) battery swap policy for electric vehicle charging stations and push on the EV ecosystem in urban areas. This meets our expectations, as highlighted in the recent CIFAR report

To support MSMEs, the government has extended the ECLGS program until March 23 as India recovers from the third wave of the COVID pandemic, although its impact appears moderate at the moment. This would mainly support the struggling hotel sector, which has been particularly battered over the past two years.

For the agriculture sector, Rs. 2.37 trillion has been allocated for procurement of wheat and paddy under the MSP. This is favorable to rural cash flow and therefore to the agricultural equipment sector. In addition, the government continued its momentum on housing and urban planning with allocations for Prime Minister Awaas Yojana (Rs. 480 billion for 8 million houses), access to piped water for 380 million households additional (Rs. 600 billion) and more impetus on urban planning. initiatives.

In a big boost to startup investments, LTCG across all asset classes was bought at par with listed stocks (@15%). The government has also increased local procurement to 68% (from 58% year-on-year) for all defense purchases in the fiscal year 2023 budget.

Overall, the EU budget for FY2023 has clearly prioritized a more structural boost to economic growth, while attempting modest fiscal consolidation. The fiscal deficit is expected to widen to Rs. 16.6 trillion in the fiscal year 2023 (BE) budget forecast from Rs. 15.9 trillion in the revised (RE) fiscal year 2022 estimates. the targeted fiscal consolidation is a modest 0.5%, from 6.9% of GDP to 6.4% of GDP.

The budget projects modest 6.0% growth in tax revenue, weighed down by a contraction in non-tax revenue. He projected moderate tax revenue growth of 9.6%, which seems realistic given an impending contraction in excise flows. Divestment flows were budgeted to fall to Rs. 0.65 trillion for FY2023, and appear achievable.

With a higher-than-expected budget deficit and the glaring lack of an update on measures to facilitate expected inclusion in the bond index, the 10-year G-sec yield surged. With repo rate hikes of 50 basis points expected in June-August 2022, the 10-year yield is likely to harden further to 7.0% over the next few months, setting the stage for an upward move of the entire yield curve. Given the challenge posed by rising interest rates, a quick start in central and state government capital spending is essential to cement India’s growth recovery in FY2023.

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