Last year’s budget had two engines of capital investments and reforms. This year’s budget has retained the focus on capital investments, but reforms have been replaced by a focus on domestic manufacturing. That may not be surprising because many of those reforms, such as the LIC divestment, identifying non-strategic companies and bank privatisation have no made much progress.
But, the Budget 2022-23 dashed expectations industry and investors had that it would spur consumption. FMCG industry data had pointed to a decline in rural consumption of essentials in the December quarter, partly due to higher prices but also reflecting income stress. But the finance minister did not announce any new schemes or enhance outlays of existing schemes that could have put more money in the hands of lower income consumers.
One reason for this approach could be to avoid doing anything that spurs inflation. In that respect, capital expenditure or increased domestic manufacturing are not pro-inflationary measures. In fact, more domestic manufacturing can create more supply that is good for lowering inflation. On the positive side, there were no new taxes or increase in taxes on individuals or companies. But the quest to support domestic manufacturing has meant higher customs duties, which will come out of the pockets of consumers eventually.
The total capital expenditure spent through the budget is projected to increase by 24.5 percent in 2022-23 but this picture changes when you consider the total capital expenditure—that is including resources of public enterprises. After doing that, the increase drops to 10.4 percent, which is good but not as aggressive as the budgetary number suggests. Even here, the revised estimate for FY22 for total capital expenditure came in a tad lower than the budgeted estimate. These investments are targeted in the infrastructure sector, with the PM GatiShakti umbrella scheme being the main driver encompassing sectors such as transport and utilities.
The government’s Atmanirbharta focus has been given a bigger push in the budget. One part of this is making it easier for businesses to operate, although these are governance measures that don’t really need to be in a budget. But measures such as supporting urban planning along with mass transit systems and setting up charging stations all result in domestic manufacturing opportunities. Similarly, the 5G rollout will be accompanied by a PLI scheme for domestic manufacturing. The budget proposes replacing the SEZ framework with a new framework that uses existing infrastructure. This theme runs through the budget in sectors such as defence and solar power.
But there is the problem of competitiveness of Indian industry against imports and that’s where the government has stepped in and taken several measures that will hike customs duty on several goods and also on project imports.
This marks a change in strategy as it was earlier considered that keeping duties on project imports low could help manufacturing industry become more competitive. But, now the government appears to have decided that it wants to encourage capital goods manufacturing also within the country. What this can do is increase the capital investment required to set up a project, which in turn could lead to higher production costs. This could work against the government’s intention of spurring industrial capex, however.
Both capex and a manufacturing renaissance will bring benefits over the longer run. In the near term, there remains the task of growth and balancing the budget. The government expects gross tax revenues to increase by 9.6 per during the year with contribution from both direct and indirect taxes—with the exception of excise duty where it has projected a decline. This seems achievable given FY22's performance despite Omicron's effect.
Since the increase in expenditure is more modest, the fiscal deficit is expected to decline by 50 basis points to 6.4 percent of GDP. While the bond market may have been upset as it has resulted in a higher gross market borrowing, the equity markets seem to have been happy with the budget. Maybe, they are looking at the brighter side, that it did no harm and that its support for domestic industry should see cyclicals benefit.
