Monday, 4 July, 2022
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Digital India is Modi govt’s priority. Budget gives it a push — from manufacturing to infra

The FY23 fiscal policy appears to be guided by the objective of sustaining economic growth momentum while also being committed to gradual fiscal consolidation.

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Every Union Budget has an underlying leitmotif. The FY23 Budget will be known for two types of policy push: Capex and Digital.

Capex is a conventional formula for supporting infrastructure-led economic growth with favourable externalities for private investments and inflation management over the medium-term. The push for digital infrastructure is a behavioural nudge for economic agents to gradually migrate towards higher productivity and efficiency.

  • The government intends to deliver on its capex promise via a significant augmentation of budgeted capital expenditure to an 18-year high of 2.9 per cent of GDP in FY23. Sequentially, the increment would amount to 0.3 per cent of GDP compared to FY22 levels. This is expected to be led by a ramp up in spending allocation for Transport & Logistics sector, in particular. Roads and Railways put together are expected to get Rs 86,941 croreraise in budgeted capex in FY23 over FY22. Combined expenditure in roads and railways for FY22 and FY23 stands at Rs 2,34,820 crore and Rs 3,21,311 crore respectively.
  • The substantial capex push by the government will cause a healthy churn in expenditure: (i) ratio of capital to revenue expenditure (a gauge for assessing overall quality of spending) is budgeted to improve sharply to an 18-year high of 23.5 per cent, (ii) ratio of capital expenditure to fiscal deficit (measures the extent of borrowed resources used for financing capital expenditure) is now back to its pre-pandemic average (FY16-FY20) of 45-46 per cent.
  • The digital nudge, while not new, has been a priority for the Narendra Modigovernment in recent years. The Budget intends to take this forward in various ways, some of which would touch upon:

Agri sector: Delivery of digital services to farmers via optical fibre network in PPP mode and use of Kisan Drones for farming.

Education and Skill Development: Creation of skilling e-labs to stimulate learning development and setting up of Digital University with world class quality universal education.

Health: Rollout of National Digital Health Ecosystem.

Finance & Inclusion: Offering of digital banking services by Post Offices and creation of 75 Digital Banking Units in 75 districts.

Startups: Promotion for facilitation of Drone Shakti for Drone-as-a-Service.

Infrastructure: Last, but not the least, is the digital multimodal integration of the various forms of transport under the PM Gati Shakti platform.

Manufacturing: Launch of design-led PLI Scheme for 5G equipment makers.

Ease of Doing Business: Unique Land Parcel Identification Number for IT-
based management of land records and creation of Digital Rupee in consultation with the Reserve Bank of India.


Also read: Why Nirmala Sitharaman’s Budget 2022 is, and isn’t, an election Budget


Where it falls short

Overall, FY23 fiscal policy strategy appears to be guided by the objective of sustaining economic growth momentum (emerging from the pandemic) while also being committed to the path of gradual fiscal consolidation. It is also guided by the intent of crowding in private investments via the multiplier effect (as per the RBI, the multiplier effect of central government’s capital expenditure is estimated at 2.45 in a period t and 3.14 in period t+1). Concomitantly, the fiscal policy also highlights greater responsibility for state governments in promotion of economic growth. A significant fiscal space in FY23 has been planned to be utilised for capital assets generation, which is important for revival of investment-led growth cycle and thus for creating more job opportunities at the state level.

Notwithstanding these critical intended policy efforts, the FY23 Union Budget falls short on few expectations.

  • Central government’s rural spending (excluding subsidies) is budgeted to contract by 4 per cent in FY23. While this reflects rollback of certain pandemic era emergency steps, the government should in our opinion remain nimble footed on this front and be prepared to scale things up if required, considering the relatively higher per capita income scarring in rural areas on account of the pandemic.
  • Cumulative divestments in FY22 (revised) and FY23 (budgeted) is lower than the initial budget estimate of Rs 1,75,000 crorein FY22. While this reflects favourably on the credibility of budgeted assumptions, more effort needs to get galvanised to generate capital receipts by unlocking of value in public sector assets.
  • Capex by PSEs is set to contract by 6.6 per cent in FY23. This will soften the central government’s capex punch.
  • Bond markets could be in a triple whammy in FY23. Record high netg-sec borrowing of Rs 11,18,612 crore will generate upside pressure on bond yields, including other long term interest rates. This adverse impact could get amplified in a situation of lack of clarity on India’s inclusion in global indices (that could have attracted at least $30 billion debt flows within 4-6 quarters) and expectation of monetary policy normalisation from the RBI. This would call for policy mitigation steps in the form of buybacks (central government surprisingly has not budgeted for any major cash drawdown in FY23), switches (to curb duration pressure), and operation twist (to manage the slope of the yield curve).
  • The central government debt is expected to increase to 60.20 per cent of GDP in FY23 from 59.9 per cent in FY22. While the increase appears modest, it goes against the intuition of normalisation of the GDP base and consolidation in headline fiscal deficit resulting in a moderating trend. Increasing interest burden is emerging as a point of fiscal weakness and needs to be addressed with a combination of fiscal consolidation and durable economic growth.

Thankfully, the finance minister appears to have left some implicit buffers. The assumption of 11.1 per cent growth in nominal GDP in FY23 appears conservative (as per QuantEco estimates, this could potentially be close to 13.50 per cent). Lower reliance on small savings and cash balances to fund fiscal deficit in FY23 appears somewhat surprising given the existing wherewithal in both these areas currently. These non-market sources of funding can be scaled up to lower the incidence on dated borrowing, if required.

As the Economic Survey ideated, the FY23 Budget would indeed need to preserve policy agility.

Vivek Kumar works at QuantEco Research and focuses on macroeconomics research. Yuvika Singhal is an economist with specialisation in empirical work in macroeconomy and public policy. Dr Shubhada M. Rao is the Founder of QuantEco and former Senior Group President & Chief Economist at YES Bank. Views are personal.

(Edited by Anurag Chaubey)

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