Budget 2022: The govt should increase capex spending to spur growth

One of the key highlights of the FY2022 budget announced last year was the focus on capital expenditure. Capital expenditure growth was estimated at 26.2% with a focus on infrastructure spending (railways, defence, housing, road transport, and highways). 

As a portion of total expenditure, share increases to 15.9% from 12.7% in FY21. This was viewed positively as higher capital expenditure share would give a required fillip to the lagging investment capex. 

For the period April to October 2021, capex surged by 28.3%. A similar capex growth estimate for FY2023 (north of 20%) could crowd in private investment and improve medium-term growth prospects. 

This would be a crucial factor to support economic growth as private consumption expenditure growth remains subdued. 

Continuation of a few additional measures such as special assistance to states which offer interest-free loans for capital expenditure and permitting states to undertake additional borrowing on meeting the capex target would make the high double-digit capital expenditure growth target achievable.

On the revenue front, the government accounts seem to be in a comfortable position with revenue receipts as a percentage of budget estimates at 70.5% as of October 2021. 

This is largely driven by high tax revenues and higher-than-budgeted dividend transfers from the RBI. 

Disinvestment continues to be a missing element with only 5.2% of the budgeted disinvestment target of Rs 1.75 lakh crore has been raised in the first half of FY 2022. 

The IPO of LIC could help mop up a huge chunk of the target, however, the probability of this and other privatisation happening in the rest of FY 2022 seems bleak and will likely see a rollover to FY2023.

The first advance estimate of FY2022 GDP growth came in at 9.2%, slightly lower than the RBI’s estimate of 9.5%. 

This would bring GDP slightly (1.26%) above the pre-pandemic level. However, to achieve a potential GDP growth rate of 7% - 7.5%, all engines need to fire. 

Private expenditure needs to pick up in a meaningful manner. This can be supported by an additional fiscal boost in FY 2023 to improve disposable income and will help in reviving consumption demand on a durable basis. 

Improvement in the quality of government expenditure should continue in FY2023. Strong external demand is an opportunity for India and further policy support should help in capitalising on this, making India export attractive and an alternative. 

The Production Linked Incentive (PLI) scheme to boost local manufacturing is a step in the right direction. The evolving Omicron situation poses a threat to the local and global growth recovery. 

However, the severity of the new covid variant is comparatively low and might not derail the growth trajectory in a meaningful manner.

Overall fiscal deficit for FY2022 could come in lower than the target of 6.8%, at around 6.5%, supported by improved revenue position. 

For FY2023, the fiscal deficit could see some moderation if revenue receipts continue to see strong growth. The focus should continue to be on increasing disposable income, capex and exports, and gradually move towards fiscal consolidation roadmap of 4.5% by 2025-26. 

Any slowdown in the economy due to covid could change the fiscal math as revenues may see a shortfall and expenditures would need to happen to support the economic revival. 

In this situation financing of the fiscal deficit would largely come in from market borrowing and small savings. 

This could put pressure on the long-term G-sec yields. Our asset class research suggests that going ahead, investors will struggle to post significant gains in bonds as we are around the turning point of the current low-interest rate cycle. 

The annual return expectation from bonds would be more normalised as compared to high teen returns delivered in the last couple of years.

(The author is Associate Director - Capital Markets & Asset Allocation, Morningstar Investment Adviser India.)

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