Decoding Budget Fineprint

As Indian economy recovers from the 'once in a century' pandemic, Union Finance Minister Nirmala Sitharaman’s fourth Union Budget has tried to push growth through ₹7.5 lakh crore capital expenditure, 35% higher than Budget 2021. A string of digital initiatives such as land records, digital currency and e-passport also kick off to keep India future-ready. Fortune India spoke to some of India's top economists, industrialists, bankers and CEOs to decipher Budget 2022. Gopal Krishna Agarwal, national spokesperson, BJP; Subhash Chandra Garg, finance secretary from July 2017 to July 2019; Gourav Vallabh, spokesperson, Indian National Congress; Suneeta Reddy, managing director, Apollo Hospitals; R.S. Sodhi, managing director, Gujarat Cooperative Milk Marketing Federation; Amitabh Chaudhry, MD & CEO, Axis Bank; Mahesh Palashikar, president, GE South Asia; and Raamdeo Agrawal, chairman and co-founder, Motilal Oswal Financial Services answer some of the most searching questions regarding government of India's annual financial statement. Edited excerpts:

Is The Union Budget Growth Oriented?

Suneeta Reddy: The focus on capital expenditure, especially infrastructure, transportation and logistics, will have a multiplier effect on jobs and growth. The government has acknowledged its role in catalysing the virtuous cycle of investment. It is likely that private investment will follow. Another factor that will drive growth is manufacturing. Government has attracted a lot of interest with Production Linked Incentive (PLI) scheme, and our focus must be on becoming a meaningful part of the global supply chain, which is opening up under the China +1 model.

Subhash Garg: Growth comes when you promote demand, or investment. It comes when you shift from inefficient to efficient modes of production. We need to judge whether these three strategic objectives are met or not. From demand perspective, there is not much in the Budget. There is continuation of existing schemes like MGNREGA and food subsidy. In the past, they served the purpose of food security, but did not create demand. On investment, government has argued that they are increasing capital expenditure, they are investing in infrastructure, especially transport infrastructure, which is what GatiShakti is about.

They have increased capex to ₹7.5 lakh crore. In number terms, it appears as investment, but when you look at the fine print, you find that expenditure on investment has increased, but capex by public sector companies such as NTPC, Indian Oil has been reduced by about ₹1 lakh crore. There is a provision which says states can be given ₹1 lakh crore capital loans. If you take away ₹2 lakh crore from budgetary provisions, the increase looks less attractive.

Also, you have to change unproductive assets into productive ones. You can privatise assets so that they work efficiently. Some like Air India have been done. Neelachal Ispat has also been sold. But it seems government is losing its enthusiasm for privatisation. This is reflective in disinvestment numbers, which have been scaled down. On this front, the Budget does not contribute much to growth.

Gopal Krishna Agarwal: Budget leaves no doubt that government is clear on long-term objectives and is committed to putting India on a higher growth trajectory. It is high on policy stability, predictability and trust-based governance. The government has struck a fine balance between capital expenditure and fiscal consolidation. The fiscal deficit for FY2023 has been targeted at 6.4% of GDP and government is committed to lower it to below 4.5% by FY2026. The glide path is going to be smooth and gradual. GST collections of ₹1.41 lakh crore in January 2022, the highest ever, show strength of economic recovery.

Amitabh Chaudhry: The government has made a decisive move towards bolstering public capital expenditure. Capex spending before FY21 had seen limited growth given fiscal constraints. The Budget provided for a larger increase in capex for FY22 and there is a sizeable increase planned for FY23. Capex estimate for FY23 is 62% higher than that for FY21 and more than 200% over FY19. In comparison, nominal GDP, used for Budgets, is just 36% higher than FY19 levels.

Despite higher borrowings, this level of public expenditure is crucial to crowd-in private investments. The Budget assumed nominal growth of 11.1% year-on-year for FY23. Actual growth will be higher, probably 13-14%, assuming real GDP growth of 8-9%. The Economic Survey has projected FY23 growth in the 8-8.5% range, while IMF has pegged it at 9%. This growth will add ₹6-8 lakh crore to nominal output, opening up scope for higher revenue mobilisation than budgeted.

PM’s GatiShakti programme and thrust on infrastructure are clear, as is the focus on urbanisation and use of CleanTech for urban infrastructure. Inclusive development through enhanced agricultural productivity and helping MSMEs through enhanced Emergency Credit Line Guarantee Scheme (ECLGS) are cornerstones of this Budget. India has become perhaps the only large economy to formally announce adoption of central bank digital currency. Formalisation of taxation for digital assets is an important milestone and should make India a hot-bed of innovation.

Gourav Vallabh: As our incremental capital-output ratio (ICOR) is about 4.5, achieving 8.5% GDP growth will require capital investment of 38.25% (8.5%x4.5) of GDP. For FY2022, investment is only 29.6% of GDP. So, what’s the government plan to increase investment by 8.65% (38.25%-29.6%) of GDP in a single year? I welcome the FM’s promise of ₹7.5 lakh crore as capital expenditure in FY2023, but the critical question is why actual capital expenditure in first eight months of the current fiscal was 45.5% of planned capital expenditure (RE). Budget is predicting 8-8.5% growth without any plan to support investment required to achieve that growth.

Raamdeo Agrawal: In a normal year, assuming there won’t be a fresh Covid wave, 6.4% fiscal deficit is humongous. If buoyancy in taxes continues and GDP grows at 8%, nominal GDP growth would be 12-14%. Then, GST collections should grow by 20%, which comes to ₹18-20 lakh crore. The FM hasn’t factored in higher revenue estimates despite expectations of 8% growth. That way the Budget has been conservative and could surprise on the upside. This continuity in capex is likely to be reflected in corporate profits. One villain could be the global commodity cycle which could put inflation numbers out of check and result in higher interest rates. If that happens, it will hurt growth.

Will It Create Jobs?

Raamdeo Agrawal: If the assumption is that GDP will grow at 8%, jobs will be created as every business will flourish. If the IT sector grows at 15-20%, that itself will be huge.

Palashikar: The big trigger will come from PLI scheme as big corporations take a larger bet on technology. There is a global supply chain ecosystem that will benefit domestic MSMEs. We have, for instance, leveraged medical technology PLI scheme and gone ahead with significant expansion with a new facility. That investment is not about us, but will create a supplier ecosystem around fabrication, PCB, cable, and components, which are run by MSMEs. Direct MSP payments will catalyse job creation in the hinterland.

Chaudhry: Remember, increasing consumption creates demand for services which, in turn, creates jobs. Moreover, multiple micro initiatives will foster inclusive development. Multiple steps are proposed to enhance productive capacity of MSMEs. First, ECLGS is to be extended by another year. Its guarantee cover has been increased by another ₹50,000 crore to ₹5 lakh crore, with additional corpus earmarked for hospitality and related sectors, which have been hit badly. This will promote employment generation and increase consumption demand.

Vallabh: Every Budget tries to address a few critical and challenging macroeconomic numbers. One critical issue is consistent increase in unemployment rates, which have reached 8.2% for urban and 5.8% for rural workers. Now, government is trying to set a new narrative of creating six million jobs with the help of PLI scheme but cannot answer how many jobs have been created by Make in India scheme launched seven years back. New jobs require investment, and to promote private investment, the economy should be full of missing demand. When there is not a word about reviving MSMEs that have been shut down, where will the new jobs be created?

Reddy: India’s foremost issue today is unemployment in general, and youth employment in particular. Our unemployment rate was nearly 8% in December 2021, with 53 million unemployed people. It was more than 7% for most of 2020 and 2021. The Budget has sought to solve this through investments in infrastructure and manufacturing. The PLI scheme is expected to create 60 lakh jobs, which is a good start. The revival of employment will need both agriculture and services to fire. The services sector has been impacted by the pandemic, and will see green shoots of revival in 2022. For agriculture, we need to reverse urban migration, and create meaningful incomes within the farm sector.

Garg: The jobs question is difficult. We are losing people in the workforce. Even those in the workforce are facing unemployment and loss of wages. The government has been trying to respond by enhancing allocations to MGNREGA, which is the last resort. Beyond that there is the Prime Minister Rozgar Yojana which gives some provident fund subsidies. I don’t find any other programme that is big enough to address this issue. I recognise the difficulty of doing much for jobs because jobs are created by the private sector and the way to create jobs is to create conditions that make the private sector produce goods and services through more investment. Among policy reforms required, labour reforms, industrial reforms have not been taken up. I don’t see PLI creating many jobs, because these are high technology investments which are good for country and economic growth, but not good for creating jobs. The Budget has not articulated the job strategy very well.

Will Budget Spur Demand?

Chaudhry: The push to public capex should eventually also spur private capex spending and, hence, there is likely to be a positive spin-off for both consumption and investment in the years to come. Consequently, in the foreseeable future, we should see demand for credit on all fronts, including the private sector.

Sodhi: Connecting post offices to the banking network will help farmers. Even today, 60% of villages in Gujarat don’t have banking facilities but have post offices. The launch of 5G communication will help farmers have better internet connectivity and information for making decisions. Cooperatives have been equated with corporates with the same Alternate Minimum Tax of 15% along with reduced surcharge. All these positive steps will spur demand. As more money will go to farmers, there will be more consumption, which will create a circular economy and induce demand for everything.

Palashikar: The government has done enough over the past 24 months to keep growth going and it can only do so much. FDI flows are robust and will help demand generation. The real boost will come from private investments. Manufacturing and services sectors are on a hiring spree. This tells an uptick is under way. While there was pent-up demand in auto, growth in aviation has been below normal. Hospitality, food and beverages are still grappling with Covid challenges.

Agarwal: The emphasis on public capex is one of the highlights of the Budget. The FM reiterated that private capital expenditure is still weak and government will have to do the heavy lifting. Together with central government grants and aid to state governments, capital expenditure adds up to ₹10.68 lakh crore. As a result, private capex may take off sooner than expected. This will spur demand, create employment and catalyse many areas of growth.

Reddy: Demand is a mixed bag. The more direct way of spurring demand would have been to support consumer spending through cash support. This has worked well in the U.S., and might have brought relief to weaker sections that have cut back consumption because of the pandemic. The government has not chosen to go this route and tried to address demand through capital investment. This will take longer to have an effect on demand, so we need to wait and watch.

Vallabh: Per-capita expenditure declined from ₹62,056 in FY2020 to ₹59,043 in FY2022, and per capita income from ₹1,08,645 in FY2020 to ₹1,07,801 in FY2022. When consumption and income have not reached even pre-pandemic levels, demand can be created only by cash assistance to the very poor who have suffered during the last two years. Rural demand will further decrease due to slashing of MGNREGA allocation from ₹98,000 crore in FY2022 to ₹73,000 crore in FY2023. Disposable income of tax-paying middle class will reduce as WPI inflation is expected at 12% and CPI inflation at 5.3%. No tax cuts were announced for this class. So, who will create demand?

Will It Boost Exports?

Reddy: It should, because of three things. The thrust on manufacturing will create more capacity and propensity for exports. Second, considerable work has gone into improving Ease of Doing Business. Third, focus on logistics and supply chain will bring down logistics costs, which will drive competitiveness.

We have a lot of potential in services and high-value agriculture exports. Both areas need special focus. The Indian health sector is poised to be the global destination for high-quality healthcare. These are areas worth supporting to deliver what IT had delivered in the 90s.

Vallabh: MSMEs contribute big to merchandise exports. So, why not a word in the Budget speech about reviving 60 lakh MSMEs that were closed down? The IT industry was demanding a special package as it was losing clients to other Asian countries. This was also neglected.

Chaudhry: The GatiShakti initiative is crucial to reducing logistics and operational costs of exporters. The sense is order books are strong, but logistics bottlenecks are slowing fulfilment. Adding to this are incentives like PLI which seek to equalise our cost differentials with competitors, and move towards cost benchmarks. The skilling initiative will add to productivity.

Raamdeo Agrawal: The export thrust was good, especially with government allocating ₹19,500 crore to boost manufacturing of solar modules under PLI. The move to replace the Special Economic Zones Act with a new legislation that will cover industrial enclaves is a positive step. The other critical move is correction of inverted duty structures.

Agarwal: Exports from manufacturing and agriculture have picked up. Fourteen sectors which are receiving support from government under PLI are performing well. They will propel integration with regional and global supply chains, boosting exports.

Palashikar: The Budget has not done anything direct to spur exports but there are enablers such as PLI for 14 sectors. It is not about Make in India for India but exports, as we have seen in electronics. Globally, we have a supply chain crisis and once that is over, our exports will get a boost. The China+1 strategy cannot be seen in isolation as China is a huge market and every big company needs to sell there. While we can make the most of the opportunity to emerge as an alternative supply chain base, we can’t bank upon it to boost exports. What’s important is to keep improving our competitiveness.

Garg: Exports are driven by expanding global demand. Global trade growth this year was 10%. This was because of the enormous stimulus in Western countries. With rolling back of monetary stimulus and slowing down of global fiscal stimulus, exports will be under pressure next year. WTO’s assessment is that global trade will grow 4% in 2022. So, while we continue to do well on goods and services, we should be a less optimistic about high growth.

GatiShakti is a programme in the works. Such projects take years to get completed. By the time you address issues, the current export opportunity may not be there. So, we should temper expectations.

Will It Attract Investments?

Reddy: Yes, that is the hope behind the government leading with significant investments. However, private investment and capacity utilisation have been muted in Q3 of FY22. We will see ramp-up of investments if we get to optimal levels of capacity utilisation in the private sector. Many in the private sector are taking a long-range view and using this period to double down on investments for the long term. The India story is intact and attractive.

Vallabh: Investment is the function of demand. There are a few worrying macro-economic indicators. Topping the list is fiscal deficit at 6.9%. 70% of the fiscal deficit in 2022-23 will be financed by market borrowing, which will have an inflationary impact in FY23. This will reduce disposable income of middle and lower-income groups and hurt demand and investment.

Raamdeo Agrawal: Government believes once the pandemic is over, the investment cycle will kick in. But unless industry is incentivised to invest, why will corporates invest except for those seeing some demand?

R.S. Sodhi: It is an infrastructure-investment oriented budget, which will create employment and livelihood opportunities for semi-skilled and small farmers. GatiShakti and its focus on railway logistics will ensure better connectivity for farm produce.

The investment in enhancing oilseed production is welcome, since we import more than ₹1 lakh crore of oilseeds. We need an oilseeds revolution. More investment in oilseed production has three-fold benefits: First, farm incomes will rise. Second, it will reduce government’s MSP burden. Third, it will help in deficit reduction.

Chaudhry: The big thrust on capex will force private players to spend. The intent is to boost demand, and in true spirit of ‘Make In India’ increase capacity utilisation, bringing private capex. We are seeing some of this happening in mobiles, consumer electronics, chemicals and auto components. There is a direct impact on cement, steel, etc. I don’t mind being emphatic and stating the effects on growth are likely to be visible very soon.

Palashikar: On a broader level, till capacity utilisation remains below a threshold, corporates will not invest since one has to look at return on investment. But, there are pockets of growth in the economy where investments have found their way. As supply-chain constraints ease, businesses will become more confident. The big trigger has to come from PLI. The one big catalyst that investments need is speed of execution.

Agarwal: GatiShakti is going to be the lynchpin around which government will build seamless, multi-modal transport and logistics infrastructure. Logistics accounts for 14% of GDP and government is committed to bringing it down to 8-9%.

MSMEs, the backbone of manufacturing, have been severely impacted by the pandemic. Keeping this in mind, government has extended ECLGS, with additional ₹50,000 crore for hospitality and related sectors. Credit guarantee for micro and small enterprises has also been revamped.

Garg: In India, foreign investment has been flowing into services, in digital start-ups. That has its own dynamism. We will continue to get good investments into this space despite the reversal of monetary and fiscal stimulus. That is where the real opportunity is and Indian startups are delivering on that. I expect the FDI flow to continue to be strong.

Has It Done Enough For Middle Class?

Reddy: Middle class India is aspirational and needs better housing, transport, schools, social infrastructure and quality of life. They are the biggest tax paying bracket, and tax performance is as important as tax incentives. On both fronts, more can be done. Tax performance in India is not a subject that is quantified or reported. And for last few years, there has not been a meaningful personal income tax change for the middle class. Now that constraints raised by the pandemic seem to be easing, the middle class will have more to look forward to.

Chaudhry: One can argue the 80C limit has not been enhanced and should you want the middle class to spend more, you need to ensure they have more money in their hands. However, in these extraordinary times, the government has done a good job in ensuring more important levers of the economy are set in motion. Once that happens, which will be followed by private sector chipping in, the economy will move in the right direction. All in all, there were priorities that the government had to focus on.

Can It Attract FDI And FII?

Reddy: FDI and FII investments work at the intersection of several factors. Over time, government has been working on improving India’s attractiveness through factors it can control – Ease of Doing Business has improved, there has been a departure from retrospective taxation, and a high degree of consistency and policy continuity. A few market reforms are in the works, and once government is able to get them passed, we should have removed all constraints and met FDI/ FII expectations.

Chaudhry: For the past few years, the government has focussed on putting structural reforms in place that aided foreign interest. However, given tight financial markets in FY23, there is room to expand the pool of foreign investors, particularly by expediting India’s inclusion in global bond indices. There is room to garner more disinvestment and dividend revenues. This will reduce upward pressure on interest rates.

Is The Budget Futuristic?

Mahesh Palashikar: The Budget focused on strengthening and consolidating what the FM has been doing over the past two years. It addresses climate change and energy transition, which is vital for India to stay competitive. It shows the PM is following through on his Glasgow commitment on climate change.

The focus on digitisation is commendable – be it digital rupee, digital university or digital healthcare mission. The focus on capital investment will nurture buoyancy in the economy. Capital investment has a multiplier impact on growth. It’s a journey and the Budget is an enabler in that process.

Today, we are at 140GW of renewable energy, and the PM wants it to be 500GW by 2030. It’s an enormous target and will need technology, policy and financing boost. Towards that extent, the sovereign green bond is an idea whose time has come. While we embark on a renewable transition, let’s not forget India has 200GW of coal plants and to that extent the scheme to promote biomass in coal-fired thermal power plants to curb air pollution is a thoughtful move.

Raamdeo Agrawal: The Budget will help corporate earnings. With nominal GDP growth of 12-13%, corporate profit should grow 15%. Besides capital goods and construction, it has not had too much impact on other sectors. The government has looked at supply-side economics and expects demand to take care of itself. These are unusual times. Travel and hospitality, where jobs and incomes have been lost, drive consumption. By including hospitality sector under ECLGS, government has provided monetary, not fiscal, support. They need customers. Where will they come from?

Gopal Krishna Agarwal: The Budget provides a roadmap for India’s economic journey from India@75 in 2022 to India@100 in 2047. It lays the foundation for these 25 years of Amrit Kaal. If India commits to follow this template of high public capital expenditure, control of populist measures, stable and predictable tax regime and focus on reforms, this Budget will be remembered as the trailblazer.

Nowhere is the Budget as future oriented as when it talks about urbanisation. Our top six cities are bursting at the seams and additional expenditure being incurred is aimed at making them liveable for the existing population. The FM rightly said that our Tier-II/III cities will have to step up to shoulder the urbanisation responsibility. Cities and towns can be engines of growth only when they are properly planned and operate on sustainable principles. The emphasis on new building bylaws, revamped town planning and creating centres of excellence and leading academic institutions through grants of ₹250 crore to five such institutions shows government's commitment.

Garg: The FM talked about a Budget that looks at 25 years. In that sense she is trying to be futuristic. But if you go into the content, high debt, expenditure commitments which are not very flexible, it seems too much into the present. So, I don’t think the content is futuristic, but is being presented as futuristic.

Gourav Vallabh: I am surprised the FM is giving a plan for next 25 years, which she called Amrit Kaal. When 4.27 crore youth are unemployed, 84% of households have suffered loss of income, our ranking on Global Hunger Index has fallen to 101 (out of 116), the FM believes that present doesn’t need any action and people can wait patiently until Amrit Kaal. The Budget is not futuristic. It is ignoring the present.

What Has The Budget Missed?

Reddy: For a large and diverse country, with massive opportunity to grow as ours, every Budget cannot address all sectors in equal measure. This Budget has given a strong push for growth, with focus on infrastructure, manufacturing and sunrise sectors. It is also a strong statement of intent, and consistent on key policy matters. I am hopeful there will be out-of-Budget announcements for sectors which need support. In healthcare, while government provided support throughout the pandemic, we have some distance to cover in percentage of GDP allocation, strengthening health infrastructure, incentivising health-oriented behaviour of individuals, and addressing requests around GST.

Raamdeo Agrawal: The government has made conservative cash-flow estimates and is well funded for next year’s budgetary estimates. But they should have done more to spur consumption on the household side through higher tax breaks and through GST concessions.

Vallabh: It missed providing cash assistance to the very poor. It had not provided any convincing framework for creating new jobs and reviving MSMEs that had shut down (during the pandemic). It failed to provide tax relief to the middle class. And there is no plan to raise more resources from 142 billionaires whose wealth has increased sharply in the last two years.

Palashikar: In our transition to green energy, we need a dual approach of incentives and deterrents to bring down emission levels. While India has a 2070 commitment, the government needs to accelerate some climate change actions to reach that goal.

Chaudhry: We need to have an eye on ‘execution’. As far as intent and signalling to the economy on where the government’s heart is, the FM has done an incredible job. However, given the wide sweep of sectors and programmes involved and new initiatives, execution will remain the key determinant.