Interpreting Budget Dynamics

THE HUGELY SUCCESSFUL capital expenditure formula adopted with such vigour in all Union Budgets since Covid year 2020 grabs the biggest outlay yet again in finance minister Nirmala Sitharaman’s fifth Union Budget, hitting ₹10 lakh crore for the first time ever. That is 194% higher than the pre-Covid year 2019. Centre’s unflinching faith in capex has kept the nation’s economic growth going even as India anxiously awaits the other engines of private capex, exports and private consumption to start aiding the GDP growth. But with all three showing no sign of revival yet, Centre this time hiked capex outlay by a significant 33% to keep the GDP ticking. Especially, since exports will stay a huge challenge in the midst of projected global recession in 2023, private consumption is directly related to elusive higher economic growth, while private investment will really take cues from exports and consumption before India Inc. starts committing resources to new capacities. So, will Budget 2023 help India’s economic fortunes?

Fortune India formed a panel of the country’s leading economists, CEOs, industrialists and tax experts to understand what the Budget offers. T.V. Narendran, former CII president and CEO and MD, Tata Steel; Sumant Sinha, president, Assocham, and chairman and CEO, ReNew Power; Nilesh Shah, MD, Kotak Mahindra Asset Management Company; Mukesh Butani, managing partner, BMR Legal; Virendra D. Mhaiskar, chairman and MD, IRB Infrastructure Developers; and N.R. Bhanumurthy, vice-chancellor, Dr. B.R. Ambedkar School of Economics, answer some of the key questions on the Union government’s annual financial statement. Edited excerpts.

Is the Budget futuristic?

N.R. Bhanumurthy: Normally, Union Budgets are focussed on the short term. Pre-election Budget is focused much more on short term than normal budgets. To that extent this Budget seems different and has focussed more on medium-to-long term in terms of growth, investments, social sector, infrastructure, building institutions, and hand-holding states. The 50-year loan, for example, is an initiative with a long-term view. Overall, there is a considerable change in the way Budgets are made and the current Budget is more focused on medium-to-long term.

Sumant Sinha: It is a Budget meant for the future and aims to build a stronger India. That is because there is fiscal consolidation built in. There is a credible plan to get to a fiscal deficit of 5.9% which means lower borrowings by the government, which translates into lower interest rates. The second thing is the 33% increase in capital spending. But over a 2-year period, it is almost a 100% increase. Thirdly, there is a lot of work on sustainability. That means greening the economy, which is obviously good for India. Then there are a number of initiatives for different parts of the economy like MSMEs, furthering the agenda of digitisation, and skilling. It is looking at building all different and important segments of the economy in a way that they contribute to long-term growth and that in an election year is quite an achievement.

Nilesh Shah: The Budget is futuristic with focus on skilling, infrastructure and fiscal prudence. The seven priorities (guiding force of “Saptarishi”) laid down in the Budget sets the tone of the proposals. Allocation of free food and nutrition to “Antyodaya” and priority households to reducing surcharge for highest tax bracket individuals, it encompassed proposals for various strata of people. Be it the proposal for empowerment of women, artisans, tax breaks for the middle class to continued incentive for new age start-ups/green energy, it is a futuristic and inclusive budget.

The ₹35,000 crore for priority capital investment towards energy transition includes focus on National Green Hydrogen Mission with outlay of ₹19,700 crore and target to produce 5 MMT of green hydrogen by 2030. ‘Make AI in India’ and ‘Make AI work for India’ envisages setting up three centres of excellence. Viability gap funding for supporting 4 GWH battery energy storage system, allocation of ₹3,000 crore for semiconductor manufacturing to zero BCD (basic customs duty) on equipment for manufacturing lithium-ion cells for use in batteries are clearly steps towards futuristic advancements.

Mukesh Butani: There are many features and proposals in the Budget indicating that it’s futuristic and could have a long-term impact. Firstly, given the 60% capex impact for the current year, the finance minister has continued the momentum and announced that overall capex allocation has been increased five times over the period FY20 to FY25. The multiplier effect of such aggressive capex spends shall accrue over a period of time and, more importantly, propel the industry and private sector to participate in loosening its purse as far as capex spends are concerned. On the demand side, by rejigging individual personal tax rates for the salaried and self-employed taxpayers, including raising the threshold limit for availing presumptive tax regime (for SMEs and professionals), the underlying objective is to put more money in the pockets of a specified class of taxpayers. With this, either consumption shall be enhanced, or savings shall be channelled in a productive class of assets. Hence, supply and demand side considerations have been weighed to impact growth prospects.

Is the Budget growth-oriented?

Nilesh Shah: The Budget is growth-oriented as it spends more money on infrastructure investment, and by cutting taxes is putting money in the hands of the consumers. The Budget has made a “hat-trick” of accelerating capital expenditure to ₹10 lakh crore, a four-fold increase from ₹2.5 lakh crore in FY16. This is remarkable at 3.3% of GDP and 4.5% of GDP, including grants to states. Spending in infrastructure will have a multiplier effect on increase in investment, job-creation and improving competitiveness of the manufacturing sector for catering to domestic demand and increasing exports.

T.V. Narendran: The finance minister has presented a high-quality budget that focuses on increasing capital expenditure to build infrastructure while not compromising on fiscal discipline that is so essential in an era of rising interest rates. This has been something we have been asking for every year and to be fair to the finance minister, every year she has increased the outlay on infrastructure significantly. It is good for the country and industry, because investment in infrastructure helps create demand for multiple industries.

N.R. Bhanumurthy: Not only this Budget but in the last couple of years, despite the huge shock the economy has faced, the government has been focusing on building infrastructure and improving public investment so that general capacity in the economy improves for long-term growth. It is also assumed that larger public investment could lead to crowding in of private investment. The public investment strategy is backed by a study in NIPFP which establishes that government capital expenditure has a multiplier effect on the economy. It is basically a growth-oriented strategy focusing on medium-term growth which helps shifting the resources from low-productivity sectors to high-productive sectors. That is the strategy the government is following to increase growth and employment strategies.

Sumant Sinha: The Budget is growth-oriented and the finance minister has found the tricky path in between fiscal consolidation and not sacrificing growth. The expectation for GDP growth in next year is 6.5% but beyond that, even the Economic Survey and most forecasters are talking about growth between 7-8% a year. This Budget encourages pick-up in private and corporate capex cycle, along with consumer demand pick-up with tax rebates, incentives for housing spend going up, and urban development. There are many positives to create a virtuous cycle which will result in more efficient and productive economy, and will catalyse more investments and consumer demand and lead to more job creation.

Virendra D. Mhaiskar: If you see, total capital expenditure committed has seen a significant increase in the outlay to ₹10 lakh crore. This is actually the real seed capital for any economic growth. The government is spending in the right place and that will have a huge impact on economic uptick. When you have any kind of capital expenditure it has a lot of rub-off effect on several other things. If you try to do consumption-based economic activity, it is like a steroid. But when you do a capital-based investment that has a much longer impact on the overall economy.

Mukesh Butani: The Budget focuses on inclusive growth and, is overall, growth-oriented. The underlying philosophy is to focus on sectors which have otherwise been laggards. With an intent to propel growth in agriculture, reforms are proposed to build a digital public infrastructure, which will be accessible to farmers to ensure a market-driven price for agricultural produce. In addition, an Agricultural Accelerative Fund has been proposed to encourage start-ups in rural areas. Further, targeted funding for growth areas within agriculture, such as animal husbandry, dairy, and fisheries sector, find prominent mention in the Budget. More importantly, to enhance farmer’s remuneration on produce which otherwise does not reach urban markets, storage capacity is proposed as part of Budget allocation. In the past three fiscals, India has achieved record foodgrain production, and more credit has passed to the sector. However, the multiplier effect benefit of such growth has not translated through a pro-rata increase in farm income. The Budget proposals are an attempt to bring in certain features which were proposed in the three farm bills, which due to political compulsions, had to be withdrawn.

Will it create jobs?

N.R. Bhanumurthy: Sustainable jobs is a very important thing. Just giving some resources to employment guarantee and schemes like that are not going to work. Sustainable and qualitative jobs are more important. We also know that both industry and service have more employment intensity. The focus is on enhancing infrastructure capacity, which will certainly lead to larger employment opportunities in the long run. If the private sector, too, participates, nothing like it. The multiplier effect is not only on the output but also on jobs.

Sumant Sinha: The government has taken a very strong view that rather than creating jobs through handouts, and subsidies, they would create jobs through productive investments. The PLI scheme is a clear example that they are encouraging manufacturing on account of multiple reasons. One is the China+1 concept, diversification of global manufacturing, Make in India and Atmanirbhar Bharat. All this leads to massive job creation. All those investments will take 1-3 years to pan out once people start making investments on the ground. We will see a pick up in job creation as a result of that. The best way to create jobs is by ensuring the economy grows rapidly. If the economy is not growing rapidly, you won’t have money for handouts and the job market will keep shrinking. The government is taking the right view to push growth as that is the best way to create jobs in the economy.

Nilesh Shah: Yes, it will create jobs through a multiplier effect on growth through investment allocation.

Mukesh Butani: The job scenario has been precarious and a challenge of sorts, given the social ramifications. In the post-pandemic era, though unskilled labour has returned to work, skilled workers and professionals have pursued self-employment opportunities. Perhaps, in the Indian context, and recognising the entrepreneurial spirit in the Indian DNA, Budget proposals have smartly articulated a host of tax and non-tax measures. The extension of the threshold of presumptive taxation in case of professionals to ₹75 lakh and SMEs to less than ₹3 crore is a case in point.

The Budget recognises the youth as ‘Amrit Peedhi’ and focuses on upskilling them, facilitating job creation at scale and supporting business opportunities. To achieve this, the Budget has launched the PM Kaushal Vikas Yojana 4.0, which will focus on upskilling lakhs of youth and bringing them on par with the needs of the industry. Further, the government has identified the tourism sector as a massive opportunity for the creation of jobs. This shall entail giving preference to domestic tourism over international tourism, which will help create opportunities for youth. Additionally, setting up various plants, airports and other infrastructure is expected to create a multiplier effect, and more jobs in the process.

Will it spur demand?

N.R. Bhanumurthy: That is the one thing the private sector has also been looking forward to, especially when external demand is subdued and expected demand is also subdued because of recessionary expectations. The only thing left is domestic demand. Budgetary proposals should lead to more consumption in the economy. Since the last quarter there is improvement in contact intensive activities. A lot of anecdotal data shows people are moving from rural to urban clusters for contact intensive activities. That should help in improving consumption.

The large number of proposals will enhance consumption activity in middle- and lower-income categories. The Budget seems to have addressed this and we need to wait and see how people react to these proposals. Disposable incomes have increased with tax rebate offered in the new tax regime. The government has estimated the outgo to be ₹35,000 crore, which should straightaway get into the market because of marginal propensity to consume in the lower- and middle-income group. Whatever additional income comes into their hand is likely to be consumed. The second is discouragement on tax incentive schemes. That will also push consumption. With savings instrument discouraged, consumption instruments are likely to be triggered.

Nilesh Shah: In an attempt to boost consumption, the Budget rationalised tax slabs under the new tax regime. Tax rationalisation would provide additional disposable income to the tune of ₹35,000 crore which is positive from the consumption standpoint. The tax cuts will spur demand.

Sumant Sinha: All the capex will ultimately lead to demand for material. It will also lead to people doing the job. It will lead to more raw material consumption. Since the Budget spend has housing in its ambit, that’s also a job creator and all the job creation will eventually lead to more demand in the economy, both at the B2B and B2C levels. The tax reductions are equivalent to about ₹38,000 crore, which will get deployed in the economy.

T.V. Narendran: Investment in infrastructure helps create demand for multiple industries, including commercial vehicles, cement, steel, and others. It helps to generate employment because infrastructure is developed across the country. It also helps to reduce logistics cost, which in India is higher than many other countries. So, it has a multiple beneficial impact.

Virendra D. Mhaiskar: Money should never be stagnant. If you put more money into the economy, more will be generated out of it.

Mukesh Butani: The Indian economy showed resilience in terms of the ratio of private consumption to GDP during the second quarter of FY23, which was 58.4%, the highest in the last decade. This buoyant consumption was due to an increase in the consumption share of disposable income.

Will it boost exports?

Nilesh Shah: The Budget’s emphasis on infrastructure can boost exports over a period of time, but do remember that global growth is slowing down.

Sumant Sinha: Since the global economy is slowing down, exports will not grow as fast as expected. Therefore, the Indian economy will have to drive growth from the domestic economy. It will not come from the external economy. That is very clear. That is why creating demand through capex cycle, through lower tax is an effort towards demand side pull for the products to be manufactured in India.

N.R. Bhanumurthy: GDP growth estimates of around 6% for next year suggest that export demand is likely to remain subdued. Policymakers have already discounted this fact. In the absence of that, the government is trying to trigger domestic demand, which might cover up to some extent the external demand loss. But in terms of export policies, we were expecting more from the government, in terms of reducing customs duties. Many exports are import led. Some tinkering has been done. But the overall strategy seems to be to not adopt import-led export growth.

Mukesh Butani: Though there is no direct proposal to boost exports, giving fiscal and non-fiscal impetus to domestic manufacturing and capex thrust on infrastructure spending is likely to push down the cost of manufacturing, making India-made products more competitive for export markets. Further, in a specified class of domestic manufacturing, such as cellphones, by addressing high tariffs on specified raw materials, export competitiveness is bound to get a boost.

With the thrust on manufacturing coupled with reduced raw materials and transaction costs, the boost to manufacturing in the medium to long term will, besides domestic consumption, find a place in foreign markets. Moreover, by providing impetus to MSMEs, the Budget will boost overall sentiments in domestic manufacturing sector and propel the growth of exports.

Will it attract investments?

Sumant Sinha: Private investments are beginning to happen. With the economy growing, demand getting visible and balance sheets getting deleveraged, corporates will definitely invest.

N.R. Bhanumurthy: It is expected demand that drives investments. Immediately after Covid, they were not sure up to what extent the economy is going to revive. There is some confidence of the private sector on domestic drivers, even if overseas drivers are subdued. That seems to be showing up in recent data on credit offtake. There is a recovery in non-food credit to the commercial sector, little more than the money supply growth. With the initiatives announced in the Budget, private investment should pick up in coming quarters.

Virendra D. Mhaiskar: Private sector investment over the last 3 years has been on an uptick. Larger size projects have also been picked up by the private sector in the last couple of years. The road sector has seen improved private sector participation. And if you see the allocation to highways, you can see that more private sector participation is warranted and there will be efforts to bring up more projects with higher private participation. That looks to be the key strategy. With improved balance sheets and NPAs in banking going down, lending support is also going to come. We cannot look at the Indian economy with the purview of the Budget only, which is just a part of it. With bank NPAs going down and private balance sheets improving, everyone is going to deploy more money into the economy.

Mukesh Butani: Though there is no direct proposal for attracting investments from the specified class of investors such as FDI, the consecutive aggressive capex spends by the government are expected to reinvigorate the industry, and private sector spends. Further, by giving benefits of corporate income tax to new manufacturing units and acting as an enabler for reducing transaction costs, the proposals are extending a fresh invitation to foreign investors for setting up greenfield ventures for domestic manufacturing and exports.

Will it contain the fiscal deficit?

Nilesh Shah: Despite spending on growth, fiscal deficit as a percentage of GDP is pegged at 5.9% as opposed to 6.4% in FY23 revised estimates (RE). Net borrowing, estimated at ₹11.8 lakh crore, broadly flat vs 2022-23 RE, is a key positive. The path to fiscal prudence continues with re-iteration to attain a level of fiscal deficit lower than 4.5% of GDP by FY26. While the Budget has delivered on many promises, equity market performance may be marred by valuation premium vs emerging markets.

Virendra D. Mhaiskar: A good roadmap has been put in place. The area that makes me comfortable is the fiscal consolidation plan. The government has been able to control the fiscal deficit. If you look at the global economy and compare other nations with where we are, it is a big achievement. And going forward, the government has talked about bringing the fiscal deficit to 4.5% which will be significant in our journey towards becoming a developed economy.

N.R. Bhanumurthy: The Budget is based on very sound fiscal calculations. The government is moving towards a credible medium-term fiscal consolidation strategy where the whole philosophy is shifting revenue deficit towards capital expenditure. This is the first time that capital expenditure is more than revenue deficit in the total fiscal deficit. That is because of two things — a substantial reduction in budgeted subsidies, which has come down by almost ₹1.5 lakh crore, and a slightly larger bet on disinvestment. The disappointment, however, is that for the third consecutive year, the government has shied away from the FRBM (Fiscal Responsibility and Budget Management Act) roadmap. Otherwise, it has done extremely well on the fiscal deficit management side.