As expected, the budget is heavy on Capex which is needed to ensure the cyclical recovery continues. Infra (railways 2.4 lakh crore, 50 new airports and clean energy 35,000 crores) along with the Agri push will help the rural economy improve by boosting employment and incomes. Allocation to affordable housing of 79,000 crores, increase of 66%, will also help the housing market retain momentum. Incentives for local production in form of lower duties will also be helpful. Overall, although it’s a long road approach, this budget push on capex will ensure that the private capex green-shoots really sustain overtime, help inclusive growth, and make the economy become more resilient in light of the global slowdown.
Both Equity and Bond markets have reacted positively to the budget, as the thrust to maintain the cyclical recovery and largely maintain fiscal prudence has helped lift the sentiments.
The following quote by the finance minister in the budget speech really sums it up:
“Investments in Infrastructure and productive capacity have a large multiplier impact on growth and employment. After the subdued period of the pandemic, private investments are growing again. The Budget takes the lead once again to ramp up the virtuous cycle of investment and job creation”.
Key themes in the budget:
Lower handouts and subsidies
By diverting flows from programs like MNREGA (rural employment guarantee scheme estimated spending down to 60000 crores from 89000 crores) to PM Awas Yojna (estimated spending on affordable housing for urban poor enhanced by 66 per cent to over 79000 crore) the government has opted for a more organic way to propel rural demand. Instead of subsidies on food, fertilizers, or fuel to help the rural economy, it has opted for productive infra schemes that have a multiplier effect and aid growth by generating jobs and income. The rural push through could have been much greater as that portion of the economy hasn’t yet much recovered post covid.
The long road - Capex over consumption .
Public capex has been hiked by 33% with major boost to roads (from 2.06 lakh crore to 2.58 lakh crore) and railways (from 1.59 lakh crore to 2.4 lakh crore) infrastructure. By doing this the government hopes that will lead to more jobs and thereby consumption and hence revival in private capex. Though it is a more prudent approach, it’s a long road to revival. We were already seeing green shoots of private capex; a consumption boost would have furthered it and hence a balance between capex and consumption would have been more optimal at this stage of economic cycle.
Fiscal prudence
In spite of the capex heavy budget, the Government has managed to be fiscally prudent with focus on investment led growth rather than being populist. The fiscal deficit and market borrowing figures were in line with market estimates. This was even as the Government approaches an election year.
Green Economy push
In light with the net zero pledge and adoption of 2030 targets, there is a clear push towards greening the economy. This year’s budget further announced implementing many programs for green fuel, green energy, green farming, green mobility, green buildings, and green equipment, and policies for efficient use of energy across various economic sectors. The recently launched National Green Hydrogen Mission, with an outlay of 19,700 crores, will facilitate transition of the economy to low carbon intensity, reduce dependence on fossil fuel imports, and make the country assume technology and market leadership in this sunrise sector. The target is to reach an annual production of 5 MMT by 2030. This Budget further provides 35,000 crore for priority capital investments towards energy transition and net zero objectives, and energy security.
Although hydrogen seem promising at this point, you can’t just concentrate on it and abandon other proven sources of renewable energy. While the intent is visible, the allocation falls short of what India requires for the green push. We do understand that with such high fiscal deficit, government could do only so much. The need was to encourage private participation and more importantly look at attracting sustainable finance from overseas which to a large extent is missing.
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