Indian government presented an investment-oriented budget with a focus on getting future ready. Increasing public investments and capital expenditure are expected to take the combined (Centre plus States) public capex to more than 4% of GDP in FY2023 from ~3% over the last few years. Advance growth estimates for FY2022 of 9.2% make India the fastest growing large economy: the increased capex could help keep the pace at 8% growth pencilled in by the government in FY2023. Some key takeaways for long-term India investors are summarised below.
Large infra capex outlay: Gati Shakti, a master plan that builds upon the National Infrastructure Pipeline (NIP), was a key focus of the budget. Increased allocation to capex positions India’s infrastructure investment program as one of the largest in the world. For comparison, USA’s Infrastructure Investment and Jobs Act envisages investments of USD 1.2 trillion in infrastructure, including USD 550 billion of new investments over the next five years; India’s NIP is a USD 1.5 trillion (INR 111 trillion) investment pipeline for six years ending FY2025. This is exemplified via the 25,000 kms expansion planned in national highways this year and 100 new cargo terminals with multimodal logistics to be built over next three years.
Fiscal dynamics suggest conservative forecasts: Fiscal deficit is budgeted to be 6.4% of GDP in FY2023 following the 6.9% in FY2022; India is committed to bringing down the ratio to 4.5% by FY2026. The large deficits over the last two years, in part because of no new or higher taxes, continued higher expenditure, and the cleaning up of the books, are financed by market borrowings. Large borrowing programmes have led to a rise in the yield of the 10-year paper to 6.85%, a rise of 95 bps over the last 12 months. The government, however, is in a comfortable position as it has significant fiscal buffer with buoyant direct and indirect tax collections. The estimate of nominal GDP growth at 11% and tax buoyancy of around one appear to offer scope for outperformance on revenue collections, which could reduce eventual borrowing requirement of the government.
External front appears comfortable: On the external front, India’s merchandize trade activity has been robust this year and well on its path to reach USD 1 trillion in FY2022. With over USD 400 billion worth of goods exports, this has been a significant shift from the previous years when exports were in the USD 300-330 billion range. As the government targets a USD 500 billion exports in the next financial year, the government has rationalized custom duties on import of raw materials for its top traded products such as electronics, and capital goods. A new legislation is also proposed to replace the existing Special Economic Zones (SEZ) Act that will likely support trade activity. High foreign exchange reserves (at USD 635 billion) offer cushion on external liabilities.
Harnessing new technologies for ‘India at 100’: India celebrates 75 years of independence in August this year. Over the next 25 years to “India at 100”, the government demonstrated its willingness and intent to harness new technologies in the sunrise sectors. Drones, agri-tech, battery swapping, electric vehicles, 5G, central bank digital currency, digital education, National Digital Health Ecosystem – all saw mention in the Budget. 5G manufacturing been brought under the government’s Production Linked Incentive (PLI) along with solar manufacturing showcasing the government’s atmanirbhar plank of development. Data centres and energy storage systems have been added in the definition of ‘infrastructure’ in the harmonized list – this will make it easier for these sectors to get access to financing. The previous budget had created tax benefits for sovereign wealth funds and pension funds investing in infrastructure.
Cities as engines of growth: Urban cities have been recognised as engines of growth. Preparing for continued urbanisation over the next few decades, a high-level committee with key stakeholders will help the government rethink this space. A suitable central government mechanism to play a stronger facilitatory role for the state-level urban infra projects and a clearer and committed devolution of funds to the urban local bodies could help strengthen the project pipeline and make for a stronger public-private partnership.
Green India: Building on Prime Minister Narendra Modi’s commitment of a Net Zero economy by 2070 at the COP26 last year, government announced issuance of Sovereign Green Bonds (SGBs) this year. These bonds are expected to mobilize resources for green infrastructure in public sector projects. Issuance of SGBs can help develop the green financing ecosystem by helping formalize a green taxonomy, development of assurance professionals, creation of a green benchmark yield, among others.
Blended finance: Institutions like NIIF allow government to leverage its initial equity commitment multi-fold by crowding-in significant private capital. Innovative financing mechanisms for blended capital and impact investments were announced in the Budget. A new fund with blended capital for investments in agricultural and rural enterprise will be facilitated through the National Bank for Agriculture and Rural Development (NABARD). Thematic funds with blended finance, 20% capital commitments by the government and managed by private fund managers, are proposed to be set up. These will focus on investments in deep tech, digital economy, pharmaceutical, agri-tech and climate economy. Government’s willingness to provide first-loss capital and to act as an impact investor signals its intent on supporting the growth ecosystem.
This Budget demonstrates the commitment of the Government to channelize its policies and funds in areas of high growth. In a world beset with uncertainties on geopolitics, inflation, supply chain issues, a continuing pandemic, and reversals of loose monetary policies, India offers a stable macroeconomic environment coupled with high growth and a forward-looking intent.
The author is with National Investment and Infrastructure Fund (NIIF). Views are personal. With research inputs from Akshata Kalloor and Kartikey Vaid.
Akhilesh Tilotia 