Traditional and new priorities

Higher capex allocation was one of the key thrusts of India’s 2022 Budget as the public sector takes to the wheel and hopes to draw-in private sector players, with an emphasis on boosting investments into infrastructure. The finance minister reinforced the need to continue with the Gati Shakti National Master Plan, integrating nationwide multi-modal connectivity, across roads, railways, and other modes of mass transport. This was also balanced with the social welfare push, targeting pandemic hit sectors, including MSMEs, farm procurement, rural allocation, vaccine rollout, national education mission, amongst others.

These traditional priorities were accompanied by focusing on new segments including launch of sovereign green bonds, laying the ground for the introduction of a digital rupee, clean energy and providing infra status to data centres amongst others, whilst income on digital assets will be subject to tax.

Market reaction was divided between upbeat equities which reflected optimism over a strong capex and growth push, whilst bond markets fretted an increase in borrowings and absence of tax measures to pave the way for bonds to be Euroclear-eligible and in turn ease inclusion into global indices.

Highlights in the fiscal math

• Nominal GDP and revenue assumptions: Nominal GDP for FY23 was projected at 11.1% yoy, on base real GDP growth of 8.0–8.5%. Most of the revenue heads are expected to rise on absolute basis, except excise duties and divestments. Based on the growth assumption, overall revenue receipts are projected to rise 6% yoy in FY23 and net tax revenue at a conservative 9.6% yoy, keeping the door open for upside surprises

• Expenditure orientation: The allocation towards capital expenditure was dialled up sharply to INR 7.5trn from an estimated INR 6trn in FY22. We note that the latter also includes settlements of dues towards Air India’s liabilities, excluding which it stands at INR5.5trn. The FY23 math includes the INR1trn transfer to states, with constraints to spending likely to slow disbursements in the final math. Under revenue expenditure, subsidy outlays were lowered whilst outlays towards interest payments are raised

• Fiscal deficit targets: The pace of consolidation will be gradual from an estimated -6.9% of GDP in FY23 vs budgeted -6.8% to -6.4% in FY22. Our preferred gauge of the primary deficit (excl one-off revenues) points to a wider 70bp reduction. Given the inbuilt cushion for revenues and expenditure, there is potential for fiscal outperformance in FY22 and FY23

• Borrowings: Bond issuances will witness a sharp jump in FY23, with gross borrowings at INR14.95trn and net at INR11trn, much higher than market expectations

Digging into the fiscal math

Small miss in FY22 deficit target

Revenues: The revised estimates (RE) of revenue receipts reflect the strong year-to-date run-rate, marked by an increase of INR2.9trn in FY22, with net tax revenues up INR2.1trn vs budgeted estimates (BE). On yoy basis, gross tax revenues are expected to rise 24%, helped by a 39% increase in corporate tax collections (between RE and BE) and 26% income tax rise. GST receipts are also expected to end the current year with a 23% yoy increase, benefiting from the accelerated pace of formalisation, higher due diligence, and import growth. Excise duties will be up a tepid 0.6% yoy in FY22 owing to the cut in the tax rates in the year. Divestment receipts are expected to be half of the BE, at INR780bn, suggesting part of the proceeds from the LIC equity offering will be reflected in the math by year-end.

Expenditure: Despite the slower ytd run-rate on capital spending, the RE math expects a late quarter push in disbursements to end the year at a higher than budgeted INR6trn, which will marginally improve the capex-revenue mix to 16% of total expenditure vs 12% in FY21. We note that FY22 RE capital expenditure includes capital infusion/loans to Air India for settlement of past guaranteed and sundry liabilities, excluding which, capex moderates to INR 5.5trn. Revenue expenditure is expected to be higher, factoring in more allocations towards subsidies, towards rural unemployment schemes and debt adjustment on the Air India sale.

Deficit: This revenue-expenditure mix leaves the revised fiscal deficit at -6.9% of GDP, compared to the budgeted and our expectation of -6.8%. Challenges with a strong push to spend in 4QFY22 is likely to see the FY22 deficit narrow to -6.6% of GDP, when actual data is made available late in the fiscal year.

FY23 math points to a modest consolidation path

Revenues: Overall revenue receipts are projected to rise by 6% yoy in FY23, lower than the 27% in the revised FY22 estimate. Even as direct tax collections are slated to rise in absolute basis, the pace of growth is expected to moderate to an average of ~13.6% yoy, moderating from the FY22 pace, and building in a tax buoyancy of less than 1.0x. Any upside surprise in the growth momentum would be an additional plus for these conservative assumptions. Reduction in excise duties on fuel led the budgeted estimate (BE) to moderate from FY22 RE.

GST collections are expected to maintain their strong run, also building in the compensation cess outflow of INR1.2trn (where savings are likely if the centre does not extend the compensation cess beyond Jun22), We recall that states have made a case for the centre to extend the GST compensation mechanism for additional five years from Jun22, in light of the revenue shortfall in midst of the pandemic and high spending needs.



Under non-tax, dividends and profits are seen at INR 1.13trn, slowing from FY22 RE’s INR 1.47trn, given the prospect of lower dividends from the central bank next year.

The biggest element of surprise in the math was under non-debt capital receipts i.e., divestments projection, which broke from tradition to factor in a modest target of INR650bn. In light of consistently undershooting targets in recent years – FY22 RE is seen at INR780bn vs targeted INR1.75trn –material progress on any of the asset stake sales including BPCL, SCI and banks’ privatisation could pose upside surprise to this revenue component.



Expenditure: A sharp increase in the budgeted target for capex spending was a highlight in the FY23 math and pegged to increase by 24.5% yoy to INR7.5trn (up 35% vs FY22 BE). This will also mark a pickup to 2.9% of GDP towards capex vs 1.7% in FY12-FY20. Add to this, grants in aid for creation of capital assets (includes allocations towards MNREGA etc.), takes the total sharply up to INR10.7trn vs FY22 RE of INR8.4trn. Sectors that have seen an increase in funding are roads (quarter of the total), defence, railways, urban development, amongst others.





The push to bring more off-balance sheet spending on to books persisted in this Budget as well, for instance, by increasing the funds set aside for the National Highway Authority of India (NHAI), in effect lowering the urgency for the agency to tap the debt markets.

Under revenue expenditure, subsidy outlay will be lowered to INR3.6trn (1.4% of GDP) from INR4.9trn in FY22 RE. Amongst major heads where spending is bound to rise include interest payments (by a notable margin), grants & loans to state governments, roads & bridges, investments into railways, defence, pension, police as well as education, amongst others.

Deficit: A sharp increase in capital expenditure and assumption of a moderate rise in revenues is expected to leave the fiscal deficit at -6.4% of GDP, pointing to a less gradual consolidation path, than earlier assumed. Nonetheless, a combination of higher revenues, constrained capacity to spend the capex funds and stronger nominal GDP can see the FY23 deficit narrow to -6-6.2% of GDP vs budgeted -6.4%.

Our own calculation of the primary balance (excluding one-off revenues) suggests a higher 70bps consolidation in the math. For states, a fiscal deficit of 4% of GDP will be permitted again, which includes 0.5% room which hinges on implementation of power sector measures. The centre will also allocate INR1trn as 50y interest free loans to the states, which will be over and above the normal borrowings. Cumulatively, this takes the FY23 general government (centre and states) deficit to 10.4% in FY23, marginally lower than 10.9% in FY22.

Sectoral push

Targeting India@100 over the next 25years, highlights of the Finance Minister’s measures for various sectors are available here, with an overview below:

• Infrastructure push: The nationwide Gati Shakti National Master Plan (which will also include states), is seen as being driven by seven engines i.e., roads, railways, airports, ports, mass transport, waterways, and logistics Infrastructure. Whilst aligning investments under the National Infra Pipeline, plans also include expanding the national highways network by 25k km in FY23.
• Farm sector: Support included higher procurement targets for wheat (Rabi crop) in FY22 and paddy (kharif) in FY23, involving outlays of INR2.4trn direct payment of minimum support prices to the farmers’ accounts. Besides, this a push of better irrigation facilities, reduction in overreliance on food imports, introduction of kisan drones etc are other proposed measures
• MSMEs: Various existing portals namely Udyam, e-Shram, NCS etc will be interlinked and streamlined. Provision of the credit guarantee scheme ECLGS stands extended to March 2023, with an increase in the outlay by INR500bn, which takes the total to INR5trn
• Social welfare: Outlays towards the rural employment scheme (MNREGA) has been pegged at INR730bn, after the FY22 RE was revised up to INR980bn. The Budget speech highlighted water availability, pursuing the health mission, women-led development, skill development, urban planning, amongst others as areas that will be on focus in the coming year



• Taxation: There were no changes to the income tax slabs but centre as well as states government employees’ tax deduction limit will be increased from 10% to 14%. Import duty tweaks were also undertaken across sectors
• New priorities: Besides a strong overall push towards expanding the digital outreach in education, healthcare, farm development, banking sector (by Digital Banking Units in districts), the Budget also introduced: a) launch of a sovereign green bond as part of the overall borrowing; b) e-passports issuance; c) green goals by promoting a battery swapping policy and attract higher private sector participation; d) facilitate domestic manufacturing of solar modules by way of high PLI allocation; e) transition to a carbon neutral economy; f) data centres and energy storage systems will be included in the harmonised list of infra; g) introduction of a rupee digital currency; h) introduction of a 30% tax on digital assets, which is seen as an indication that these investments will not be outlawed. These cannot be offset against any other incomes and 1% TDS will be charged for payments using digital assets

Market implications

The market reaction to the budget was divided between upbeat equities which reflects optimism over a strong capex and growth push, whilst bond markets fret an increase in borrowings and absence of tax measures to pave the way for bonds to be Euroclear-eligible and in turn ease inclusion into global indices. 10Y yields jumped ~20bp post the Budget announcement. The FY23 borrowing program has been pegged at a high of INR14.95trn and net at INR11.1trn. This math excludes the recent announcement of a decrease in the redemption pressure by a conversion in Gsecs and oil bonds with the RBI worth INR1.19trn, to FY28-FY30. Of these, bonds worth INR 636bn maturing in FY23 have been converted to longer-term debt, lowering gross borrowings to that extent.



Ahead of the monetary policy review on February 9, 10Y yields have risen sharply, building on a ~30bps rise on ytd basis, fuelled by strong gains in US yields, rally in oil prices, upcoming policy normalisation and anticipation of a higher borrowing program. With few of these concerns coming to fruition, borrowing costs are bound to rise further in the near-term, in the absence of open market operations or liquidity neutral OTs to cap yields. Despite the monetary policy committee’s dovish bias, evolving financial market conditions, sticky inflation and better confidence on the growth outlook will set the stage for incremental repo rate increases in 2H22.

Past growth revisions call for tweaks in the GDP growth trajectory

In the first revised estimates for past National Income reports released on January 31, showed that the GDP growth rose by a weaker pace in FY20 and contracted to less extent in FY21. Real GDP for the FY21 and FY20 was revised to INR 135.6trn and INR 145.2trn, showing a contraction of -6.6% of GDP in FY21 (vs -7.3% in earlier estimate) and 3.7% in FY20 (4% release earlier). This takes nominal GDP to -1.4% in FY21 and 6.2% in FY20. As additional data, such as Annual Survey of Industries, is made available, these data points might undergo further revisions. Prima facie, an upward revision in FY21 GDP pace lends downside risks to our projection for FY22 (besides Omicron impact), which currently stands at 9.5% yoy and upward bias to FY22 forecast at 7%.





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