We entered 2022 on a cautiously optimistic note, hoping for a safe navigation through the latest Covid (Omicron) variant. From a market perspective, there were a few rounds of selloff mainly triggered on account of a hawkish narrative from the US Fed. Their decision to close the liquidity tap created volatility across the globe. Just before the US Fed meeting in January, Indian markets had corrected by ~3-5% across major indices. FIIs had also turned bearish, selling ~70,000 Crores over the last 4 months, further adding to negative sentiments. Higher inflation and supply-side bottlenecks were already creating a dent in the growth engine. Global rating agencies were skeptical of a quick revival in the economy post-pandemic and hence had revised downward India’s growth numbers. Amidst this negative backdrop, the Union Budget 2022 was a major event with the core responsibility of putting India back on the growth track and building confidence in the underlying India story.
Hon. Finance Minister Ms Nirmala Sitharaman (FM) set the tone right from the start of her Budget speech, making it clear that it was a ‘Growth and New Economy Budget’. Infrastructure development was the prime focus of Budget 2022 and the speech touched upon various aspects of this theme. The development of logistic infrastructure was one of the key themes of this year’s Budget. Along with infrastructure, another area that took centre stage was New Economy and Digitalization. The budget also gave impetus to the revival of the rural economy through various initiatives to assist SMEs/MSMEs and other associated welfare programs. Another key aspect was to encourage private investments for the growth economy via PPP projects. In terms of taxation, there were no changes in tax slabs or deduction limits. However, the surcharge on unlisted long term capital gains has been brought down from a maximum of 37% to a maximum of 15% (at par with listed assets), thus providing potential savings of ~4% on the accrued capital gains. The FM also announced the launch of an RBI Digital currency and introduced a 30% tax on the gains accrued from the transfer of virtual digital assets, showcasing an attempt to regulate the crypto space.
In a nutshell, this year’s budget is a continuation of a similar theme of the past budgets of this government, with steady incremental gains rather than any big-bang reforms. It was a pro-growth budget with an intent to boost the economic cycle rather than maintain fiscal prudence. A push on capex, support to boost the digital economy and inclusion of the less privileged in the reforms story. Focus on more structurally beneficial initiatives like investment in sustainable energy, digitization, elimination of inefficiencies etc. will ensure that the long-term growth story of India remains intact.
Understanding the Budget Math:
(All numbers in INR Crores)
|Change of FY23 over FY22||Comments|
|Gross Tax Revenue||20,27,104||25,16,059||27,57,820|
|Net Tax Revenue||14,26,287||17,65,145||19,34,771||9.6%||Rise in tax collections looks a little on the conservative side compared to rise in GDP. With improvement in economic activity, actual tax collections may surprise on the positive side|
|Total Non Tax Revenue||2,07,633||3,13,791||2,69,651||(14.1%)|
|Revenue Receipts||16,33,920||20,78,936||22,04,422||6%||With the pickup in economic activity and better tax buoyancy, we think that the numbers are more realistic and have upside potential|
|Disinvestment Receipts||37,897||78,000||65,000||(16.7%)||Last 3 years, aggressive disinvestment targets were set and they were not achieved. Though this year, Air India was a big success and LIC IPO is also expected. Disinvestment targets for FY23 are more realistic in nature|
|Total Capital Receipts (Excluding Borrowings)||57,625||99,975||79,291||(20.7%)|
|Total Receipts (excluding borrowings)||16,91,545||21,78,911||22,83,713||4.8%||Key thrust is on tax revenue which will likely pick up in FY23|
|Revenue Expenditure||30,83,519||31,67,289||31,94,663||0.9%||No major rise in revenue expenditure on any social schemes|
|Capital Expenditure||4,26,317||6,02,711||7,50,246||24.5%||The biggest boost provided to the economy is through higher allocation towards capital expenditure|
|Total Expenditure||35,09,836||37,70,000||39,44,909||4.6%||The quality of expenditure is much better as the increase in expenditure is mainly on account of capital expenditure which has a higher multiplier effect in terms of economic growth|
|Fiscal Deficit / GDP||9.2%||6.9%||6.4%||FY23 Fiscal deficit is on expected lines with a clear intent to focus on growth rather than fiscal prudence|
|Market Borrowings||12,39,737||8,75,771||11,58,719||Higher market borrowings are budgeted for FY23 mainly to fund growth-related capex|
- The main highlight was an increase in Capital expenditure to INR 7.5 Lac Crores in FY23, an increase of 35% over last year’s budget estimate. Even the estimates for FY22 were further revised upwards by ~9%, thus providing the needed impetus to kickstart the capex cycle.
- Further allocation of INR 1 lac Crores to states as financial assistance will boost the up-gradation of state infrastructure.
- The Budget has provided allocations to scale investments in EVs, batteries, solar panels, drones and digital penetration. Further allocation of INR 19,500 Crs under PLI scheme for solar panels was announced.
- The introduction of Sovereign Green Bonds to fund green projects will provide the necessary focus to build clean energy infrastructure. Single-window clearance for green projects will fast track progress.
- 68% of the budgeted capital for the defence sector to be earmarked for the domestic industry along with 25% of the Defence R&D budget will be kept for the domestic industry, startups and academia
- Spectrum auction for 5G rollout will be conducted to provide a further boost to digital penetration and adoption
- 100% of 1.5 lakh post offices will come on the core banking system, enabling financial inclusion and access to accounts through net banking, mobile banking, ATMs, and providing online transfer of funds between post office accounts and bank accounts
- Introduction of RBI Digital Currency using blockchain technology is a step towards building the next generation digital infrastructure
- 100 Cargo Terminals for logistics to be set up in the next 3 years under the PM Gati Shakti Yojna
- No major change in income tax rates or slabs structure
- 30% capital gains tax introduced on the gain accrued from the transfer of Virtual Digital Assets (Cryptos, NFTs etc)
- Surcharge on LTCG from other assets (which are unlisted) has been brought on par with listed assets at 15%. This will benefit HNIs with a potential saving of ~4% of the gains.
- Alternative Minimum Tax for co-operative societies reduced from 18% to 15%
- Tax deduction limit increased from 10% to 14% on employers contribution to NPS account of state govt employees
- Updated income tax returns can be filed within 2 years from the end of the relevant assessment year
- The equity markets have cheered the budget since it provided the necessary impetus to kickstart capex cycle. Higher allocation for capex and intent for more PPP projects has set the right tone to drive growth. Also, the budgeted numbers seem to be on the conservative side and thus have the potential to positively surprise as the year progresses
- Instead of announcing welfare schemes, the budget aimed at inclusive growth through higher capex which in turn will have a higher multiplier effect in terms of economic activity and job creation
- Green energy and the Digital economy got a special mention on account of various initiatives which will attract fresh investments in these sectors
- With a key focus on a PPP model of development, many domestic companies should witness an increase in their capacity utilization leading to an improvement in their earnings
- Revival of the capex cycle and support to SME/MSME sectors should also provide a boost to the credit cycle, thus supporting covid sensitive sectors and the associated financial services
- Capital goods and commodities will be key beneficiaries of the capex cycle revival
- Overall, the equity markets will take some positive cues from the budget on account of a strong capex push, boost to digital economy and inclusion of the less privileged in the reforms and growth story. Focus on more structurally beneficial initiatives like investment in sustainable energy initiatives, digitization, elimination of inefficiencies etc. will ensure that the long term growth story of India remains intact. Near term volatility in the Indian markets can continue due to volatile global markets, US Fed rate hikes and high inflation. Thus having a slightly longer investment horizon when investing in equities might be appropriate for the current times.
- A higher fiscal deficit leading to higher market borrowings might lead to some selloff in the bond markets. Recent US Fed commentary and actions have increased volatility in bond yields. With a further rise in global inflation and tightening of domestic liquidity, yields are expected to rise further.
- Debt markets were expecting a narrative on India’s inclusion in global bond indices but it was missing, leading to some disappointment
- Yields are expected to rise further from their current levels in anticipation of a higher supply of securities
- For debt investors, investments across short duration funds to protect against interest rate volatility is recommended. Also with rising inflation, it is recommended to invest some funds in high yield assets to protect the value of the portfolio against inflation.