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Focus remains on improved spending quality

Conservative receipts lead to higher-than-expected fiscal deficit

The Union Budget 2022 was presented on 1 Feb’22 amid high expectations. Although the Economic Survey forecasted 9.2% real GDP growth in FY22, followed by 8-8.5% growth in FY23, the markets were anticipating that the government would announce measures to support weak consumption. Instead, the government continued on its course to improve the quality of its expenditure by focusing on investment growth. However, the higherthan-expected fiscal deficit, and thus, borrowings, disappointed the bond market and pushed the benchmark bond yield to over 6.8%.

* Focus on better spending quality is encouraging: At a time, when there were high expectations from the government to announce measures to support weak domestic consumption, the Union Budget 2022 kept revenue expenditure growth at minimal, and propelled capital expenditure (capex) strongly for the second consecutive year. While the revenue expenditure growth was revised to 2.7% in FY22RE, it is budgeted to grow only 0.9% YoY in FY23BE. Simultaneously, capex is budgeted to grow 24.5% YoY in FY23BE following 41% growth in FY22RE. The government’s capital spending, thus, has more than doubled to INR7.5t in FY23BE, from INR3.4t in FY20. Since the total government expenditure is budgeted to grow just 4.6% in FY23BE, higher growth in capex indicates improved quality of spending. Total capital spending of the government is budgeted to rise to 19% of total spending, marking the highest share in 18 years from just 12-13% in the pre-COVID years.

* Including IEBR, however, investment growth is more modest: Although the government has budgeted a very high capex growth, a part of it is due to the reduced internal and extra-budgetary resources (IEBR) of public sector enterprises (PSEs). Including IEBR, the investment growth stands modest at just 6.2% in FY23E.

* Extremely conservative revenue estimates for FY22RE and FY23BE…: For the second consecutive year, the government appears to have underestimated its revenue growth in FY22RE and FY23BE. Based on provisional data available up to Dec’21 and the historical trends, our calculations suggest that revenue receipts could exceed the revised estimates by as much as INR1.7t in FY22E and further by INR2t in FY23E. However, what is perplexing is to note that the government expects INR660b from disinvestments in Feb-Mar’22 that may be difficult without the public issuance of Life Insurance Corporation (LIC). We believe LIC and other disinvestments could happen in FY23, implying that while there would be a shortfall in FY22 (v/s FY22REs), there is a possibility of over-achievement in FY23. Overall, while there could be an overshoot of INR1.2t in FY22, total receipts could exceed the targets by INR2-2.5t in FY23E.

* …will lead to higher-than-expected fiscal deficit and market borrowings: If so, we believe that just like in FY22, the government will have an option to either spend more or to consolidate further in FY23. Such conservative receipt estimates are the primary reason for higher-than-expected fiscal deficit and, thus, borrowings in FY22/FY23, which spooked the debt markets. Notwithstanding better nominal GDP growth, the fiscal deficit is revised upwards to 6.9% of GDP in FY22RE (at INR15.9t visà-vis INR15.1t in FY22BE) and pegged at 6.4% of GDP for FY23BE (at INR16.6t). The gross/net market borrowings are pegged at INR15t/INR11.2t (5.8/4.3% of GDP) for FY23, respectively.

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