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The government has stuck to its priority to boost growth over fiscal consolidation By Arvind Chari, CIO - Quantum Advisors

The government has stuck to its priority to boost growth over fiscal consolidation. The budget for Capital Expenditure spending from INR 5.5 trillion budgeted for FY 22 to INR 7.5 trillion for FY 23 is a massive increase.

If the central and the state government is able to implement and spend those amounts in a timely and efficient manner, it could lead to a multiplier effect in the economy. This should enable the continued economic recovery and extend the growth over the next 2-3 years. We had noted that there are several tailwinds to the Indian economy and we are on This increase in government CAPEX spending should be able to revive private CAPEX activity and bodes well for Indian equities over the medium term.

The priority towards growth means that the bond markets will see a slower fiscal consolidation and will have to face a very high level of borrowing both from the centre and states. In the backdrop of higher oil prices, a hawkish US FED and the pressure on the RBI to tighten monetary policy, the higher borrowing will see bond yields rising. Across the yield curve, over the course of the year, we will expect bond yields to rise by 20-30 bps for now. The RBI will also have to start hiking its policy rates and we would expect at least a 100 bps increase in rates in FY 23.

The major disappointment for us continued to remain on the governments focus on boosting supply side over demand. We would have loved to see some balance between boosting industry and supporting individuals.

Think of the sacrifices the Indian consumer has made over the last 2 years.

Lost livelihoods, lower incomes, health costs, higher oil and food prices, higher taxes on income and GST. The government's response in terms of some income support or a lower tax burden has been missing.

The economy faces short term risks from higher global and domestic inflation. In this respect, the government’s continued increase in import duties to boost domestic manufacturing on the back of improving growth will lead to higher cost pressures in the economy. We would have liked to see the government take some measures to manage future cost pressures with duty cuts.

The announcement also had no mention of rural employment, the impact on the informal enterprises and the continued divide between the formal and the informal economy. We do recognize that higher growth will trickle down over time, however, there should have been some immediate relief to the economic segments which were impacted by the pandemic.

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