A slightly higher deficit number will not be taken negatively by market

Over the past few years, the relative importance of the Union Budget from a financial market standpoint has been reducing, as various important decisions and initiatives are being taken outside the Budget. This year's Budget continued the growth impetus laid in the last year's budget by focusing on the 'quality' expenditure, growth and all-inclusive welfare.

Rather than taking a populist bend (which was widely feared as we get into several State Elections), the government rightly preferred to provide the growth stimulus by focusing on Capex and increasing the outlay by a healthy 35 per cent to Rs 7.5 trilion. The underlying focus on promoting domestic manufacturing has continued with several measures to support ease of doing business and focusing on improvement of infrastructure in the country (including through PPP route).

Although there were no direct measurers to stimulate consumption, the Government preferred the capex route to create employment and have a trickle-down effect on consumption. The government, by doing the initial heavy lifting for investment and creating a virtuous environment for growth, expects the private sector to join the growth capex soon. There was also a clear focus on leveraging digital technology across areas including for education, skilling, health ecosystem, financial
services and compliance. Also, the clean energy focus was visible with additional allocation to solar PLI, measures to promote Battery Swapping and continuing focus to promote EVs. The overall numbers presented in the Budget, including for the tax revenues and divestments, seem realistic and achievable.

 

Apart from these some other positive measures include:

• Issuance of Green bonds and promoting of GIFT city to help attract global investments. Also setting up of an International Arbitration Centre in the GIFT City for timely settlement of disputes under international arbitration is a big positive.
• Reduction in surcharge (capped at 15 per cent) on long term capital gains – is positive from financial markets perspective and the benefit being extended to unlisted equity will help the startup community.

While the FY23 budgeted gross borrowing at Rs 14.95 trillion and fiscal deficit at 6.4 per cent were slightly higher than expectations (as reflected in the rising of the bond yields), there is scope of these numbers coming in better-than-budgeted as the Government seems to have been a bit conservative in their revenue estimates.

Also, with the focus on stimulating growth through the more productive and long-term oriented capex spends, which have a clear multiplier effect on the economy rather than the short-term populist spends, a slightly higher deficit number will not be taken negatively by the market.

To conclude, the Budget is growth-inducing and does the heavy lifting by sharply increasing capital expenditure. While, there is a bit of disappointment as there is no direct stimulus to spur consumption and no major announcement on privatization, the focus on boosting manufacturing as well as an underlined emphasis on areas such as startups, modern mobility and clean energy, shows that the FM has prioritised long-term growth.

Ashish Gumashta is CEO at Julius Baer. Views are personal