Eye on the Market

Budget FY2023: Anchored on Policy Continuity

a Pro-Growth Road Map with “Gati” & “Shakti”
through increased capex
February 1, 2022

Indian Finance Minister Nirmala Sitharaman presented the Annual

st
Budget for fiscal year 2022-23 on 1 February, 2022 in the backdrop of
extended pandemic, concerns over inflation, global supply chain issues,
low interest rates and a challenging global environment (USD, Fed
Commentary etc.). The budget presented in a paperless form for the
second time, focused on developing world-class physical infrastructure,
a more vibrant digital ecosystem and aspirational goals of a green India.

Breaking away from her own record of delivering the longest budget speech in
history in February 2020, the Finance Minister in her ~90 min speech this year,
refrained from making any big bang announcement choosing instead to walk the
path of providing growth impetus likely to come from the capex side that is
expected to crowd in private investment and hopefully spur consumption through
job creation in construction activities.

BSE Sensex seesawed 1295 points on the budget day to finally settle at 58,863 nearly
850 points up, even as market capitalization of BSE listed Co’s jumped ~`2,99,354
crores. Bond Markets reacted adversely with India’s sovereign benchmark yield
surging up to 24bps given Govt’s higher than expected borrowing plan and no
FY23
indication on bond index inclusion. The gauge closed at 6.85% on 1st February, 2022 vs fiscal deficit
6.68% the previous day. pegged at
Continuing with a thrust on Infrastructure as expected and highlighted by our 6.4%
economists in the Budget preview, the changing nature of the government spending
of GDP
was evidenced with a tilt toward capital spending from revenue spending. There has
been a favorable shift in direction of spending from subsidies (-27%YY in FY23BE) to
capex. We* estimate total Central capex (Govt + Public agencies) growth at ~16%YY in
FY23, higher than pre-Covid average.

Sticking to the path of fiscal prudence, FM alluded to laying the foundation of the
Indian economy over Amrit Kaal of next 25 years from India@75 to India@100 and
listed the 4 pillars namely: Productivity, Climate action, Financing Investments and
PM Gati Shakti Plan.
Gross tax revenue is expected to decline by 15%YY in the last quarter of FY22 while still meeting the full year target.
Divestment revenue of `650 Billion for FY23 seems to indicate focus on clearing existing pipeline. With a gradually
declining debt to GDP ratio, a much better quality of fiscal expenditure and lower dependence on foreign financing,
the rating agencies are more likely to stay on hold for now.

Citi analysts believe the budget refrained from any populist consumption push despite the busy election calendar
ahead. While focus on capex is a welcome move, they believe lower allocation towards social security related
spending could come under pressure from economic disruptions. FY23 fiscal deficit has been pegged at 6.4% of GDP,
marginally higher than Citi analyst’s estimate of 6.2%. Expecting a downside risks to the FY23 gross GSec issuance of
`14.3 Trillion, Citi analysts expect bond yields to remain under pressure. They expect the 10y bond yields on the path
towards 7.25% in absence of concrete support coming through by the RBI.

We present to you the key highlights of the Budget proposal**:

FISCAL DISCIPLINE

Ÿ The Revised fiscal deficit for FY22 is expected to be at `15.91 Trillion or 6.9% of the GDP. It was budgeted to be
at 6.8% of the GDP. The revised estimate of fiscal deficit is `840 Billion higher than budgeted
Ÿ The `2 Trillion higher small savings collections, more than `1 Trillion extra drawdown of cash balances and
higher T-bill issuances have compensated for this marginal increase
Ÿ FY23 fiscal deficit has been pegged at 6.4% of GDP, marginally higher than our estimate of 6.2%

Ÿ The net market borrowing for FY23 through government bonds has been estimated at `11.2 Trillion (vs `7.8 Trillion
in FY22). This indicates gross borrowing target of `14.95 Trillion. The `630 Billion switch of securities maturing in
FY23 that has been announced on 31st January, 2022 is not included in this estimate
Ÿ Citi analysts expect downside risks to the gross borrowing estimate for FY23

Ÿ The proportion of fiscal deficit financed through GSecs at 67% has gone back close to the pre-pandemic 5-
year average of 65% but substantially higher than the 49% in FY22

INFRASTRUCTURE AND CAPEX PUSH

Ÿ Outlay for capex raised by 24.43% from estimated `6 Trillion in FY22 to `7.5 Trillion in FY23

Ÿ Budget focuses on supporting economic growth and job creation - public capex is up 16% YoY in FY23BE vs ~5%
total expenditure growth budgeted
Ÿ Incentives for domestic manufacturing (solar, PLI, defence indigenization target raised to 68% from 51%, custom
duty recalibrations), deregulation and digitization of the economy
Ÿ National Highways network expected to be enhanced by 25,000km; 400 new generation Vande Bharat trains
to be manufactured
Ÿ Emergency credit line guarantee scheme for small businesses have been extended upto March 2023. It has been
further expanded by `50,000 cr
 TAXATION

Ÿ No material changes to income taxes (corporate or individual) or short/long-term capital gains taxes announced.
The minimum taxable income continues to remain the same

Ÿ Taxpayers will be allowed to file an updated return on payment of additional tax within 2 years from relevant
assessment year

Ÿ 30% income tax on returns from digital currencies introduced along with 1% Tax deduction at source on Digital assets

Ÿ The surcharge on tax payable on long term gains from capital assets (property, unlisted shares, artifacts)
proposed to be capped at 15%

FINANCIAL MARKETS, RATES AND FX

Ÿ India’s FY23 bond supply estimate is worse than market expectation. With the tax structure not amended,
index investor flows into India bonds is expected to remain absent

Ÿ Placement of `5 Trillion of FY23 bond supply maybe a struggle due to a) RBI expected to normalize liquidity/policy
settings; b) relatedly, less of further liquidity driven demand from banks; and c) global yields pushing higher and
financial conditions expected to tighten

Ÿ Buoyancy in Equity markets as a positive response to budget positively cushioned the disappointment in INR’s
price action. Citi analysts expect RBI’s FX reserves at about USD 634 Billion to reduce the risk to sharp currency
moves. In a like hood of Currency weakness, INR is likely to be on an orderly depreciation path in FY23, barring a)
sharp USD weakness, and/or b) sharp decline in oil prices

Ÿ Upcoming RBI MPC meeting expected to be focused on navigating calibrated normalization path while supporting
the bond market at the same time. Citi analysts expect the 10y yields to be on path to 7.25%

RURAL/AGRICULTURE

Ÿ A balancing act for Rural growth with lower consumption support from social security related spending but
higher capital spending that could support non-farm rural jobs

Ÿ Citi analysts observe that Rural spend has normalized after Covid-related escalation last year (YoY decline in
food & fertilizer subsidies, MNREGA allocations)
 OTHERS

Ÿ E-Passports with embedded chip and futuristic technology to be rolled out next fiscal year

Ÿ Govt expected to auction spectrum in 2022 to enable roll of 5G mobile services by FY23

Ÿ World-class foreign universities and institutions will be allowed in the GIFT City to offer courses in Financial
Management, FinTech, Science, Technology, Engineering and Mathematics free from domestic regulations,
except those by IFSCA to facilitate availability of high-end human resources for financial services and technology

Ÿ Battery Swapping policy for EVs ; interoperability standards to be formulated

Ÿ The government highlighted several drivers of the agenda for the medium/long term, including focus on public capex
(led by railways, renewable energy, water in FY23E), green infrastructure, digital economy (digital payments, start-
ups etc.) and digitization of government services

STRUCTURAL IMPLICATIONS

Ÿ A higher fiscal deficit coupled with normalizing household savings may lead to crowding out private investment
thereby risking capex revival

Ÿ Expected reversal of interest rate cycle (before output gap is closed) to likely have implications for private
borrowing costs, asset valuations and fledgling growth recovery

Ÿ No indication of bond index inclusion could lead to BoP deficit and create liquidity space for OMO purchases

Ÿ Gradually declining debt to GDP ratio and much better quality of spending expected to keep rating agencies on
hold for now
*India Economics, Asia FX & Rates Strategy, India Equity Strategy
**For more details, please refer to the Budget Document.

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budget speech which is available in public domain, before arriving at any conclusion.

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*(Source: Budget Documents, Citi Research)