It is imperative for public spending to lead the way for a broad capex revival in the system for various reasons. Covid uncertainties and relatively lower capacity utilisation have meant that corporate India hasn’t started making large capital expenditures, though their balance sheets are generally healthy.

Aggregate capex for BSE200 companies in 2021, excluding financials is up barely 7% from the 2014 levels. The same is also reflected in the sluggish credit growth in the system. Given that the pandemic-linked demand variability will persist for a while, public spending must lead the way. The Budget’s 35% estimated capital investment growth was a significant positive surprise. This spending will not only have a strong cascading effect through job creation and improved infrastructure, it will also propel private capex in construction, engineering, materials, automobile, metals, and technology. Other related measures such as keeping 68% of defence equipment procurement for domestic industry and extending the PLI scheme to solar PV cells will further help domestic manufacturing and intellectual property in India.

On a related note, the help accorded to the MSME sector through, for example, extending the ECLGS scheme will also help support the wider value chains. The initiatives also come as a good time in terms of banks’ appetite to lend - their books are a lot cleaner, and willingness to lend is also making a comeback.

It is noteworthy that the FM has gone beyond conventional infrastructure spending. There is a reasonable allocation for social infrastructure, including education, healthcare, and housing, and measures targeted at supporting urbanisation, new energy vehicles (NEV) and digitalisation themes.

The government has already demonstrated an ability to ramp up capital expenditure in sectors such as transportation and railways, so there should be good visibility around the actual spending.

Investors will also take heart because the assumptions on the tax inflow front look conservative versus the current run rate. As a result, borrowing worth Rs 15 lakh crore are higher than an expectation of around Rs 12-13 lakh crore.

This has rattled the benchmark yields, particularly in the face of the upcoming tapering. However, with conservative assumptions on the inflow front, debt markets should hold here. Investors will also keep in mind that the extra borrowing is mostly going towards investments rather than being used for one-off demand injections in the form of subsidies. Improved infra and capital allocation will eventually help contain inflationary pressures.

Overall, this Budget has successfully put some strong multipliers in place to help pull up India's potential growth rate. Hope that it will also create a template that the government will follow through the remaining of its tenure, prioritising building public goods and infrastructure over giving out excessive doles and subsidies.


The quote was published in ET online in February 2022.

The opinions expressed are author's own. Fidelity International is not responsible for the author's opinions.