The uneven recovery post the pandemic raises questions about the sustainability of demand and consequently the strength of economic recovery. Due to the kind of economic condition we are in, the fiscal policy tends to be more effective than monetary policy. For that our Finance Minister has an uphill task at hand as she has to strike a delicate balance ensuring the fiscal impulse is maximized to boost potential growth while policy adherence to medium-term fiscal sustainability is signalled. This would require: (1) the expenditure-to-GDP ratio remaining healthy; and (2) front-loaded investment-focused stimulus, especially amid its larger multiplier effect on growth and employment. This necessitates innovative reforms, better resource allocation, and possible fiscal funding by aggressive asset sales in the form of existing functional infrastructure monetization, disinvestments, and strategic sales, among others.
Focus on rural, MSME and PLI
While revenue expenditure will likely be focused on rural sectors and health, one is also need to watch out for extension/deepening of PLIs to exporters promoting Make-in-India and also for railway manufacturers. This would be encouraging while also fast-tracking the implementation of projects and supporting the manufacturing ecosystem. Contact-sensitive sectors such as Tourism/Travel and Hospitality and MSMEs/small businesses which have been hit severely post-Covid and are still in shallow recovery mode could get higher allocation rebates.
According to some reports, there may be incentives in standard deduction for the salaried taxpayers and pensioners, LTC vouchers, etc. to salaried government employees. This may help the individual tax payers to counter the inflation effect and spare more money in the pocket.
Meanwhile, there have also been talks about likely phasing out of income tax deductions, exemptions, and incentives on direct taxes. Though such stringent moves may be meant for some future date as the time is not suitable for the same now, its foolhardy to expect the FM to loosen the purse strings wholeheartedly while giving some deductions for individual tax payers. There has been an endeavour toward providing compliance relief, ensuring tax certainty, and reducing litigations. There may also be compliance relief/some tax rebate for MSMEs/small businesses which have been hit severely post Covid and are still in a shallow recovery mode.
Capex driven growth
The stance of the government over the last few years has been to promote investment-driven growth. Indeed, measures taken – such as reduction of corporate tax rates, unveiling the National Infrastructure Pipeline (NIP) of INR102tn, and steps to promote domestic manufacturing through incentives under the production-linked incentive scheme – all point in the direction of promoting capex-driven growth.
In October-2021, the government appointed KV Kamath as the first chairperson of the National Bank for Financing Infrastructure and Development for a three-year tenure, which is likely to start its lending operations in Q1F23, with the underlying agenda of meeting financing needs of projects under NIP while also remaining open to provide resources to other projects.
Further, the recently initiated structural reforms by the government, low interest rates, in addition to the initiation of the PLI scheme thus augurs well to attract private sector participation to propel the capex upcycle in the coming months. Additionally, the steadily improving capacity utilization rates and the robust balance sheets and profitability of the corporate sector are likely to encourage asset creation and thus mark the cusp of a virtuous cycle of investment. Further, the government can make efforts to push exports higher for both goods and services, by addressing sector concerns around logistics, tax issues etc. This will also positively feed into the capex cycle.
It is expected that government will take initiative in order to revive the struggling housing sector. Initiative like increasing the tax rebate on housing loan interest and incentive for private sector investment in affordable housing are key industry asks. Government allocation towards PM Awaas Yojana (PMAY) is expected to increase.
Some of the measures which can boost housing demand include: (1) continuation of interest subsidies for affordable housing (2) tax incentives for second home purchases (3) housing loans up to 90% of cost (4) higher quantum of deduction of interest costs (5) increase in maximum value of homes in metros and non-metros to be eligible for interest subsidies and (6) reduction in GST for house purchases.
Cement sector is an indirect beneficiary of higher government spending on housing and infrastructure and any measures in the budget to improve spending augurs well for the sector.
Housing is one of the key pillars of cement demand in India, which has shown signs of revival in recent months. For infrastructure, the government’s capital expenditure programme is expected to grow above 20% yet again this year. Capital expenditure for FY21 was Rs4.39 lakh crore and 26% increase was announced in last years’ budget. For FY23, another 20-25% increase in capital expenditure is expected, which will significantly increase cement consumption.
A boost to rural or farm income is also expected as a popular measure from the government in this year’s budget. This will likely be positive for rural demand, which has shown some signs of weakness in the recent past.
Recently, the South India Cement Manufacturers’ Association (SICMA) has urged the Centre to facilitate movement of cement from excess region of South India to other deficit regions of the country by providing telescopic railway freight services and to reduce cement imports from nearby regions. Let’s wait and watch whether any steps will be taken in this direction.
The exogenous nature of the shock warranted a well-balanced mix of policy support by both the central bank and the government to revive the faltering growth trajectory of the nation in the previous fiscal year. As economic conditions steadily normalise in the current year, a few of the policy support measures continue on both the monetary and fiscal front. These include relief and welfare measures such as free food allowances and a rural employment scheme, as well as an accommodative monetary policy with an unbridled emphasis on growth.