This year\u2019s Union Budget had three overarching themes: One, and perhaps the most important announcement, pertained to the increase in public capital expenditure by a staggering 33% over last year to a total of Rs. 10 lakh cr. An increase in capital expenditure is especially significant given that it comes only a year before the general elections take place and thus signals the growth focus of the government. Higher capital expenditure is desired as it encourages private investment by boosting consumer sentiment and demand.<\/p>\n\n\n\n
The second salient feature of the budget is that the fiscal deficit target is set at 5.9% of the GDP (Gross Domestic Product). This is not only lower than this year\u2019s deficit target of 6.4% but is also sentiment positive, given the fact that it comes on the back of the material increase in capital expenditure. Normally, higher expenditure must arguably lead to a higher deficit, but the Centre chose to cut back on some other expenditure categories, such as subsidies, to help reduce the deficit targets.<\/p>\n\n\n\n
A lower fiscal deficit will, in turn, help the Centre control borrowing. This brings us to our third point, which is that the borrowing target by the Centre has not been raised significantly. The Centre has set a borrowing target of Rs. 15.4 lakh cr., slightly higher than this year\u2019s budget estimate of Rs. 14.9 lakh cr. but in line with the market\u2019s estimate. This is evident in the fact that India\u2019s 10-yr government bond yield dropped from a high of 7.42% to a low of 7.28% during the budget day. <\/p>\n\n\n\n
Remember, when the government borrows more from the market, it pushes up yields as demand for funds rises. Higher borrowing also tends to crowd out private investment as companies now find it expensive to borrow. In this context, a modest borrowing target by the Centre bodes well for the interest rates, private investment, and, therefore, the economy. <\/p>\n\n\n\n
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