Sunday, March 3, 2013

Post Budget Analysis 2013-14


Union Budget 2012-13-On Expected Lines and little to cheer.
B. Yerram Raju
Budget is generally viewed in the backdrop of the Economic Survey. The Economic survey presented yesterday did not hide the failings thus far in the economy and just fell short of telling that the governance deficit would something beyond the FM. It laid bare the retarding growth and rising inflation and also agreeing with  the CSO estimate of depressing 5% growth expectation during the current year. As at the quarter ending December 2012, actual growth figures ended at just 4.5%. It attributes the retardation to the declining contribution of services sector from 8.2% in 2011-12 to 6.6% in 2012-13 and in part from the fall in growth in agriculture and industries sectors. It complements the medium term fiscal consolidation effort that pegged the fiscal deficit at 5.3%. It expects that the growth would be in the range of 6.1%-6.7% in the coming year. It leaves us the hope that the downturn of the economy is ‘more or less over.’ ‘Economic slowdown is a wakeup call for stepping up reforms,’ the Survey mentioned.
It also predicts that the global economy is also likely to recover setting at rest that the shadow of continuing global failure would be a drag on the Indian economy. Core Inflation shown to be at 4.2% and wholesale price index at 7percent with food inflation at double digit figures leaves one in doubt regarding the inflation figures mentioned in the Budget speech of the FM .
This optimism left hope in the markets that the Budget would be in the direction of spurring investments and domestic savings, measures to increase the consumption to spur growth and fiscal prudence to contain inflation. But alas, the index fell by 1% and the currency fell equally after the presentation of the Budget.
It hoped that the fiscal targeting and the likely downtrend in inflation would help RBI to look at rationalizing the interest rate structure.
Agricultural growth declined from 2.7% last year to 1.8%. It called for appropriate policies in the farm sector to reach the 12th plan target of 4% per annum: for improved agricultural growth, the survey underlines the need for stable and consistent policies where markets play an appropriate role, private investment in infrastructure is stepped up, food prices, food stock management and food distribution improves, and a predictable trade policy is adopted for agriculture. The high dependence of employment in the backdrop of a declining share in GDP to 14.5% is a cause for worry and this requires consistent policy to develop alternate skill-sets in farm labour to migrate to rural livelihoods programmes on one side and increasing mechanization on the other. Its analysis of agricultural credit is however flawed: in the face of declining area and deficient monsoon, if the banks claimed achievement of credit targets for agriculture, something is seriously wrong and the Survey should have lent a word of caution instead of praising the banks for reaching the targets.
The FM had to provide for capital refurbishment to the Banks in the public sector at no less than INR 1.17crores to meet up with the Basel III norms from April 2013 and the drift in the composition of NPAs from the erstwhile priority sectors that anyway do not cross 40% of lending portfolio to the corporate debt hiding mostly in the power and infrastructure sectors is the biggest worry. He has to provide for the railway deficit of Rs.26000crores apart from the revenue deficit. Implementation challenges of Food Security Act would also leave no room for containing the deficit. Of this, he provided Rs.26000cr to PSB capital in the Budget. Moving up on the revenue front against an incremental 1 to 1.7% of growth is not going to be substantial. Therefore, containing the fiscal deficit at the expected 4.8%  would appear unattainable.
The supply side issues as were made out to be the key factors for food inflation at the current growth in agriculture but had little mention in the budget.
In this backdrop, it would be interesting but at the same time highly disappointing to see the Budget neither growth oriented nor towards containing fiscal deficit. There are also very few indications as to when and how the current account deficit would be brought down to a reasonable level of, say,3%.  Inflation anyway the economy has to reconcile with during the year, notwithstanding any interest rate cuts that the RBI may like to offer. Let us now look at the Budget figures as to why I have to come to such conclusion.
How the pie of rupee gets divided between revenues and expenditure gives us a clear picture. 27% of the Rupee in budget 13-14 comes from borrowings while it was 29% in 2012-13. The question that now confronts us is whether this marginal reduction in borrowings would contain the fiscal deficit? The straight answer would be a natural ‘no’. Let us see the other avenues vis-à-vis last year: There is no change in the corporate tax pie- at 21%. Income tax has a marginal rise of 12%. Revenue from customs has come down from 10 to 9 percent while the Union Excise duties are estimated to come down by another 1%. Service taxes and other taxes are expected to go up by 2% compared to last year at 9% in 13-14. Non-tax receipts remain at 9% while the non-debt capital receipts are up by a percentage. In so far as expenditures are concerned, non-plan assistance to State and Union Territories and Plan assistance remain at the same share of 4 and 7% respectively. Same is the story of State’s share of duties and taxes at 17%; other non-plan expenditure at 11% in the year just concluding and in 13-14. Defence expenditure comes down from 11% in 2012-13 to 10% and he spent ten minutes in his speech. Central Plan outlay has also come down by a percentage point from 22% in 12-13 to 21% in 13-14. Do these figures give any confidence that growth will be spurred? No way. At the same time, the growth projection is 6.4% - 1.4% more than the current year! He defended the lower growth rate as part of global phenomenon. China alone is credited with higher growth. How can fiscal deficit come down to 4.8 percent in the backdrop of such uncertain growth picture?
Yet, let me list out some of the best things that this Budget announced:
The FM assured higher employment for youth. Health sector has secured the highest attention. Integrated development of women got an allocation of Rs.91.134crores, the highest share in the recent years. He has even promised an exclusive Women Bank with Rs.1000cr in the public sector. He may have already identified the Woman CEO for the Bank!! It would work for the women and by the women.
Investment incentives have found their due share and the stock markets have everything to cheer up which they did just for a short while. The MNREGS got an allocation of Rs.80184crores. This allocation is not backed up by any specific direction. Actually the scheme objective specifies creating livelihood opportunities but has confined itself to providing wage distribution with no asset creation. This has led to serious imbalances in agricultural labour wages and the farmers have been demanding a mechanism by which the scheme gets dovetailed with the crop cultivation and horticulture in measurable terms. Rajiv Gandhi equity Scheme has been liberalized. Household savings have also found a new route. Interest deduction for investment in housing up to Rs.25lakhs is also on cards and is likely to be announced after discussing with the RBI. Rs.2000 tax credit at the lower end of the Income tax bracket would bring cheer to the wage earners. Inflation Index bonds and Inflation indexed National Savings certificates are the new instruments of savings for households are welcome features. On the infrastructure side two ports – one from West Bengal and another from Andhra Pradesh found mention. National waterways development for bulk cargo transport to ease the road transport burden has also been announced. MSMEs get a better deal in terms of allocation of higher refinance from the SIDBI and Micro Finance Equity Fund, credit guarantee fund  and Rs.2200crs for 15 additional technology centres and incubation centres as also waiving the IPO offering for getting listed on SME Exchange are worthy to note. KVI artisan clusters also received an allocation of Rs.800crores; handloom sector to get working capital and term loan at 6% covering 1lakh individual weavers and Rs.26crores interest subvention.
Another sector that got rich attention is Finance Sector: He proposed setting up a Standing Council of experts in the finance ministry to analyse the international competitiveness of the Indian Financial Sector.  He also proposed a Committee to provide clarity on the treatment of Investment as FDI or FII.
The most disappointing attention is for the farm sector that got an allocation of just 1.4-1.5% of the total budget outlay. Although growth of farm sector at 4%per annum on average for the 12th Plan is held imperative for attaining 8% growth, there are no indications to spur such growth in the budget. One can argue that agriculture being a State subject much depends upon what the States allocate. But the Economic Survey as we noticed above desired specific policy direction for food prices, food storage and food distribution. In the wake of 1.8% growth in the sector in 12-13, and with a drop in the area cultivated how he expects a lofty target of 275mn tons in 13-14 is a big question mark, On the top of it once the Food Security Bill is passed how he proposes to meet the nutritious food and grains at the promised level in the Act for the poor can at best be a wild guess.
It was not also clear as to how he presumed that the current year’s credit allocation for short term agriculture at Rs.5.75lakh crores when the area under cultivation has come down is not clear. On the top of it he proposed to raise such short term loans for crops that too at concessionary rates of interest to farmers to Rs.7lakh crores. In any case this does not come from the budget. There is no allocation for interest subvention for such huge outgoes to the Banks.  Continuing 4%interest scheme on farm credit and treating investment in cold storage as infrastructure funding may be welcome but he could have treated investment in cold storage transport also as infrastructure funding.  This would have made the movement of perishables and vegetables, meat etc easier and faster and would have stabilized their prices for the farmer. 
On the manufacturing front, the budget allows for deduction of investment allowance of 15% on investment of Rs.100cr or more in plant and machinery during the next two years 13-15. Incentives for semiconductor manufacturing facilities including zero customs duty for plant and machinery to promote domestic manufacturing of hardware much of which is currently imported.
He chose to announce recapitalization of the public sector banks to partially meet the requirements of Basel III. But when the required recapitalization is of the order of Rs.1.17lakh crores, Rs.26000cr allocation would be just a little less than one fourth of the requirement.  Another similar incentive that might be counter-intuitive is, increase in the rural infrastructure development fund.  The Expert Committee on Agriculture Indebtedness 2007 suggested de-linking of RIDF from the lending to priority sector. As long as this does not happen, there is a window of opportunity for the commercial banks to dress up their figures for lending to agriculture. Third, although cooperative credit structure, occupying a little over 12% of financial space, is in the hands of States, the FM would have done well to release recapitalization of such rural credit cooperatives who have moved forward in effective legal and structural reforms in that sector because it is they that are within the easy reach of the farmer and they are the best instruments of financial inclusion if shaped properly.  Excluding cooperatives in the effort of financial inclusion and dependence on the unwilling commercial banks would for sure delay the process by a decade more if not less.
The announcement that GST would find its entry in the midstream of the Budget year having covered good ground to get acceptance of States and an allocation of Rs.9000crores symbolically is a good push for this important reform measure. He kept to his word regarding the direct tax by conforming to the code and a marginal increase at the lower threshold has been noticed to be not upsetting his revenues on this count. He introduced voluntary disclosure and payment of service tax for filing a declaration of past dues for the past five years by waiving penalties and interest on the hope of a million tax payers joining the stream, enhancing the pass through privilege, providing for bringing jewelry up to Rs.50000 for men and Rs.1lakh for men as part of baggge that will be welcomed by the middle class. Similarly mobiles costing Rs.2000 and below would not get into additional tax levied. Other luxury goods have been taxed. But the rich have been let off. He is himself rich and would not like to tax himself.