Wednesday, March 2, 2016

Budget 2016 Transformational Budget

Karl Marx once said speaking of the goals of economic satisfaction: ‘each according to his needs’ (communists achieved it); ‘each according to his ability’ (capitalists achieved it) -- extend this to each according to his greed (modern economies surpassed). Democracy means great expectations and the FM has to meet these expectations in the most unenviable challenging environment.

The stunning defeat in the States’ elections during the year made the FM look at Rural India, agriculture, irrigation and infrastructure in this budget as key to regain its political prominence. Noses ground to the soil made different voices allocating more than 8% of the budget 16-17 to agriculture, rural development and irrigation. The Economic Survey forebode it to a degree.

Economic Survey 2016 read between the lines indicates that the economy would travel in uncertain growth territory due to weak growth of world output (around 3%), declining commodity markets, turbulent financial markets, and volatile exchange rates. The current expectation of 7-7.75% growth during the current year and 8% in the succeeding years is the hopeful. Agriculture sector constituting around 15% of GDP at current prices having 60% of population dependent on it just ended with 1.1%; manufacturing with Make-in-India push surged to 9.5% and services in spite of start-up and digital India efforts slackened to 10.1%.  Unless manufacturing start-ups attract angel funds in a big way it would be difficult to show a double digit growth in the sector as the credit markets are weak.

A weak financial sector and strong economy can hardly coexist. Notwithstanding the new initiatives of financial inclusion through JAM (Jandhan-Aadhar-Mudra) and the expansion of banking through the Payment Banks and Small Finance Banks, it is unlikely that the breathers compensate the dragging traditional banking sector facing scathing attack from all corners for the unprecedented surge in NPAs.

Out of the Modi Panchasutra , Make in India, Skill India, Digital India, Start Up and Stand Up, Swatch Bharat this Budget has focused only on Start Up, Skill India a bit and digital India have seen allocations leading to stability of these efforts.

The nine point agenda looks rhetoric but the details point to a growth oriented rural and infrastructure budget with little spice for the corporate sector.

Agriculture and Farmers’ Welfare: with focus on doubling farmers’ income in five years; (ii) Rural Sector: with emphasis on rural employment and infrastructure; (iii) Social Sector including Healthcare: to cover all under welfare and health services; (iv) Education, Skills and Job Creation: to make India a knowledge based and productive society; (v) Infrastructure and Investment: to enhance efficiency and quality of life; (vi) Financial Sector Reforms: to bring transparency and stability; (vii) Governance and Ease of Doing Business: to enable the people to realise their full potential; (viii) Fiscal Discipline: prudent management of Government finances and delivery of benefits to the needy; and (ix) Tax Reforms: to reduce compliance burden with faith in the citizenry. As if to confirm the failure of unearthing the black money with his earlier piloted law in this direction he has introduced the voluntary disclosure scheme. This seems a tacit admission that there are many still hiding in the black holes wanting to see the white clouds even in the ruling party. 

No wonder stock markets reacted adversely. On the tax front, he did not levy additional taxes on the poor and middle classes in the wake of accepting Eswar Committee’s reforms but preferred the Cess route. His proposal to increase the share transaction tax was not received kindly although it is the best move. In fact he would have taken it to 1% and offered with his left hand 5% reduction in corporate tax.

Agricultural sector with just 15% contribution to the GDP and its 60% population dependent on it has seen the historical jump in allocations from just around 2.2% during the past eight years to a little over 8%. Farmers’ welfare got an allocation of Rs.35,984cr. Apart from the allocation of Rs.12857cr out of Rs20000cr Long Term Irrigation Fund with NABARD, revamped PM Krishi Sinchai Yojana to bring around 28.5 lakh acres under irrigation, at least 5 lakh farm ponds and dug wells in rain fed areas and 10 lakh compost pits for production of organic manure will be taken up by making productive use of the allocations under MGNREGA. He laid the road map for de-bonding the agricultural markets through a process of digitisation. He assured the farmers a decent living and assured incomes to distance them from the suicides. PM’s Fasal Bhima Yojana allocation of Rs.5500crores falls short by Rs.2000cr announced by the PM. State’s matching contribution holds the key in addition to the fine print in the insurance policies.

Market stabilisation fund of Rs.900crores for pulses in the wake of declining production and increasing exports is a welcome move. But its adequacy is suspect. Research, development and agriculture infrastructure and irrigation got the deserving booster in the Budget.

Direct Benefit Scheme of subsidy regime should regulate the excessive harmful use of urea fertilisers and incentivise rational application of inputs. Aadhar enablement is proposed to be legalised to ensure the success of DBT in favour of the poor. It is also heartening to hear that all the fair price shops will be digitised to bring about transparency  in food security implementation.

Banking: PSB reforms commenced pre-budget formation of Bank Board Bureau, effective April 2016, in line with the recommendation of the P.J. Nayak Committee Report.  It is disappointing to see that the Government would be legalising the constitution of Monetary Policy Committee recommended by the FSLRC that would lead to erosion in the autonomy of the RBI in monetary policy. Inflation targeting and rate fixation thereafter could be a guess for the future.

Allocation of just Rs.25000cr indicated even in the last budget towards PSB recapitalisation out of the requirement of Rs.1.87lakh crores indicated in the Economic Survey should have disappointed the beleaguered banks. He should have at least announced limiting the equity contribution

Rajan’s call for cleaning up the Banks’ Balance sheets before March 2017 calls for a slew of measures from the FM – divesting its portfolio in PSBs limiting its own equity to just 51%; maintaining arms length in management of banks and fixing accountability on Banks’ Boards for the poor credit origination and monitoring for all loans approved by the Bank Boards beyond Rs.100crores  and rebuilding trust among the customers that the banks would serve them well at least cost taking advantage of the technology gains and an assurance on quick resolution of all cyber crimes and debt default. A watch dog mechanism is overdue on the targets of agriculture and MSMEs beyond the goody-goody SLBCs and DLCCs.

Announcing for dalits a start-up fund of Rs.500crores to the MSME Ministry and 2 such units to come up from each bank branch is welcome but needs close monitoring by the RBI.

The FM failed to address the large scale sickness in the MSME sector as a result of failure of the government and corporate sectors not paying the bills on time and the resultant sale of securities by the banks in a jiffy slapping the SAFRAESI Act. Seeing the existing units collapsing, new manufacturing enterprises are seeing no hope and therefore the start-ups in manufacture have not been surfacing.

While 19.60 lakh accounts have been opened under Jan Dhan scheme, overdrafts sanctioned did not cross 0.63% of the accounts thus far. This includes the Mudra loans as well. PSBs’ morale is very low today with the public pulling them up in street corners over the corporate NPAs coupled with declining customer service.

Education: Large scale reforms resulting in thorough overhaul of the sector, right from primary to the higher education and technical education and providing affordable education to the poor hold the key. Ethics in education stooped too low reflected in recent happenings on UOH and JNU are just the symptoms. Correction requires not a band aid but surgery. Road map should have been laid by the FM and the budget allocation should have ensured teacher-pupil ratio of global standard, class-room infrastructure and appointment of well qualified teachers. Degrees have long ceased to be the yardstick of quality. Nevertheless, skill development has a significant allocation.

n the marked up expectations the FM did an exceedingly good job on the balance laying the road map for growth and welfare in no small measure and deserves approbation.