Union Budget 2022-23

 

Union Budget 22-23

Backdrop:

The expected growth rate of 11 percent in the Economic Survey 20-21 is now pegged at 9.5 percent by RBI and several global rating institutions in the backdrop of negative 7.7% growth rate of 20-21 whereas the World Bank upgraded India’s outlook for the year to grow by 8.3 percent in FY 2022. The V-curve expectation of the Chief Economist of India, in an online seminar in August 2021 would prima facie appear real, with health infrastructure measuring up to withstand the second wave of Covid-19 and the inescapable third wave of Omicron variant of the pandemic rescue in full swing. It is inflation that led the GDP growth instead of production and productivity increase. HBL headline of the 16^th instant shows decline of IIP to 1.3 percent.

Retail inflation index scaled to 5.9 percent; a five-month high during December 2021. OECD has leagued India among the four nations that would cross 6.4 percent inflation this fiscal. The share of private consumption has been steadily falling since the pandemic struck according to the latest RBI Survey. SBI Report says that per capita income dented due to covid-19 effect by as much as 5.4 percent.

The ratio of private consumption to GDP fell to 54.7 percent in ‘21-22 from 55.6 percent in ‘19-20. Demand for MNREG from all the states confirm that rural wages for agricultural and non-agricultural workers have been flat. Pandemic has also inflated both debt and deficit levels. IMF estimates that India’s debt is around 90 percent of GDP, the highest among the peer group of nations similarly placed, even by the end of the third quarter of FY21-22, an unsustainable level.

Financial Stability Report of the RBI and Morgan Stanley economist leave the hope in financial sector. Last Budget has seen the mergers of PSBs, setting up of Development Finance Institution to finance infrastructure and National Asset Reconstruction Company (euphemism for Bad Bank) to reduce the non-performing assets of banks. The quality of assets of banks improved and the NPA accretion during the year saw a decline. However, micro, and small manufacturing enterprises got a raw deal at the hands of banks and NPA levels of NBFCs and Fintech companies are on the rise.

While India could save the lives of many, it is efforts to save the livelihoods has only marginally impacted going by the CMIE Working Paper from A. Gupta et.al quoted by the Economist, 14^th January 2022. First wave 20-21 saw stagnation in poverty (measured by $1.9 per day in 2011 purchasing power parity) and oscillated in rural poverty whereas both urban and rural poverty declined with urban poverty nearing zero and rural poverty reaching 18-19 percent, during the second wave. It is a moot point whether increase in gross fixed capital formation post 2019-20, a proxy for private and public investment in absolute terms and as percentage of GDP, has led to the reduction in the number of the poor in the country.

Budget Hopes

“.It was the spring of hope and the winter of despair,” to recall Charles Dickens’ description in the Tale of Two Cities. Markets responded very positively with several startups and IPOs in the green. Then, what could be the expectation from Sitharaman, the FM? Everyone expects that taxes could be lowered and incentives to pep up consumption should be increased! What is the balancing trick that the FM would do?

Revenues:

GST revenues have been buoyant, but the states want the compensation for loss of revenue that could end by this fiscal to continue for two more years! With elections in five states announced, and general elections that would follow two years hence, the FM has little scope to cut revenues on this front. She can expect dividends from all the PSBs and profit-making PSUs to make up the revenue deficit to an extent of at least 1.5 -2 percent of GDP.

The FM should increase non-tax revenues very discreetly. She is hamstrung on fiscal deficit. This is likely to surge to 6 percent from the stated level of 3.5 percent as the State Survey of RBI also mentioned that all the states crossed the benchmark level of 4 -4.5 percent of public debt.

Investor sentiment will not be hit badly even if she increases the share transaction tax to 2 percent. This measure does not involve tax administration expense but earns revenue every day instantaneously into government account.

As part of agricultural reforms, she should announce separate budget for the sector: 1. Assurance on MSP for a few commodities with a sunset clause; 2. Digital agricultural market incentive as part of Agricultural Market reform; 3. Agricultural Income Tax for income above Rs.25lakh per annum at 5 percent; 4. Incentive for farm mechanization and formalized lending to tenant farmers; and 6. Strengthening Rural Cooperatives and 7. Restructuring NABARD.

Allocations:

The FM should strengthen implementation of the budget proposals towards reforms in the areas of judiciary, police, and administration through even symbolic allocation.

Health sector should get at least 6 percent allocation both for infrastructure and functional efficiency.

Education sector, consistent with the National Education Policy 2021, should receive 3 percent allocation and mandatory schooling of the wards of the parliamentarians, legislators, and government servants in government schools. Mid-day meals programme should be strengthened.

The FM should be bold enough to introduce abolition of surcharge of all types to demonstrate the cooperative federalism.

Micro and Small enterprise sector

Micro Finance Association has already demanded Rs.15000 crores to make up their capital erosion, due to the pandemic. While conceding to this demand, she should also announce a new law to deal with the micro and small enterprises. While 98 percent of MSMEs are proprietary or partnerships (family-owned mostly), the benefits of the existing MSME Development Act 2006 have reached the medium and large among the small, to an extent of over 55 percent.

The threshold level of TReDs should be also reduced at the entry level to Rs.50cr turnover per annum to activate factoring and bill finance as independent finance channel. Cluster of manufacturing MSEs should be enabled to pool their limits and collaterals under a separate agreement with the banks and FIs so that they can access inputs at lower costs and sell on TReDs platform as a pool. All the government departments also should be mandated to purchase on this platform by registering on TReDs.

Indiscriminate application of SARFAESI Act by the Banks should be contained by announcing a state approved third party scrutiny of NPAs in the manufacturing MSE segment. SIDBI should be restructured as it hardly met the expectation of the sector during the last thirty-one years of its existence. Banks should be mandated to furnish data on the number of enterprises financed in manufacturing and services MSEs and not in terms of number of accounts.

While most queries on finance should be dealt with by the Department of Financial Services, Union Ministry of Finance, they are directed for response to the Ministry of MSMEs that does not have a voice with the banks to resolve the issues. The solution lies in resolving across the table all such issues through a monthly meeting between the DFS and DC-MSME on a pre-determined date.   

Priority sector targeting is a soaring point for the banks while they do not admit to this openly as it carries interest rate risk and loan origination risk. Lending MSEs has no charm for the PSBs and large traditional private sector banks. SFBs and NBFCs could be the best windows. FM may announce suitable measures for better regulation of the sector. FM should resist the temptation of state interventionism to bring big business to heels.

*The Author is an economist and risk management specialist. The views are personal.

Ten point Policy for MSMEs

Sweet nothings for MSMEs

Risk aversion can’t be turned into risk appetite with excess liquidity in the hands of hesitant lenders

MSMEs, the lifeline of the economy and the main job-provider, has no oxygen left. The Micro, Small and Medium Enterprises (MSMEs) have been the worst affected by the pandemic but only sweet nothings have been coming as announcements for the sector. The RBI offered a deceptive comfort: standard assets as on March 1, 2020, would get a relief of three-month moratorium with no interest relief; review of the working capital requirements and pumping in liquidity of the order of 3.37% of GDP combined with the GoI relief for the weaker sections by way of cash remittances into the Jan Dhan accounts.

There was further relief by way of refinance from Sidbi: Rs 50,000 crore; Nabard: Rs 25,000 crore among others. The net result of previous liquidity injection as per the RBI April 2020 Bulletin is 0.7% year-on-year credit growth for the industry. Sectorwise: manufacturing micro and small enterprises was -0.4%; food processing: -3.1%; textiles: -6.6%; leather and leather products: -2.3%, all engineering: -0.4, state-sponsored SC/ST credit: -70.4%; export credit: -13.2%. Will all these negatives turn positive with the new liquidity? Risk aversion cannot be turned into risk appetite with excess liquidity in the hands of a hesitant lender.

In a pandemic, history tells us that massive credit and large fiscal expansion should go in sync to pump-prime the economy to a new normal.

Realistic View

When the manufacturing MSMEs open their shutters, they will find all the machinery waiting to be greased; sheds to be broomed; factory premises to be sanitised, and all tools readied. Several bills pending for payment require renegotiation. Labour will mainly demand their lost wages rather than renewing their work.

All supply chains are choked and each link in the chain needs to be looked at by the size of investment needed for re-functioning to the level of at least 60% capacity, Without this, interest commitments may not be honoured. The entrepreneur will, therefore, have to set his priorities right and decide which corners need to be cut and which widened.

The immediate trigger for enterprises in Telangana is deferment of fixed electricity charges for April and May without penalty and they will get 1% rebate on payment.

Several enterprises would first search for cash from banks and NBFCs. This would depend on the collateral securities they had and their previous track record. Banks are not poised as of now to lend on a cash flow basis. They may still try to work out estimates based on the pre-Covid-19 performance levels. This is the first tragedy. There may be a few understanding branch managers, who will take the risk and lend.

Next thing, the entrepreneur needs to negotiate with the existing labour. It will be a very hard negotiation and he will need to find money to pay the wages for the shutdown period first. Some understanding labour may oblige with deferred wages but they would be just a few. Most fair-weather friends would come up with suggestions like pledging gold; mortgaging excess property, etc but no cash. Private moneylenders too would be hard to come by.

The demands of all national associations like the CII, FCCI, PHDCCI have been kept waiting at the doors of the Finance Ministry. The UK Sinha Committee Report that recommended Rs 10,000 crore fund of funds and Rs 5,000 crore Distressed Asset Fund have not been set up. After set up, if they are kept in the conservative hands of Sidbi, it will be of no use. The Fund should address payment of wages of all the manufacturing MSMEs based on the muster roll and ESI evidence.

Assessing Demand

It is unlikely that products would be in demand at the same level. People have become austere. Every person, who faced a compensation cut, would continue to move the demand curve to essentials than FMCG. Sectors like pharmaceuticals, medical equipment, processed foods, packaging that were functioning on the fringe could move to higher capacities. All others will have to make rounds to the banks for their merciful looks!

Every enterprise will have to envision a new future – different scenarios have to be built and they should convince investors and lenders. They cannot look to the global markets immediately as the pandemic has levelled them all.

As far as India is concerned, a great opportunity is knocking. China has lost its sheen and credibility. Global markets hitherto linked to China would be looking at ways to pull off from them. Entrepreneurs should carefully set their trigger points. It is here that the policy vacuum can hurt hard.

Ten-Point Policy

1. Redefine MSMEs by way of turnover
2. Allocate specific portfolio for manufacturing sector to make ‘Made in India’ a reality
3. Enterprise should digitise operations and have a consent-based ERP architecture
4. Bundle up all existing credit (term loan plus working capital, inclusive of interest) for enterprises with a turnover of Rs 10 crore – extend a moratorium till December 31, 2020, after converting it into a Fixed Interest Term Loan carrying interest at 6% pa, for repayment thereafter in 48 annual instalments
5. Evaluate working capital requirements on cash flow basis
6. Discount all the bills drawn on government departments, PSUs and even large undertakings that carry credit rating of AAA and above at 75% and credit into the client account, provided the invoice clearly says that the purchase is within the approved annual budget.
7. Credit Guarantee Fund Trust for Micro and Small Enterprises should do portfolio guarantee up to Rs 5 crore and then second charge on the collateral security with the lender for the balance up to Rs 10 crore
8. Declare NPA threshold at 180 days overdue and redefine the Special Mention Accounts — 0,1,2 at 60, 90, 180 days
9. Review all existing limits, legal proceedings, auctions etc, and ensure that no viable enterprise will exit
10. For the rest of the enterprises, make exit comfortable: fair treatment of sovereign dues; priority to the creditors on first-in-first out; and transfer of assets to those who would like to acquire them. These accounts should be subject to a third party review by a State government accredited agency.

Thereafter, the industry should draw up their trigger points and rational action plan in consultation with the lender/investor. All Industry Associations should nominate one or two active Executive Committee Members to form a think-tank or negotiating team for regular interface with both State and Union governments.

(The writer has authored ‘The Story of Indian MSMEs’)

https://telanganatoday.com/sweet-nothings-for-msmes

Uion Budget 2020 worrisome

Hardly the time for a tight fisted Budget 2020-21

FM in her second year of budget presentation has very unenviable task in performing a balancing act. GST revenues are looking southwards and the input tax credit, the key for success of GST is mired in data upload controversy and hostile inverted duty structure. Markets do not seem to worry about this going by the forward movement of indices, blowing against the wind.

PSBs absorbed all the capital that the government buffeted and yet did not perform. On top, some banks have acquired the notoriety in manipulating balance sheets. Frauds have surfaced like never before to Rs.71,543cr – a rise of 74% over the previous year in the financial sector. NBFCs too joined the cry for capital or regulatory relaxations.

Through legal process – IBC, SARFAESI Act, DRT and Lok Adalats, 14.9% in 2017-18 and 15.5% in 2018-19 is the amount recovered out of the claims lodged. Recovery through IBC at 42.5% is the highest, while it is 3.5% through DRTs, the lowest, according to RBI -M&M Economic Research.

No economic recovery will be possible with a crippling banking sector like the one we have today. Some Banks having Insurance and Mutual Funds are still entrusting targets under these subsidiaries to the regular banking staff taking away their productive time for selling banking products like deposits, credit and digital services.

Creating demand in rural, semi-urban, and urban areas would occur when the people have enough money in their hands. Credit has not moved in tandem with the demand from farmers and MSMEs in manufacturing. RBI doing its job by reduction of 135 basis points in the base rate has no spread effect in retail lending market as there is no risk appetite among banks.

Knowledge in banking products and services has come down significantly among line staff and this is the reason for credit origination risk escalating to failure in repayments. Capital infusion without rectification of the basic malaise and governance, will not address the problems.

Why worry about fiscal deficit when the denominator GDP has many undisclosed data escaping entries? Several economists make mountain of mole hill while speaking about fiscal deficit. Right from the Union Finance Ministry to the regulators, all converge on the fact that the slowdown of the economy is real and need demand boosters. There were occasions when we reached around 6-6.5 percent (2008-11) of GDP and the economy registered growth thereafter.

The worry on employment growth is real. Unemployed youth hitting the streets would exacerbate the security risks. Industry, despite the skill development initiatives, bemoans that they do not find the right persons for the right job.

Sector-wise, agriculture grew 2 percent while manufacture showed less than 1%. Make in India, the flagship manufacturing initiative has not shown uptick during the last four years in continuum. Services sector too is showing decline.

Priced education and health have made increasing demands on the government. Several States and Union Government have schemes like Arogya Sri, Kutumba Sri, Ayushman Bharati etc., and yet their reach to the intended is still facing issues in payment for the services to the hospitals. Affordability is still an issue.

What should be the measures in the budget to boost employment? Which sectors need focused attention from such perspective by way of fiscal incentives? How can the States be brought on the same page as the Union Government?

The slowdown is both cyclical and structural. There should be consensus between the States and Union Government on the way forward. Union Government should release post-haste all the payments for the pending works under MNREGS.

Several States and Union Government have huge arrears to suppliers, contractors and sub-contractors for several project works that has choked the bank working capital releases and all these payments should be released to the last pie.

The paltry pension to farmers at Rs.6000 per annum should be altered to Rs.12000 per cultivator whereby even the tenant farmers would be eligible for pension payment after 60 years. Since the scheme envisages payment by the farmer between 40 and 60 years of age his/her contribution, several farmers who are of 60 and above right now, would not be benefitting from the scheme. The scheme should benefit those who are above 60 now. Adequate budgetary provision is necessary.

Budget allocation for health sector should significantly go up to a minimum of 6% of the total outlay from both the States and Union. Health infrastructure is pretty poor and needs improvement.

Education budget should target universal education up to Class 12 and this happens when teacher pupil ratio significantly improves, and school infrastructure also improves. National Education Policy shall indicate the prospect of resource allocation as well.

Ensuing Budget should convert intent into actionable allocations in the critical sectors and lay a path firmly for cleaning up the banking sector. Frustration should not be at the breaking point.

Published in the Hindu Business Line, 3.1.2020

www.thehindubusinessline.com

Revival of economy requires swallowing bitter pill

The US Fed rate cut last month signalled that the world economies linked to the US dollar are under stress. Also, the  International Monetary Fund (IMF) cut global gross domestic product (GDP) expectation from 3.2% to 3.1% while India’s GDP slowed down to 5% in the second quarter this fiscal. The debate and discussion in the media has been on: are we heading for a recession or has the economy hit a slowdown as a natural phenomenon of the business cycle?

Growth rate of the Indian economy is linked more to the agriculture and services sectors than to others. But the precipitous fall in business confidence and consumer confidence indices, slowdown in savings and investment rates, and in capital  formation signal the necessity of corrections on different fronts. 

A fall in the growth of real estate, automobiles, and core sectors warranted policy corrections. It is, however, doubtful whether a stimulus is required. Moody’s expect the growth of the economy to be at 6% current fiscal. A 6% GDP growth in an overall depressing scenario in the rest of the world, should be seen as encouraging but that does not leave any room for complacence. 

The IFO World Economic Survey, released every quarter, says in its recent statement: “In the emerging and developing Asia, the climate indicator fell, from +2.1 to –12.1 balance points. This figure mainly reflects the negative developments in China and India. 

The ASEAN-5 countries (comprising Indonesia, Malaysia, the Philippines, Thailand, and Vietnam) saw a renewed downturn in their economic climate, from 34.6 to 21.3 balance points. The present economic situation continued to deteriorate but remained at a satisfactory level. The best economic climate is reported for Malaysia and the Philippines.” Malaysian Ringgit, it says, is undervalued vis-à-vis US$.

INFLATION RATE 

Retail inflation in India fell to 3.15% year-on-year as of July 2019, less than the RBI inflation target of 4%. A growing economy should be having a healthy inflation index. High growth rates in the past were achieved against high inflation rates. 

An alarming rise in inflation to 12.17% in 2013 provoked the RBI to take stiff measures to bring it down to the inflation expectation target. Deflationary trend will send negative signals for growth. A comparison between India and China in terms of Inflation rates indicates peaks and turfs but do not cause the economy to shrink to lows, bringing it close to recession. 

On the retail price front, inflation accelerated to a nine-month high, though remained moderate and below its long-run average. If we can maintain at the RBI an expectation at 4%, that is a rise of 0.75 in the inflation rate, the economy will bounce back to a growth level of average 7%. 

GDP Per capita 

Comparing with US dollar, per capita GDP in India was 2104.20 in 2018, which is equivalent to 17% of the world’s average and it was at a record low of $330.20 in 1960. 

Poverty index also fell to a low of less than 20%, going by the Niti Aayog data. Bourgeoning middle class and conspicuous consumption would not disappoint the retail markets, particularly the fast moving consumer goods (FMCG) sector. This would mean that the slowdown would be a temporary phenomenon.

Consumer Confidence Index:

Consumer confidence in India fallen to 95.70 index points in the third quarter of 2019 from 97.30 in the second quarter of 2019. It is way below the average of 103.10 for the period from 2010 until 2019. It has been falling since demonetisation but started rising till the second quarter of 2018. Thereafter, the fall has been precipitous. Reversing this requires more than pep talk. 

The goods and services tax (GST) has a sagging effect not merely on micro and small enterprises but also on consumers. While it has brought about the much needed business discipline and tax compliance, input credit delivery suffered gradually eroding the confidence in the system. This needs reversal sooner rather than later. 

Bank mergers contributed to the erosion in consumer confidence. Mergers led to distancing the reach of banking to the people, notwithstanding the new initiatives like the small finance banks, postal bank, small payments bank, Rupay card and Micro Units Development and Refinance Agency Ltd. (MUDRA). 

The speed of service through technology is different from the reach. Caring for customers has vastly eroded in the banks. Apps may be attractive but difficult to access for the semi-literate rural clients. If growth of the services sector is declining, financial services has a major contribution to this failure. This needs quick reversal.

BUSINESS CONFIDENCE INDEX

The business expectations index (BEI) fell to 112.8 in the second quarter of 2019-20 fiscal year from 113.5 in the previous three-month period. The index in India averaged 117.74 from 2000 until 2019, reaching an all-time high of 127.50 Index in the second quarter of 2007 and a record low of 96.40 Index in the second quarter of 2009.

Ups and downs are part of business cycles. Several states indulge in make believe efforts when it comes to projecting ease of doing business. Still, several departments and public sector companies indulge in the procedural rigmarole for paying the bills and releasing the promised incentives. 

It is necessary that all states should revisit their industrial incentives as to what they can easily deliver and what they cannot, and whether the incentives are delivering the intended benefits at the right time. Giving rise to undeliverable expectations brings down the business confidence index. This needs correction.

MANUFACTURING NEEDS A BIG PUSH

The IHS Markit India manufacturing PMI (purchasing managers’ index) dropped to 51.4 in August 2019 from 52.5 in the previous month and below the market expectations of 52.2. The latest reading pointed to the weakest pace of expansion in the manufacturing sector since May 2018.

Output rose the least in a year and new order growth slowed to a 15-month low, with overseas sales increasing at the softest rate since April 2018. Backlog of works and project delays continued. Employment levels continue to cause concern with not so good results seen even against the huge investments made in skill development. 

Source: https://tradingeconomics.com/india/manufacturing-pmi

Technology and markets are growing at a rapid pace, throwing up new opportunities. More than 75% of global growth in output and consumption is in the emerging markets. High tech advancements like the industrial internet of things, machine learning (ML), artificial intelligence  (AI), though have become buzz words in the Industry, they are yet to catch up in all the segments of manufacturing. 

Some of the announcements like relaxations in foreign direct investment (FDI) policy touching retail and media, government junking old vehicles and replacing them with new ones will trigger a demand in auto sector only marginally. Cost-cutting across the supply chain remains a major priority. 

Addressing the workforce skill gap remains a challenging priority. Manufacturers can address the skills shortage by forming partnerships with schools, associates and even competitors to train and recruit talent at an early stage.  But there exists a gap in the confidence of industry to partner with educational institutions, irrespective of the emphasis that Modi and several state governments like Telangana have laid on it. 

Though labour code has been introduced with the consolidation and rationalisation of 12 labour laws, the increased burden of social security and minimum wages requires re-engineering of business processes and restructuring of organisations and this may require some more time. 

In order that the industry develops its own push-pull measures, tax breaks can be planned by the government for research and development. Corporate social responsibility (CSR) targets can also be dovetailed for a soft touch to the markets. When the morale is sagging, demand generation is hard to come by. Every measure from the government addresses just one or the other key component of manufacturing investment. It needs to be a facilitator and catalyst rather than pumping money into the economy. 

The areas where it should pump money are public investments in infrastructure and fast delivery of contract payments. Quick credit of input tax on payment of GST will also help. But unless state governments also come on board, avoid wasteful expenditure, monitor all their investments for quick results on an on-going basis and review the situation periodically through accredited third-party agencies, it will be difficult to reverse the slow growth. 

The Economy in Dilemma amidst Political Stability.

Union Budget by the first lady FM in 50 years is amidst great expectations in this era of political stability. For her, all is not hunky dory. GDP growth is projected by the RBI at 7.1% for the current fiscal. We can set aside for a moment the arguments of Arvind Subramanian and the controversies surrounding the calculus of GDP.

CEIC data reveals that consumer confidence grew at 14.8% in March 2019 compared to the earlier quarter although Business Confidence declined to -1.1% in June 2019 compared to the earlier quarter of a growth of 0.4%.

The dilemma: household debt was 10.9% of GDP while external debt was 20.1%. Private consumption declined to 59.3% of its nominal GDP in March 2019 declining by 2 percentage points from the previous quarter. Gross savings rate was at 30.9% of GDP. With the number of census towns increasing by 186% in 2011, urbanization of India moved to 31% space.

World poverty statistics show that poverty declined to some 70mn in June 2018 from 306mn in 2011. This should mean that spending money to keep people above poverty line, euphemistic subsidies should sharply decline. But the Union and several States are releasing unemployment allowances and loan write-offs along with caste-based dole-outs in the name of poverty!!

NCAER statistics place the middle-income population at around 153mn while the lower middle-income population is at 446.3mn (Krishnan & Hatekar, EPW 2017). The salaried persons constitute still the dependable taxpayers. There is only a marginal increase in tax to GDP ratio between 2008 and 2018 from 17.45% to 17.82% while the GDP and per capita income have doubled during this period. Relentless efforts are needed against tax havens.

We have seen the way audits are conducted calling for disqualification of the so far reputed Deloitte, PWC not excluded. Hiding incomes has become honourable and paying taxes honestly unwise. This situation unfolds great opportunity for the FM to see new frontiers in taxation. Direct Tax code is expected to change and it may tilt the scales.

All the legislators and Parliamentarians with very few exceptions are billionaires. It is time to start rationalizing subsidies and incentives for this group. There is also a case for taxing the rich among farmers – defining them at a threshold of six times to eight times the salaried. The mechanics are difficult but not impossible. Of course, most of them being in politics, irrespective of party affiliation, would engineer ghost rallies against even any modicum of such thought but should be fought over by a stable government trading off with the benefits for the rest of the farm sector.

Manufacturing growth is almost stunted amidst continuously declining credit for the last five years but for the recent marginal increases. Incentives to manufacturing start-ups should be more fiscal than financial and rebuilding the eco-system for sustainable manufacturing growth brooks no delay.

The rural-urban hiatus can be addressed adequately by encouraging investments in modernizing agriculture and value addition initiatives in rural areas. Rural industrial enterprise clusters or Rural Enterprise Zones (like the SEZs) can be the best answer and therefore, fiscal concessions for such investments will two birds at one shot: achieving employment and economy growth.

Actual projections for such fiscal outgoes would be far less than the bonanza that the urban and rich as also the corporates expect from the FM. In addition, as I have been untiringly mentioning since 2005, a percentage of share transaction tax in a rising economy and growing stock market would fetch to the exchequer instantaneous revenue with no tax administration expenditure.

Government should stop incurring public debt to save irresponsible lenders with capital infusion just because it happens to be the owner. Any additional capital from government should go with stringent conditions on the Chairpersons. Governance improvement shall be the focus and the RBI should withdraw its executives on all Bank Boards so that its regulatory rigour can be on par with a food regulator at the time of introduction of new products.

Women have more courage than men when it comes to the question of saving a child from a disaster. Madam Finance Minister should be able to pull it off.

*The Author is an economist and risk management specialist. The views are personal.

https://www.moneylife.in/article/will-political-strength-lead-to-a-bold-budget/57522.html

Published on 24^th June 2019

12-point Agenda for the RBI Committee on MSMEs

Pain points for the MSME sector

MSMEs Credit woes in stock

The RBI has its task cut out as it sets about addressing the sector’s credit and viability concerns.

A debate on MSMEs has come alive due to the Centre’s insistence on a regulatory reprieve for the beleaguered sector post GST and post demonetisation. The RBI at its last Board meeting that Urjit Patel chaired, promised to set up a Committee on the MSME sector by the end of this month.

There is an estimate, authenticated by the Centre, that there are around 50 million MSMEs, both registered and unregistered, employing 120 million, second only to agriculture.

Credit crunch

MSMEs contribute 6.11 per cent of manufacturing GDP and 24.6 per cent of services GDP. They also account for 16 per cent of bank lending. Around 8 per cent of credit to manufacturing micro and small enterprises and 13 per cent to medium enterprises are estimated to be gross NPAs.

MUDRA (Micro Units Development and Refinance Ageny) and the ‘59-minute loan sanction’ promises enhanced credit reach to the sector with SIDBI in the lead for both. MUDRA helped banks to push the services sector lending below Rs. 5 lakh significantly.

Field studies reveal that MUDRA loans have been used by several banks to swap a good number of failing micro service sector loans. There is also evidence of moral hazard following adverse selection as several enterprises are non-traceable at the location mentioned in the applications.

In the band of Rs. 5-10 lakh the percentage of loans is less than 20 per cent, indicating preference for a risk free portfolio and lack of interest in the manufacturing sector.

The government has put in place e-Invoice, TReDX, Samadhan, GeM to ensure prompt payment of bills from public sector undertakings and central government departments. Even so, the State PSUs and state government departments continue to delay the bills of MSMEs, leading to NPAs.

A procurement policy has been put in place to provide for preferential purchase from MSMEs, without sacrificing the conditions of quality of goods and services supplied to the buyer.

The process of loan disbursal is also cumbersome. Quite a few banks follow a multi-layered approach to lend to the sector and as a result due diligence suffers. The branch that disburses is also expected to monitor and supervise the credit but does not have the time or manpower for that.

There is hardly any communication between the entrepreneur and the credit authority until an irregularity in the account surfaces.

So given declining credit and growing NPAs, the following 12-point Agenda is a way ahead for the RBI panel:

* Thresholds in priority sector portfolio.

* Credit risk assessment of the MSMEs

* Thresholds for declaring the MSMEs as NPAs — 98 per cent of the portfolio in the fold of proprietors/family owned enterprises in the shape of partnerships, have no exit route of the sort facilitated under the IBC code or the Industrial Disputes Act.

* Revival and restructuring of sick enterprises — Innovative institutional interventions like the Industrial Health Clinics in States that carry the highest numbers of enterprises in this category.

* Cluster Development — Additional lending incentives.

* SIDBI’s Role — Review and Redefine for assuming real leadership role.

* The guarantee mechanism in the shape of the Credit Guarantee Fund Trust for Micro and Small Enterprise (CGTMSE) needs to be reviewed and redefined.

It has a role conflict with SIDBI as the latter is its promoter and at the same time secures its guarantee for the enterprises financed directly by it. CGTMSE premia rates were found to be high by their primary lending institutions and the claim settlement process unacceptably late.

* Role of credit rating agencies and effectiveness of internal credit rating tools.

* Recommendations to the Centre on policy initiatives.

* Digitisation of MSME lending and managing its transition.

* Setting up of Movable Asset Registry — Operational issues and directions.

* Setting up of Public Credit Registry — Roadmap for data integration without sacrificing data

privacy and data security.

Given the cascading effect of the large corporate manufacturing and services enterprises on the MSMEs, their healthy growth is crucial for employment and growth of the manufacturing sector as a whole.

Since MSMEs are still largely debt driven and not equity driven, it is important that access to credit should be easier, cleaner, and faster.

The writer is Adviser, Government of Telangana on Micro and Small Enterprises

Published on December 27, 2018, The Hindu Business Line

Shadowy Growth Cloaking disparities

Growth Mystery and Imbalances

India has been the cynosure’s eye in regard to the announced growth of 7.1% for 2017-18 in spite of fall in manufacturing growth and wavering agriculture growth. Analysts have various expectations ranging from 7.5% for the next fiscal even amidst fears of rising inflation expectation from the RBI. For 2019, Goldman Sachs downgrades its estimate of growth to 7.6% from 8% made earlier.

The much touted macroeconomic fundamentals, EODB rankings not withstanding are shaken with frauds and scams surfacing day after day in the financial sector. Good economy and bad banking are strange bedmates.  

Contextually, Kenneth Rogoff aired concerns about ‘the ethical and social implications of material growth’ in his most recent Project Syndicate article. In a country where 500 billionaires are expected to take decisions for 23-34% of the population that is poor, such concerns surrounding inclusiveness of growth will be a concern.  

The way we measure growth appears faulty and the manipulative statistics to suit the political agenda giving macro economy the look of strong fundamentals and the increasing focus on the movement of share indices – that is basically an index of the corporate wealth movement, are distortionary providing a lever for the rich to play upon their resources adverse to the national interest of inclusive growth. We need to measure the Happiness Index. Increasing focus of budgets on health and education with definite measurable outcomes is the only route.

While the output related IIP and the input related PMI of recent times are showing up in the manufacturing sector, sustainability is on a weak wicket given the Corporate failures and tottering telecommunication sector. 

Focus on rural infrastructure and agriculture at this point become relevant. It is a moot point whether loan write off of some states is the right solution for the farmers’ woes. Farmers are misled and they unite only under sterile leadership. Little did they ever realize that by frequently demanding such write off they created a deep mistrust in lending institutions and walked into the trap of money lenders instantaneously because debt and farming are inseparable universally.  Solution lies in reforms to the Agriculture markets, price discovery mechanisms for the farmers, crop planning and efficient delivery of inputs. Government of Telangana could prove a worthy model in this regard and the future would decide the efficacy of institutional transformation results.

Another important aspect is that the injustice to the weaker sections has regional disparities. Some States like Tamil Nadu, Kerala, Telangana etc., have performed well while the others did not on Human Development Indices. Best practices of some states are not picked up by the other states that continue their feudalistic practices.

The Ma-Baap attitude of the Union and State Governments is now being questioned for good with the people asserting their rights due to higher literacy rates and visual media within the easy reach. Though the earlier marginalised sections have occupied seats of power both in politics and bureaucracy their contribution to correcting the situation is minimal and this aspect is mainly responsible for the imbalances in the economy.

In democracy, admittedly, consensus on issues concerning the inclusive agenda does not get so instantaneous approval as the salaries of Parliamentarians or gubernatorial posts. Whenever Elections are ahead, the interests of the poor get widely discussed. This is where ‘ethics’ come into play. This is manifest in unemployment growth; inflation; rural urban disparities and the social unrest in areas neglected and people unattended.

What worry me are the technological innovations like the AI and MMT, IoT that take away more jobs than they create. I love the technologies that really are helping access to information in real time, transparency and more accountability. But the perilous consequences of intrusion into privacy, scope for fraudsters and manipulators getting an edge over the right doers, making persons and institutions slave to technologies are no insurance for sustainable employment growth in the economy.

I notice that there is maturity in our democracy and more and more people are voicing their concerns and political activism could be the answer if there is proper leadership and mentoring of the activist groups. Protection to the activist groups from the powerful also needs emphasis in such context.

In spite of 73^rd and 74^th Amendments to the Constitution, those states who are seeking legitimacy of the Federal structure have been found to be defaulting in recognizing the power of local bodies both in political and financial terms.

In the Federal context, it is the view of some political analysts whether the country can have two Deputy Prime Ministers – one representing the North and the other South, as there is a feeling of total neglect of Southern States in certain key economic dispensations.

Alternate institutional mechanisms, political stability, bureaucratic reforms and eternal vigilance are the remedies and eminent persons of stature who have a vision for the future would make a significant contribution in driving them. They would eventually also reduce the sovereign risk and bring about stability in domestic markets.
Published by Telangana Today on 24th March 2018. 

Fragility to Fast Track?

Arun Jailtley mentioned that the UPA’s fragile economy is on fast track now. CSO forecast of GDP growth on the eve of the Budget 2018-19, however, is 6.5%, the slowest of the last four years. What has moved fast?

Union Budget presentation moved from March end to February end. Insolvency and Bankruptcy Code completed its first anniversary. But the MSMEs are yet to get their deal. All the goods carriers from North East to down South Kerala move without any check post hurdles and the palm greasing saving nearly Rs.30000cr for various companies. Indirect Tax Reforms through GST with all its initial hiccups is still with glitches. Tax compliance moved an inch up on direct taxes although only 1.2% of the tax filers paid taxes.