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.

Banking reforms the Budget should not miss

Banking Reforms the Budget should not miss

Former President of India, Pratibha Patil, in her address to the Lok Sabha on 4^th June 2009 said: “Our immediate priorities and programmes must be to focus on the management of the economy that will counter the effect of global (domestic) slowdown by a combination of sectoral and macrolevel policies.” She laid emphasis on accelerating growth that is ‘socially and regionally more inclusive’. 

The objective of overall policy in India is accelerated inclusive growth with macroeconomic stability. This approach is likely to reverberate in the ensuing Budget Session.

FM needs to give a measured response to the imperative outlined. In order to take the States on board, she may announce clearance of all the dues on GST to the States once the present audit of GST concludes. She may also like to give a new financial sector reform agenda to resolve the existing imbroglio. A few of the available options will be the focus of this article.

FM is at crosshairs between fiscal austerity and enhancing public spending to stimulate growth. Discomfort lies in the worst performance of Public Sector Banks (PSBs) and failure of NBFCs. While the RBI is balancing inflation and growth objectives, the recently released Financial Stability Report re-emphasis on the need for ‘good governance across board’, improving the performance of PSBs and the necessity to build buffers against their disproportionate operational risk losses.

None of the recent bank mergers added to her comfort. Hence there is need to look at the unfinished earlier reform agenda suggested by various Committees since 1991 and announce either a Reform Agenda or appointment of a High-Level Committee with a specific timeframe for actionable agenda that could stonewall criticism against the PSB failures, bank frauds and twin balance sheet problems. 

The issues surrounding banking are not peripheral.

The moral hazard consequence of banks receiving bailout is worrisome now and therefore, she may refrain from any further bailout announcement. Stress in the NBFCs and Cooperative banking seemed to have forced re-look at the Financial Resolution and Deposit Insurance Bill, 2017. While the Bill proposes to establish a Resolution Corporation to monitor the health of the financial providers on an ongoing basis, the bail-in by depositors and stakeholders is worrisome.

Increasing stress in various buckets of assets stands unabated and calls for a surgical strike. Banks’ credit origination risks need urgent evaluation. It is important to relook at the universal banking model the country adopted aping the west. Customer preferences and customer rights have taken a back seat.

Market-led reforms of the past have replaced social banking with profit-banking objective. 2025 $5trn GDP target should look at more efficient performance of banking as key to its achievement. There is a need for reconciling satisfactorily the dilemma of policies appropriate for short term with those suitable for the long term.

Governor, RBI in a recent address indicated that he would like to look at the priority sector categorization afresh to ensure that it delivers the intended. This assumes greater importance in financial inclusion agenda as efforts hitherto like Jandhan, Mudra etc could make only numerical and not qualitative advances. Provision of adequate and timely credit to the rural areas in general and agriculture, micro and small enterprises and weaker and vulnerable sectors, remained a major challenge for Indian banks for decades.

Direct credit programmes in Korea, Japan in 1950s and 1980s revealed the need for narrowly focused and nuanced programmes with sunset clauses delivered the results. The problem with directed credit is essentially three-fold: First, pricing at its true market level, second, avoidance of the persons who are not credit-constrained, and third, selection of focused areas and regions without political interference in undefined democracy.

Credit discipline and equity, the twin principles of credit dispensation suffered a systemic failure with politically motivated loan write-offs in several States. Both farm and micro and small enterprises require credit with extension, handholding, monitoring and supervision as key deliverable. This calls for out-of-the-box thinking.

While there has been broad recognition that increasing supply to cope with the rising demand through diversified lending institutions like small finance banks, and NBFCs of various hues, ever-increasing demand to cope with new technologies, low labour productivity, and absence of aggregators structurally to resolve the pricing of produce at the farmer’s doorstep, are all issues that require comprehensive solutions. Resources should not fall short of the requirement for such effort. Budget 2020-21 should make a bold and strategic announcement regarding the direction of investments in farm sector supportive for responsible credit flow. FM would do well to avoid announcing any crop loan targets and leave it to the RBI’s priority sector reformulation.

Supply-side issues cannot be adequately and appropriately addressed without institutional reforms focusing restructuring NABARD and giving a new mandate consistent with the future goals of the economy. SIDBI the second surviving DFI is living on interest arbitrage and enjoying the munificence of the Finance Ministry to the detriment of the sector it was intended to protect and promote. This also begs either closure or restructuring.

As regards governance of banks, the unattended reforms of Narasimham Committee -II deserve attention: Removing 10% voting rights; reducing the legally required public shareholding in PSBs from 51 to 33 percent; improving the Boards qualitatively with well-defined independent and functional directors’ roles.

Since the FM already announced that she is exploring the amendment to the Cooperative Act to skip the duality of regulation of cooperative banks by both the Registrar of Cooperative Societies and RBI, she would be going one step further in eliminating similar duality between her Department of Banking and RBI in so far as the PSBs are concerned, particularly because the RBI created separate Departments of Supervision and Regulation and College of Supervisors to improve the supervisory skills of RBI personnel.

the Hindu Business Line, 16.1.2020 https://t.co/eNEANVcaW8?amp=1

Tepid Union Budget 2018

This budget has an increment of Rs.11000cr over the previous outlay. But the direction has changed more to the health and education sectors. The effect of these interventions will be experienced more in future than immediate present. 

In so far as Agriculture is concerned the farmers get some announcements and hopefully, appropriate rules will be made to ensure that the farmers get 1.5 times the cost price for their produce. So far they have not been able to get the dividend out of the MSP. E-Nam spread though welcome has not so far stabilised in delivering the intended benefits to the farmers. 

A non-budget allocation of Rs.11lakh crores to farm credit is again a please all announcement. If NITi Aayog comes up with a modicum of lending to the tenant farmers with the owners' interests duly protected, things may change in the short term credit. Any short term credit not matched with the term lending or investment credit for farm sector as has happened so far, would end up in only irresponsible target chase. 

Agriculture should have been provided a separate budget because of the low growth experienced (just around 2.1%) and the already admitted climate change risks in the Economic Survey 2018. 

In so far as MSMEs are concerned, emphasis on the food processing, leather and apparels would provide great fillip. National Bamboo Mission would provide the bamboo based artisans and small enterprises in rural areas and tribal areas a great opportunity for developing branding and move to export zone. 

MSEs' major problem is availability of land for setting up the enterprise as the land prices everywhere are just soaring to unbearable heights. If he had announced tax exemption for five years for infrastructure and land cost in Rural Industrial Parks - either private or state - it would have been of great help.

In the name of MSME sector, the corporate tax exemption threshold rise to Rs.250 crores would help the medium enterprises and mid-corporates that constitute less than 2% of the total number of MSMEs. This is more an apology of support to the sector.

Mudra Loans target increase by 3lakhs should have been more specific to manufacturing MSEs. So far less than 3% of the total loans have been given to manufacturing. 

SHG credit allocation of Rs.75000 cr - a non-budget allocation would be rebalancing the gender portfolio of banks in the MSME sector.

As a senior citizen I am happy that my medical bill is better met now than before. The FM deserves thanks for this concern.

SMEs in Union Budget 2014-15 – Implementation Challenges

This path-breaking Union Budget providing discontinuing continuity on several fronts has concretized all the promises in the BJP manifesto unfolding the vision of the Modi Government. Its allocations reflect pragmatism in that some projects got funds for Detailed Project Reports while others of long term nature that can only make a beginning got symbolic outlays.

Manufacturing sector that is just showing signs of revival with its growth rate touching 4.7% in May 2014 reversing the negative trend of growth till the end of March 2014 got a shot in the arm. Of particular relevance is the attention paid to the MSME sector.

Future need not be rosy but not reddish either

Markets are tizzy at the moment. The economy looks down the drain in the backdrop of global debt crisis; falling rupee; rising inflation; political paralysis and less than estimated GDP growth. But what holds promise is the concern of all and the anxiety to resurrect the sagging economy. Finance Minister has a tough task ahead in the Budget 2012-13, with just an year to go for the General Elections. The fiscal deficit would hardly find space for further doll-outs. The ray of hope is that the US economy promises a revival. The bail-out package to Europe also lends some credence to keep the balance swinging in favour of arresting unrest in the economy. However, the domestic undoing in the last two years unfolding scams after scams needs tackling firmly and this is where the infirmity lies. Markets are not going to behave worse if the FM makes bold to increase the Share transaction tax to at least one percent. Second, the farmers must be provided input subsidies of a larger scale than now but with laid out crop planning regionally acceptable; investmetns in drought proofing the economy; and finding resources for merti goods like education and health at double the rates prevailing now. The year ahead may not be rosy but need not be reddish either.

బుద్గేట్ ౨౦౧౧-12

BUDGET 2011-12 – A BIG CHALLENGE

B. Yerram Raju*

The FM’s biggest challenge for formulating the 2011-12 Budget is not so much the revenue and expenditure projections as the direction in the wake of highest food inflation rocking the growth boat that has been the cynosure of the global investors. Agriculture, though reducing in its overall share of GDP, is still the prime mover of the economy. The rising food inflation, the unabating suicides of farmers in a few important patches of the economy, lagging productivity despite a quinquennial growth in overall production of most of the important crops have pointed out more the inefficient distribution channels than the supply side issues. Government could not respond adequately to these issues well in time. Elections to two important States are on the anvil. Congress governments in States, particularly, Andhra Pradesh is threatening the political stability not to speak of all pervading corruption. The focus of my article is therefore on Agriculture sector Budget that requires special dispensation.

Sector Analysis:
Based on the Mid Term Appraisal of the XI Five Year Plan, agriculture sector has only recorded the most unimpressive growth.

Growth in GDP at factor cost 1999-2000 prices
Eleventh Plan Agriculture and Total economy
Allied Sectors

2007-08 4.7 9.2
2008-09 1.6 6.7
2009-10 R E 0.2 7.4
Triennium 2009-10
over Triennium 2004-05 3.4 8.6
Eleventh Plan
Average (2007-10) 2.2 7.7
The slow down has been attributed to a number of factors that included the lack of a breakthrough in technology of major crops ; low replacement rate of seeds/varieties; slow growth or stagnation in area under irrigation and fertiliser use, decline in power supply to agriculture, and slowdown in diversification. It was assumed that the large gap between attainable level of productivity achieved in frontline demonstration plots and actual productivity at farm level offers a ready option to raise productivity and production by pushing use of quality seed, fertiliser, and water (irrigation). XI Plan only made only pious expressions to reverse these trends. World Bank in its Report (IEG 2010) reaffirmed that sustainable agricultural growth is critical to poverty reduction. It has provided enough data from the Brazil, China and India to show that a percentage growth in agriculture in South Asia led to 0.48% reduction in the number of poor in those nations.

In the wake of rising labour costs that today account for 30-40 percent of the total factor costs in agriculture, farmers are increasingly resorting to mechanization and this has been reflected in the number of threshers, weedicides, harvesters and harvester-combines sold during the year. Technology’s importance is realized more today than ever. Therefore, the direction in which the Budget should move is in the areas of assured input supplies, investments in Research and Development, incentive for farmers to stay on the farms and removal of hardships and stress and relief from the calamities when confronted. It has been proved that the farmers have not benefited to the expected degree through the Loan write-offs and increased flow of short term institutional credit. Delivery mechanisms of all the announced incentive packages leave much to be desired.

.
Central Plan outlay for Agriculture and allied sectors
(Rs. in crore)
Total outlay Agri sector share
X Plan (2002-07) Rs 9,45,328.00 Rs.26,108.00 (2.4 per cent)
XI Plan (2007-12) Rs. 21,56,571.00 Rs.50,924.00 (2.4 per cent)

The allocation to agriculture and allied sectors in Centre’s Plan has been substantially increased from Rs. 21,068 crore in the Tenth Plan to Rs. 50,924 crore in the Eleventh Plan while retaining the over all share undisturbed.

SET UP NEW FUNDS AND IMPROVE DISTRIBUTION CHANNELS:
As an astute and the most experienced Finance Minister he should be looking for some out of the box solutions as extraordinary problems require extraordinary solutions.
One cannot keep on asking for writing off credit and yet ask for more credit to flow. This is responsible for driving the farmers to private money lenders who lent at usurious rates and caused the suicides. Instead, what I would suggest is a Natural Calamity Relief Fund, Farmer Innovation Fund, Farming Technology Fund and Market Stabilisation Fund.
Investment Credit in the farm sector has been making a very slow movement and this has to be accelerated so that more funds would flow for investments in Research and Technology, organic farming, bio-technology in agriculture, soil regeneration, efficient water management and the like. Working capital loans in farm sector that the FM has been generously asking for from the Banks have a knack of camouflaging and do not result in asset restructuring and improving productivity although they should continue to flow consistent with the investment credit. Therefore, I would venture to suggest the following:
Institutional Loans to be made available at 4% p.a as suggested by Dr Swaminathan. The difference in interest which the Banks expect from such lending and this 4% should come from Interest Compensation Fund flowing as budgetary support from both the Center and State Governments in 50:50 share.
Redirect the Rural Infrastructure Development Fund to move into one of the four funds I suggested above. Each of these Funds should be managed by NABARD with State Specific allocations providing for flexibility in drawal depending on the situation arising in the respective State and the Fund MANAGMENT Committee of NABARD should have Farmer Association Representative and at least Two Economists of repute from the State to be members. The Committees should be set up at the State level.

I am not venturing to suggest the size of the funds as this would depend upon FM’s overall resource position agenda. It is important that the country should move away from the traditional way of allocations to this important sector.


*The Author is an Economist and Member of the Expert Committee on Cooperative Banking, Government of Andhra Pradesh. The Views are personal. Can be reached at yerramraju@yahoo.com