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.

India's Growth Story

The Apparent and the Real Growth Story of India

B.  Yerram Raju*

There was a chorus from some economists with former FMs joining against the transitory decline in the GDP growth as though GDP is a strong determinant of growth. High growth and high inflation are good friends (see the table below) and the net result has resulted in poor becoming poorer and rich, the richer.

S.No.	Particulars	Average 2009-10 to  2013-14	2014-15	2015-16	2016-17	2017-18 First quarter
1	Real GDP@ market prices (%change)	7.4	7.5	8.0	7.1	5.7
2	Inflation (CPI-Industrial workers) (average %change) Wholesale price Index (average % change	10.3 7.1	6.3 1.3	5.6 -3.7	4.1 1.7	1.8 1.9

Source: RBI Annual Report 2016-17 and monthly Report September 2017.

Notwithstanding some of the good things that NDA government has done like the laws to regulate the Real Estate sector and the Insolvency & Bankruptcy Code, amending 87 rules for FDI in 21 sectors, abating corruption in some quarters and the GST introduction etc., resounding alarm has been the faulty(ed) demonetization, the GST glitches and the enigmatic oil prices that have lost the relationship with the crude price variations.

In the context of monetary policy announcement there is another chorus for reduction in interest rates as though such reduction in the backdrop of risk aversion of the banks due to the unrelenting NPAs would kick start fresh demand for credit. All the rate cuts thus far failed to result in any fresh credit or a pass through to the existing clients to spur demand. It is doubtful that RBI would have the luxury of another rate cut in the emerging economic uncertainties and falling rupee on the Forex front. Stock markets became nervous with the global undercurrents of rising unrest between North Korea and USA.

While demonetisation set in a trail that closed the a lakh and odd shell companies and disqualified 3lakh directors apart from around Rs.30000cr tax evasion, GST is in the process of bringing in better tax compliance. Going by global experience, GST will take a minimum of two years to stabilise. However, what the GST missed out is a big worry: skipping the petrol, diesel and trade in waste and scrap. A rough estimate says that the city of Mumbai alone has a turnover of Rs.1trn a year in waste and scrap. Huge black money hides here because all deals are in cash even now.

Rising fiscal deficit is another major concern. The States in the emerging political context and certain states by habit have been indulging in distributive justice without productive gains. Gujarat elections are a case in instance where the insurance companies against no fall in agriculture production are in line for responding to unsustainable claim settlements under PMBY.

In addition dragging farm sector despite good monsoon, education and health sectors are the other bigger causes for the present imbroglio in the economy.

Pragmatic government would have started addressing more worrisome issues like the rising unemployment and declining manufacturing, certainly not as a consequence of the reforms but as a cause.

Nation with more young population in the backdrop of consistent unemployment rate of 7-8% during the last three years is also facing the rising aged working population with bulging demand for high pension budget. NSSO 2011-12 Employment Survey – the one quoted by NITI Aayog in its Vision 2017-20 – admits to 51% of the workforce employed in manufacture and services, contributing to 83% share in the economy.

The Vision Document failed to make MSMEs the centre of manufacturing and employment growth.  MUDRA should move to targeting micro manufacturing enterprises in the ‘Tarun’ window. A crore of Rupees investment in manufacturing MSEs would give rise to average of six persons while six crore rupees in medium and six hundred crores in large enterprises would give rise to employing no more than ten and a couple of hundreds respectively. Its emphasis on the high-productivity high-wage jobs in the large industry sector is misplaced while its focus on infrastructure investment is laudable.

Before any strategic corrective interventions are made, the government must listen to dissenting voices both from within and outside. While fresh investments in infrastructure like Rail, Road and Ports are welcome, corrections to the failed infrastructure would require less investments if the Industrial Estates of the yester-era do not turn into havens of real estate instead of manufacturing hubs.

If the next budget typically focuses on elections and fails to provide the much needed investments in education, safe drinking water, health and bolstering manufacturing sector realising that the Make-in-India and Start-Up India remained as slogans both the economy and the NDA are going to witness a decent burial. If every citizen in the country can get safe drinking water health budget of the poor would come down by 70-80 percent. This should be the next mission of the Government.

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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.

New Year Bites 2015

For the New Year:

Year 2014 can be termed as year in waiting. People waited with bated breath for the policy paralysis to end and for the economy to start growing to its potential. Post elections, the wait did not however end. There have been announcements more than achievements and promises more than performance. 2015 would therefore be a demanding year for the rulers.

The crude shocks elsewhere brought some cheer to India in containing its current account deficit and inflation that touched unsustaining levels in March 2014. Stock markets reacted favourably with the indices taking the highest ever jump of 6000 since the last General Elections. They shocked the investors with a peak in the crash on the 7^th January 2015 led by yet another decline in global oil prices and other commodity prices.