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.

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

India Did Well: Needs More Reforms

The political economy of India enters the 72nd Independence Day with a sense of pride, no doubt, with the third largest economy of the world on an uptick of 7.5% growth rate. What is more, there is hope of consistency in such growth. GST, a showpiece of cooperative federalism, is the major indirect tax reform on the road to stabilization after the recent rate modifications and relaxed quarterly return submission. All it now needs is bringing fuel prices under its ambit. Yet, the nation cries for more reforms to ensure equity and social justice to all.

The Worries:

Core Consumer Price Index inflation accelerated to a 3-year high in July 2018 at 5.7%, while Wholesale Price Index moved to a six year high. Inflation is set to breach 5% in 2018, crossing the benchmark rate of 4%. Fiscal policy will be under severe pressure during the current year with States’ contribution to the widening deficit as warned by a recent Study of State Finances by the RBI. Impending General Elections 2019 to Lok Sabha would add more fuel to this fire.

The rise in stock-market indices driven by more domestic investment of about Rs.66666cr in the backdrop of foreign portfolio investors pulling out Rs.4,583cr in 2018 thus far, has little to cheer as the balance of payments position continues to be weak. IMF in its Annual External Sector Report cautioned India against relying on global financial markets to fund current account deficit of 3% of GDP.  The over-valued US dollar in the wake of increasing oil prices is enough cause for our future worry. A few economists have already predicted a burst of the bubble sooner than later with the exodus of FIIs.

Developed India:

70 reforms during the last 71 years have led to the present status of development. The nation has a large unfinished agenda on education and health reforms. I would add one more: water security in the country.

National Water Commission’s (2012) recommendation for establishing Water Regulatory Authority in each State to ensure use and allocation of water as a precursor to attaining equity and social justice is yet to gain acceptance in the wake of water wars.

Government of Telangana holds a beacon light in water policy with the world acclaimed Mission Bhagirath assuring to provide drinking water to every household in the State every day and Mission Kakatiya, tank-linking project that cleaned up 30000 of 46000 tanks in the state. Adaptation to climate change, demand management and water use efficiency in the wake of ever declining ground water resources also deserve greater attention.

Fiscal Responsibility:

Fiscal deficit is bound to exist to some degree or the other as the State has a constitutional responsibility to ensure welfare, safety and security of all the citizens. The earning capabilities are not neutral to size of the villages on one side and the natural resource base of the villages on the other. Such fiscal deficit occurs right from decentralized level to the State and Central level.

The resources should preferably be from the sub-regional fiscal allocations – i.e., the panchayats and mandals, for the assessment of the need can best happen at the village level and not at the District and State levels. Therefore, there is need for insisting on a transparent mechanism of sub-regional allocations and releases of the resources.

The ability of the villages to levy taxes and cess just does not exist and even if it existed, it has to be integrated with the regional pool of resource. For example, property taxes, drinking water cess, drainage cess, etc can be collected at the village level and their deployment for effective maintenance can be ensured through a decentralized monitoring mechanism that should include professional surveillance and social audit.

Natural disasters are unpredictable and so are the resources required for restoring normalcy in the affected areas. Many a time the expenditure cannot wait assessment of damage. These will initially cut into the budgetary allocations for various sectors but have to be replaced with appropriate fiscal initiatives. A few states have recurring floods while a few others have frequently occurring drought. Each disaster cannot be treated with the same brush.

 “There is enough evidence of growth leading to reduction in poverty: Prof S.S. Bhalla has proved (Inclusion: January-March 2012) that during the 21-year period (1984-2005) growth was around 55% and poverty decline was about 2 percent per annum (in log terms). In the five year period since 2004-05, as the growth increased the pace of poverty decline also more than doubled to 4.7% per annum.”

Reaching the poor through Jan Dhan and Mobile access led to greater financial inclusion and the social benefits of schemes like Mid Day meals programmes with the twin aim of higher enrolment and lessening poverty at the Union level; Kalyan Lakshmi schemes easing the burden of marriage costs, schemes meant for financial and social security for the farmers through ‘Rythu Bandhu’ and Rythu Bhima of Telangana Government serving as role models; making MNREGS more inclusive, 2-bed room houses for the poor from Telangana Government; and central and state schemes for providing houses to the poor etc., are all in the direction of economic empowerment of the poor and social security.

Investment Climate

If investment climate has to distance from state led incentives, there is a case for more tax reforms. While the GoI may be happy at the steady inflows of direct taxes, there is a case of reduction in the income tax and corporate tax. Both are possible if the Government can eye on increasing the share transaction tax where the tax administration expense is almost zero. Both the buyer and seller of the shares buys or sells with an eye on gains. The present STT at 0.15% can move to 1%. Since the tax deducted instantly moves to revenue kit of GoI as all demat accounts FRBM comes with ease.

Finally, In the backdrop of unprecedented pile up of NPAs, financial sector reforms leading to improvement in governance of the PSBs cry for immediate attention. This should preferably start with the winding up of the Department of Banking with the GoI. All these reform measures have the potential to take the growth to higher trajectory with stability at the expected ten percent per annum.

Published in Telangana Today's Opinion Column on 15th August 2018.