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.

Balanced Growth is Essential for Democracy

https://www.thehindubusinessline.com/opinion/balanced-growth-is-essential-for-democracy/article30705183.ece

The fabric of democracy depends on the social and economic consequences of the amendments to the Constitution at a critical time in India’s economic history. Agitations have caused loss of lot of man-days and diversion of productive time.  Timing of change is important for the success of change. This article does not intend to discuss the merits or otherwise of the latest amendments to the Constitution – either Article 370 annulment or CAA. The focus will be on the consequences of the economics of democracy and not so much the politics.

In democracy, it is the voice of the people expressed through the electoral vote. We have seen that the vote bank rarely touched even 30 percent of eligible population. People who caste their votes have mostly been the less endowed and widely spread across all religions and castes and this has little prospect of change.

One of the world's largest democracies had to wait for its day to overtake china's growth rate as consensus doesn't come about without discussion and lot of deliberation. Centralised planning of the Maholnobis-Nehruvian model though conceived well to usher in socialistic pattern of society let off the principles of federalism to come up with an experiment with Niti Aayog whose results are yet to be on the dashboard of India. Development is more than growth.

Ethnic, cultural, and religious diversity apart multiple languages form the Indian Union. This diversity is both its strength and weakness. States formed on linguistic basis with some of them larger than several countries had uneven natural endowments, and imbalances in the dispensation of resources at the hands of central government.

Notwithstanding the average nominal growth of 8% between 2007-12, human development indices ranked India at 129. 12.1cr (2011) population is covered by 24.95cr households with average habitat population of slightly less than 5 per household. Poverty levels have gone down in rural areas from 50% in 1993-94 to 23% in 2016-17 and in urban areas correspondingly from approximately 32% to around 13%. Rural roads constitute 70.2% of the total length of roads across the country. Quite a few States have made CC roads instead of metal roads. As per 71^st round of NSS, Literacy levels too have gone up significantly to 69.1% by 2014.

Goldman Sachs' estimated an average of 8% per annum during 2016-20 notwithstanding the prevailing global turbulence. So did all the leading predictions from KPMG and McKinsey. Although the NDA government announced the goals of good governance and cooperative federalism, both remain still at the goalposts.

Unless States are taken on board in this second largest democracy of the world, prospects of sustained growth remain elusive. As at the end of March 2018, eleven of the twenty-nine States (now 31 and 7 Union territories) showed consistently high growth during the period 2014-18. If the nation were to attain the lofty goal of $5trn by 2024-25, the rest of 20 should also join the minimum 8% growth level. Bihar (14.50%), Chattisgarh (11.20%); Goa (14%), Karnataka (12.00); Madhya Pradesh (around 18%); Maharashtra (10.6%); Tamil Nadu (12.30%); Telangana (14.10%); Uttarakhand (11.20); West Bengal (16.10%) and a few North Eastern States like Assam, Meghalaya also lead the list. 

Government of India would do well to lend all support to these leading States and push the other lagging States through sustainable interventions in infrastructure, communications, transport and tourism without giving scope for them to feel a partisan approach. All the Global Investment opportunities should have equitable spread.

Vice President in a recent Address mentioned that 479 Parliamentarians are crorepatis. The State Legislatures also are crowded with such crorepatis. Latest Oxfam Report (Jan 20, 2020) laments “Economic inequality is out of control. In 2019, the world’s billionaires, only 2,153 people, had more wealth than 4.6 billion people.” The Report attributes this to gender inequality and unpaid Care work at home by women. The richest 1% have more than twice the wealth of the 6.9bn people.

One good suggestion for the Finance Minister at the right time: taxing 0.5% of the richer 1% for the next 10years would be equal to investment needed for 117mn jobs in education, health and elderly care. Good governance demands that these rich sections shall not receive subsidies of the order currently prevailing.

Availability of health services, supply of drinking water remains inadequate and costly. Availability of liquor, however, has enhanced adding significantly to the State revenues. Both are causes of concern for the future of a healthy democracy.

The World Bank projected that India, along with Brazil, China, Indonesia, South Korea, and Russia, will account for more than half of the global growth by 2025 with an average annual growth rate of 4.7 per cent between 2011 and 2025. While this prediction is likely to undergo change in the context of current slowdown not just in India but in all the major economies in the world, there is no chance for India to alter its growth vision.

Addressing the resource constraints (mainly water, energy, infrastructure and investing more in human development (mainly public health and education) is important to realize India’s growth potential. Consensual approach is the essence of a successful democracy. India does not have the luxury of being otherwise.

(All the latest data is sourced from the Report of the Ministry of Statistics and Program Implementation, Government of India, 2018: www.mospi.gov.in ) 

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.

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.

http://www.moneylife.in/article/the-apparent-and-real-growth-story-of-india/51803.html?utm_source=PoweRelayEDM&utm_medium=Email&utm_content=Subscriber%2327753&utm_campaign=Daily%20Newsletter%2004%20Oct%202017

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.

Health insurance

Whose health are we insuring? thehindubusinessline.com · The new health savings plan appears more advantageous to insurers and agents than consumers My comments as posted in the article:

Insurance industry in this country is just evolving. Neither the operators nor regulators nor the insured know the intricacies in full. Not that I also know something great. All I know is the risks attached to insurance are far different and have varying dimensions across ages and sex. Premium as the insurance companies say is measured by the risk associated. So as one ages, the risks become larger and therefore, the premium is charged higher equivalent to an ageing automobile. Women become more vulnerable to certain health problems far different from after a particular age - say 40-45years. Both men and women while they are earning more could be charged higher premium for insuring risks to cover those that become larger when they age or when they retire and for women after 45 years. The moment one says he is insured in a corporate hospital, the list of tests become longer; charges become hefty to take the maximum in the insurance pie. This exploitation should be stopped by IRDA.