Aspirational Budget 2019

Union Budget 2019 – Exceeded Expectations

Amidst the honco of high growth and reducing retail inflation this pre-Election Budget largely fulfilled the expectations of farmers, middle class, real estate. Disposable income in the hands of salary earners and the middle class would jump due to the increase in IT exemption limit to Rs.5.lakhs, up to Rs.50000 standard deduction and non-taxable income from bank and post office deposits up to Rs.40000 and this would surely spur the domestic savings stagnated at around 30% till now and also stimulates the demand.

Farmers certainly have something to cheer. All farmers having less than 5acres would get monthly income of Rs.6000 under direct benefit scheme. There were 12.76cr operational holdings under the command of farmers owning below 5 acres according to Agriculture Census. At the allocation of Rs.75000cr against this item of budget at Rs.6000 it can reach only 12.5cr if there was no further subdivision and fragmentation. But such a measure alone is a big bonanza for farmers. Integrated look at agriculture sector – animal husbandry and fisheries also got a big boost. One can’t expect more from interim budget. Tenant farmers are just ignored although 80% of suicides occurred in this group that has a share of 14% of land under cultivation according to the NSSO data.

Micro and small enterprises having loans up to Rs.1cr would get interest subvention of 2% for the first time. We should hope that this benefit would reach the intended and the banks would not take advantage of this concession.

NDA did well in the cleanliness drive; but performed poorly in providing safe drinking water. While the NDA spent 77% of allocation on this score, still its reach to the poor is far too distant. If the reach improves, expenditure on health may decline. Coupled with this, environmental clean up providing for fresh air should have been provided at least 2% of the Budget in line with the Climate commitments to the UN.

In this backdrop well calculated Fiscal Deficit would cross even the 3.4% of GDP. CAD at 2.3% is on sensitive border. If the oil prices go northwards, then this will upset the apple cart of growth and lead to higher inflation than the one taken forgranted at little above 2%. It will cross 5.5% during the next six months. Even RBI inflation expectation at 4% will have a zolt. 

Mention was made about Banks and NPAs. While the reforms like the IBC code accelerated the recovery process from the corporate loans much more clean up is required in the stables of banks, looking at the staggering frauds of Rs.41,500cr and the recent sacking of ICICI Bank CEO. Lot more is needed in improving governance over which the FM had no word.

Education is in a big mess and Employment is in doldrums. It is strategy rather than spending that requires attention in both the cases and real time monitoring is the need of the hour. This did not get any attention. Draft Employment Report of NSS unfolded a big rise in unemployment. When 55% of the population is below the age of 25 years, strategies for employment and enterprise promotion, and education are clear areas of neglect in the budget.

Budget understandably is at best an estimate. Although NDA has displayed better spending of the allocations, outcomes need regular monitoring and this should be done within the public glare.

Union Budget 2019

Union Budget 2019 – Reasonable Expectations

Amidst the honco of high growth and reducing retail inflation this pre-Election Budget has some just expectations. Tax-GDP ratio of 17.5% can be pitched up to 20% given the fact that the rich have been growing. Domestic savings at around 30% has to improve and investments have to be less volatile for which the foundation has been well laid by considerable acclaim in EODB.

Demand stimulation and medium term employment have to improve significantly. Farmers certainly have high hopes notwithstanding the limitations of union government in this regard as Agriculture is a concurrent subject. It is wise to give up the announcement of crop loan targets as it is not related to the Budget per se. States like Telangana and MP have done well in Income support schemes and Center would do well to support such initiatives in some appropriate proportion.

Assurance of Basic Income may have to wait for the 15^th Finance Commission’s recommendations. One announcement can be setting up a fund for Price compensation for farmers whenever the MSP and market prices have wide divergence at the point of farmer reach.

All the tenant farmers and small and marginal farmers above 65years could be provided pension of Rs.5000 per annum as their ability to work and earn their annual incomes is eroded completely by then. This can be done through a pooled fund out of the 2% of income earned on commodity exchanges and 1% of agricultural insurance premium.

NDA did well in the cleanliness drive; but performed poorly in providing safe drinking water. While the NDA spent 77% of allocation on this score, still its reach to the poor is far too distant. If the reach improves, expenditure on health may decline. Coupled with this, environmental clean up providing for fresh air should be provided at least 2% of the Budget.

Education is in a big mess and Employment is in doldrums. It is strategy rather than spending that requires attention in both the cases and real time monitoring is the need of the hour.

Banking: Restructure NABARD by hiving off RIDF portfolio; RRB and Cooperatives and Rural Development through Watershed, SHGs, FPOs and finance to tenant farmers and agriculture marketing as 3 separate subsidiaries. Similarly, SIDBI needs restructuring to provide assured lending to micro and small manufacturing enterprises and revival of incipient sick and sick MSMEs by way of external support mechanisms. Union Government would do well to announce any compelling credit products only through a committee of select bankers.

Budget understandably is a best estimate. But outcomes are important and they need effective monitoring.

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