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 16th
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, 14th 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.
