Every Budget has expectations. The past seven years have seen some reform agenda like Jan Dhan, Real Estate Regulatory Authority (RERA), Insolvency and Bankruptcy Code (IBC), Make in India, Start-Up India, Stand Up India, reviving the development finance institutions (DFIs), and setting up a bad bank. The National Democratic Alliance (NDA) government focused on gross domestic product (GDP) growth than on poverty alleviation. The results are the brave fight against the coronavirus and the contribution of farmers to the stability of the economy during the pandemic, notwithstanding their agitation against the three farm Bills. Can we now expect a reversal to jobless growth and see the big push to manufacturing? Can we see the wealth moving to an equitable platform?
The expected growth rate of 11% in the economic survey 20-21 is now pegged at 9.5% by Reserve Bank of India (RBI) and several global rating institutions in the backdrop of a negative 7.7% growth rate of 20-21. In contrast, the World Bank upgraded India’s outlook to grow by 8.3% in FY21-22.
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. Inflation led to GDP growth instead of production and productivity increase.
Plus, there is a decline in the index of industrial production (IIP) to 1.3%. The retail inflation index scaled to 5.9%—a five-month high during December 2021.
The Organisation for Economic Co-operation and Development (OECD) has leagued India among the four nations that would cross 6.4% inflation this fiscal. According to the latest RBI survey, the share of private consumption has been steadily falling since the pandemic struck. The SBI report says that per capita income dented due to the COVID-19 effect by as much as 5.4%.
The ratio of private consumption to GDP fell to 54.7% in 21-22 from 55.6% in 19-20. Demand for Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) from all the states confirms that rural wages for agricultural and non-agricultural workers have been flat.
Pandemic has also inflated debt and deficit levels.
International Monetary Fund (IMF) estimates that India’s debt is around 90% 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.
The financial stability report of the RBI and Morgan Stanley economists leave hope in the financial sector. The quality of assets of banks improved and the non-performing asset (NPA) accretion during the year saw a decline.
However, micro and small manufacturing enterprises (MSMEs) got a raw deal at the hands of banks, and NPA levels of non-banking financial companies (NBFC) and fintech companies are on the rise.
While India could save many lives, its efforts to protect the livelihoods have only marginally impacted, going by the CMIE Working Paper from A Gupta et al. quoted by the Economist in its 14 January 2022 issue. The first wave in 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% during the second wave.
It is a moot point whether the increase in gross fixed capital formation post-FY19-20, a proxy for private and public investment in absolute terms and as percentage of GDP, has reduced 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 start-ups and initial public offerings (IPOs) were mostly got listed in the green. Then, what could be the expectation from Nirmala Sitharaman, the finance minister (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 revenue loss, which could end by this fiscal year, to continue for two more years! With elections in five states announced, and General Elections that would follow in two years, the FM has little scope to cut revenues on this front. She can expect dividends from all the public sector banks (PSBs) and profit-making public sector units (PSUs) to make up the revenue deficit to the extent of at least 1.5% – 2% of the GDP.
The FM should increase non-tax revenues very discreetly. She is hamstrung on fiscal deficit. This is likely to surge to 6% from the stated level of 3.5%. The state survey of RBI also mentioned that all the states crossed the benchmark level of 4% - 4.5% of public debt.
Investor sentiment will not be poorly hit even if she increases the securities transaction tax (STT) to 2%. 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 a separate budget for the sector that would include…
1. An assurance on minimum support price (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 Rs25 lakh per annum at 5%;
4. Incentive for farm mechanisation and formalised lending to tenant farmers;
6. Strengthening rural cooperatives; and
7. Restructuring National Bank for Agriculture and Rural Development (NABARD).
Allocations
The FM should strengthen the implementation of the Budget proposals towards reforms in the areas of judiciary, police, and administration through even symbolic allocation.
The health sector should get at least 6% allocation for infrastructure and functional efficiency.
Consistent with the National Education Policy 2021, the education sector should receive 3% allocation and mandatory schooling of the wards of parliamentarians, legislators and government servants in government schools. The mid-day meals programme should be strengthened.
Research and development (R&D), the springboard for innovation, should get better attention from the private sector compared to their present share of 1.2%.
The FM should be bold enough to introduce the abolition of surcharges of all types to demonstrate cooperative federalism.
Micro and Small Enterprise Sector
Micro Finance Association has already demanded Rs15,000 crore to make up their capital erosion due to the pandemic. While conceding to this demand, Ms Sitharaman should also announce a new law to deal with micro and small enterprises.
While 98% 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%.
Trade Receivables Discounting System (TReDs) threshold level should also be reduced at the entry level to Rs50 crore turnover per annum to activate factoring and bill finance as an independent finance channel. The cluster of manufacturing MSEs should be enabled to pool their limits and collaterals under a separate agreement with the banks and financial institutions (FIs) to 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 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) by the banks should be contained by announcing state-approved third-party scrutiny of NPAs in the manufacturing MSE segment.
Small Industries Development Bank of India (SIDBI) should be restructured as it hardly met the sector’s expectation during the past 31 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 several accounts.
While the department of financial services should deal with most queries on finance under the Union ministry of finance, they are directed for a 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 high point for the banks—while they do not admit to this openly as it carries interest rate risk and loan origination risk. Lending to MSEs has no charm for the PSBs and large traditional private sector banks.
In the circumstances, small finance banks (SFBs) and non-banking finance companies (NBFCs) could be the best windows for MSE lending. The FM may announce suitable measures for better regulation of the sector. Ms Sitharaman, the 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.)
