- January 28, 2018
- Posted by: admin
- Category: Economy & Markets, Research Reports
– Report by Mr. Bitan Chattopadhyay (IIM Calcutta)
– Under the guidance of Mr. Janak Shah (The Money Roller Team)
The 2017 Union Budget of India was presented before the parliament by Mr.Arun Jaitley on 1st Feb, 2017. The optimism of Mr. Jaitley was evident from his opening speech, backed by the key features of the Rs.21.47 trillion INR budget. The agenda set was “TEC – Transform, Energize & Clean India”. Prior to this, we have seen the NDA Government bringing two major reforms that set the tone for the budget session – Demonetization & Goods & Services Tax (GST).
In the last fiscal year, GST has been a major factor in building people’s expectations about the forthcoming budget along with tax slabs, job creation, recapitalization of bonds, etc.
Apart from this, it’s imperative to study the schemes/initiatives launched by the NDA Government in the last 2 years and the impact that they have been able to create.
This will be a major factor in carving out our expectations from the Union Budget to be presented on 1st Feb, 2018 – the last budget of the 2014-19 NDA Government.
Major Schemes/ Initiatives:-
Before we dwelve deep into the various schemes launched so far and gauge their progress, let’s scrutinize the total budget size and the expenditures under each header (Fig. 1).
It is evident that this government had allocated close to 44% of the entire budget to the various schemes, a rise from 40.5% in 2015-16.
Fig:1 Source: Indian Economic Survey
A glance at Fig. 2 would give us an estimate of the amount of rupee outflow under “Subsidies & Schemes” which is roughly one-third of the entire government expenditure.
Now that the financials are established, the stage is set for analyzing the on-ground performance of the initiatives.
Pradhan Mantri Fasal Bima Yojana:
This scheme was launched to ensure continuity in farming by providing insurance coverage to farmers in case of failure of the notified crop due to calamities, pests or diseases. This scheme is facing some problems since its inception:
- Unable to cover majority of farmers due to huge loan amounts of farmers who are currently availing this scheme. This defeats the purpose as the non-loanee farmers are in greater need of coverage due to their huge lease rents and high costs of cultivation.
- The farmers are not being notified before the premiums are deducted. The private insurance companies haven’t been able to perform any better than their government counterparts and almost 58% of the Rs.17,184 cr allocated has been use to fill their coffers.
This year’s Union Budget is likely to increase the allocation to Rs.13,000 cr. This will ensure that the farmers get full coverage at the expense of a nominal premium.
Pradhan Mantri Gram Sadak Yojana:
This scheme was launched to provide all-weather access to unconnected habitations. The target to achieve this has been forwarded by 3 years to 2019. But there are some problems which need to be addressed:
- The government hasn’t spent even 26% of the allocated fund and 60% of works that have been declared complete have incomplete drainage works. The ones which are complete aren’t sustainable in nature due to their sub-standard quality
- The coordination and planning among departments is questionable. Roads that were supposed to be constructed under this scheme were already in place by some other department under a different scheme. This calls for better monitoring by the states.
This year’s Union Budget is likely to see a spending of approx. Rs. 1,00,000 crore on new roads in LWE areas. Also, an additional Rs.11,000 cr will be allocated to roads in LWE through in PMGSY.
Pradhan Mantri Mudra Yojana:
This scheme was set up to provide funding to non-corporate, non-farm sector income generating activities of micro and small enterprises of credit limit less than Rs.10 lakhs.
In recent times, it has come under purview due to:
- MUDRA banks are already having a number of able competitors – the refinancing agencies. These agencies have not been able to provide money to the small businesses. So, focus should have been on restricting these agencies instead of creating a new agency
- Conflict of interest arising out of financing micro and small businesses while setting down policies for financing and regulating them at the same time
The government can do away with Mudra bank and instead, create small banks to finance small businesses. Since the MFIs have now come under both the RBI as well as Mudra, so that creates a fresh set of problems. This year’s Union Budget will see a special focus on improvement of infrastructure and subsidies for the agriculture and the manufacturing sectors.
MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act):
This scheme is aimed at guaranteeing the “right to work”. This will enhance livelihood security in rural areas by providing a minimum of 140 days if wage employment to unskilled laborers. A corpus of Rs.48000 cr was aloocated to this scheme in FY 2017.
- Delays in payment and the number of working days being only 40% of what was promised earlier; differently abled people are still unemployed
- Government has been unable to create enough demand and to stop corruption which reflects the lack of proper accountability mechanisms Also, fakes job cards and muster rolls are prevalent and the Gram Panchayat, not the Disctrict Administration, is taking decisions
- Labour movement is mitigated and the poor is suffering from inflation and durable assets are rarely created.
- Non-uniform allocation of work: richer sates like Tamil Nadu, AP getting more work but more demand exists in UP, Bihar
- Skill India & MNREGA cannot co-exist together
Fig 3: Source: Communication for Development
Finance Minister Arun Jaitley may increase allocation for MNREGA by a fourth to nearly Rs 60,000 crore for the financial year 2018-19, as a part of the NDA government’s larger plan to focus specifically on the country’s rural sector, amid concerns over rising agrarian crisis.
Pradhan Mantri Awaas Yojana – Gramin:
It is a social welfare flagship programme which intends to provide housing for the rural poor in India. The target set by the government is to complete 1 crore new houses by 31st March, 2019 and half of these are to be completed by 31st March, 2018.
In order to do so, the expectations from the government are as follows:
- Single-window clearances to prevent procedural hindrances
- Merging with the real estate sector to raise funds for developers, lower the costs assictaed with projects in generating employement and increasing overall demand
- First-time home buyers should be encouraged by lowering/ exempting taxes
- Green buildings to be encouraged by providing better incentives in terms of FSI to encourage developers; tax rationalization of REITs can benefit the real estate sector
The entire valuation of this initiative is estimated to be Rs.81,975 cr out of which Rs.60,000 cr will come through budgetary allocations and the rest through NABARD.
Make in India:-
This is a type of Swadeshi movement which covers 25 sectors of economy which was launched to encouraged companies to manufacture their products in India. Except for space, defence and news media, 100% FDI is allowed in all other sectors. But in the last few years, some issues have come to the fore which need to be addressed:
- Ineffective use of India’s unskilled labour force and drifting away from India’s comparative advantage towards skill specialization
- Automation (increased use of robotics) is likely o create an industrial robotic revolution which will benfit developed economies like China more than developing ecnomoies like India
- Late reponse to R&D by Indian companies due to protectionsit measures like market protected by custom duties. Long-term competitiveness wil need huge investments in R&D
- India has labour laws and organised unions that can hinder smooth expansion. It is not easy for the Modi government to change laws to make a dramatic impact.
Fig 4: Source: Deccan Chronicle
In this Union Budget, the government is expected to boost its domestic manufacturing by increasing import duties on power, capital goods and chemicals. Policies are likely to be implemented that will boost the building of mobile phones, luxury brands and automobiles. In addition to this, the government will look forward to create 10 cr jobs by 2020 and train the youth to imbibe the requisite skills by way of its skill development programmes – SANKALP & STRIVE. This year’s budget will see an allocation greater than Rs. 3.96 lakh crores in 2017.
Recapitalization of Banks:-
The state-run banks lie at the very heart of the Indian economy, but years of slapdash lending and lack of innovation have resulted in continual losses for these banks. This ultimately resulted in the Reserve Bank of India’s strict instructions on accounting for bad loans in 2015. Banks had until March 2017 to clean up their books to be eligible for capital infusions. They would also have to comply with global capital adequacy ratios. In order to keep these banks from drowning, the finance ministry will strictly monitor banks’ lending practices and public accountability.
Fig 5: Source: Nikkei Asian Review
To ensure a complete overhaul, the imminent option is “recapitalization”, which initially started with the Indradhanush plan. But that was just the starting.
The Finance Ministry has recently pledged Rs.88,000 cr to aid state-owned banks to offset the effect of 7.34 trillion rupees of bad loans that the public-sector banks are currently facing. The intriguing part about this recapitalization is that the process is to take place through bond issuances (tenure of 10-15 years), raising money from the capital market and budgetary allocations. This is a part of the broader 2.11 trillion rupee bank recapitalization plan.
In order to ensure the money isn’t entirely raised from the taxpayer’s, it is imperative for the government to look at other viable options – disinvestment, for example.
Disinvestment is necessary to finance the increasing fiscal deficit, large-scale infrastructure development and encouraging spending by investing in the economy.This will not only reduce the financial burden on the government but improve competition and market discipline and encourage wider share of ownership.
The government has already targeted 36 companies for strategic disinvestment.
Fig 6: Source: Department of Investment & Public Asset
Against the initial target of Rs.72,500 cr for FY18, the government has already raised Rs.54,337 cr out which Rs.36,915 cr is going to be added by the end of this month from the merger of HPCL with ONGC with 51.1% of HPCL’s stake being owned by ONGC.
This goes on to prove that receipt of Rs.1 lakh crore through disinvestment alone is a realistic target for FY18. The higher receipt from disinvestment will help the government in sticking to its fiscal deficit target of 3.2% of the GDP this financial year, which may see lower collections from the newly introduced goods and services tax (GST).
The central bank has taken various steps to resolve the issue of stressed asset resolution- it has set up a database of large-ticket loan exposures, prompted banks to recognize bad assets and directed banks to initiate proceedings against 12 large borrowers under the Insolvency and Bankruptcy Code (IBC). RBI expects the banks to utilize the IBC extensively and file for insolvency proceedings whenever they sense NPAs.
Fig 7: Source: RBI
Along with this, all loans above Rs 250 crore would be scrutinized by specialized monitoring agencies and a stressed asset management vertical will be set up to ensure stringent recovery. RBI has the prompt corrective action (PCA) framework—11 out of 21 public sector banks will be a part of this until they see an improvement in their capital ratios and start operating profitably.
Populist Tax Measures:-
We have invariably felt the effects of GST this year – a move by the government to consolidate indirect taxes. There are underlying sentiments among people that this year’s budget will have something on the direct tax front to take some load off the taxpayers. The maximum amount until which tax is exempted is likely to go up from Rs.2.5 lakhs p.a. to 3 lakhs.
Others expect an increase in limit of Section 80 C so as to accommodate benefits of ELSS, redefining period of holding under Section 10 (38) so as to help increase domestic investment. The government can also look forward to extending the holding period for short-term capital gains (STCG) tax on listed securities beyond the current period of one year to ensure that there is more liquidity in the market. There are expectations of additional benefits for health insurance and the return of standard deduction in some form.
Investors also are expecting withdrawal of dividend distribution tax (DDT). According to market experts and analysts, this could be a significant step in increasing and retaining investment.
The Confederation of Indian Industry (CII) has sought a reduction in the peak tax slab from 30% to 25% in its pre-budget memorandum to the finance ministry. Along with this, it has sought reduction in corporation tax rate to 18 percent, including all surcharges and cess. This would create more jobs and incentivize doing business in India.
The eminent economists of the country expect the long-term capital gains (LTCG) tax is expected to be re-imposed on listed securities and mutual funds. This will help mobilize revenues for the government. The revised (based on expectations) tax slabs are mentioned below:
Fig 8: Source: Probable tax slabs (estimated by the author)
Estimate of the Overall Union Budget:-
As it is expected that there will be some relaxation on direct taxes, so the tax receipts for FY18-19 is likely to go down but due to GST, indirect tax receipts will offset this effect. Also, higher subsidies are going to be offered by the government particularly, on food and petroleum due to the rise of crude oil prices. We have made an estimate of the budget with these factors in mind.
Fig 9: Source: Probable Budget Estimates (estimated by the author)
The total budget size is estimated to be 21.893 trillion INR which is close to 2% increment over the last year. The fiscal deficit is likely to be 3.4%. It will be interesting to see how the Modi government attempts to prevent fiscal slippage in terms of policies and tax reforms. Any sign of reduced fiscal slippage is likely to surprise the markets positively! Also the Government will have to resist the temptation to increase the subsidy bill drastically keeping in mind next years elections and provide farmers with better and more sustainable reliefs, irrigation could be a good place to begin with ! The stage is set for Mr.Arun Jaitley to present the union budget on 1st February, 2018!