The Union Budget 2016 bore Prime Minister Narendra Modi’s imprint rather than that of his finance minister, Arun Jaitley. It offered a fine blueprint of several small steps to lift India’s villages and encourage small entrepreneurs but failed to impress on NDA-government’s big challenge of taking ahead the reforms process and aggressive infrastructure spending needed to lift the economy to a high growth path.
The 2016 budget, a big test for Jaitley, was a tough balancing act between the fiscal consolidation and much-needed spending to revive growth in the economy, especially in the face of rising investor-pessimism on the rise, which has risked Modi’s task of reviving the economy. Jaitley committed to the fiscal consolidation path, but failed to impress by setting aside enough funds to push ahead the infrastructure growth and address the banking sector woes.
The major highlight of the budget was Jaitley’s big push on agriculture and rural India. For rural development he announced a package of Rs 87,765 crore in fiscal year 2017 as against Rs 79,526 crore. That apart, Jaitley announced a subsidy scheme for BPL families for cooking gas and said the government targets to double the income of farmers by 2020 and Rs 2,000 crore for new LPG connections. Jaitley allocated Rs 35,984 crore for the farming sector, Rs 86,500 crore on irrigation for five years, and Rs 15,000 crore interest subvention for agricultural loans.
For crop insurance, Jaitley announced Rs 5,500 crore and Rs 38,500 crore for MGNREGA as against Rs 34,699 crore last year. He also laid out plans to electrify all Indian villages by 1 May 2018 and allocated Rs 8,500 crore for rural electrification in fiscal 2017. As in every year, the agriculture credit target has been increased to Rs 9 lakh crore from Rs 8.5 lakh crore.
Fiscal deficit on target
For fiscal year 2017, Jaitley announced a fiscal deficit target of 3.5 percent and for the fiscal year 2016, the fiscal deficit target has been met at 3.9 percent. This news could make the rating agencies, investors and the RBI happier since there was immense pressure on the government to stick to the fiscal consolidation roadmap (set at 3.9 percent in fiscal year 2016, 3.5 percent in 2016-17 and 3 percent by 2017-18). But Jaitley promised that there “won’t be compromise” on the spending side, announcing a 11 percent increase to Rs 19.78 lakh crore in fiscal 2017 from Rs 17.77 lakh crore BE year before. Of this, plan expenditure is up by 15 percent to Rs 5.5 lakh crore and non-plan expenditure increased by 9 percent to Rs 14.28 lakh crore.
But the government lowered its spending on the infrastructure segment. For fiscal year 2017, Jaitely set aside Rs 2.21 lakh crore for the infrastructure sector , a decline of 12 percent, compared with Rs 2.51 lakh crore announced last year. Of the total, Jaitley allocated Rs 55,000 crore for roads and highways and another Rs 15,000 crore from bonds will be raised by NHAI. For railways and roads , in 2016-17, total capital allocation is Rs 2.18 lakh crore. One should note that Jaitley’s big task remains making sure the engines of economic growth aren’t failing. This year, the increase in infra spending is merely Rs 30,000 crore as against Rs 70,000 crore last year, which isn’t so encouraging at this stage of economic growth.
This part is critical given that private sector investment cycle is yet to kick off. The Economic Survey announced on Friday, ahead of the budget, spelled out the first priority for Jaitley to deal with in the budget — ensure that growth momentum is on. “This is because the current environment is fraught with risks, which threaten all the engines of India’s growth,” the Economic Survey said.
The government has set a disinvestment target of Rs 56,500 crore for fiscal year 2017 as against Rs 69,500 crore for fiscal year 2016. Of this Rs 56,500 crore, Rs 36,000 crore is through the sale of stake in state-run companies and the rest through strategic sales. In the last year, as against the target of Rs 69,500 core, the government managed to raise only Rs 18,421 crore (from sale of stake in six PSUs) on account of lukewarm market conditions. Lowering the divestment target is a good strategy since missing a very ambitious target could boomerang.
Turn off for banking sector
For fiscal year 2017, Jaitley announced a capital infusion of Rs 25,000 for government-banks, which was part of the Rs 70,000 crore announced for five years last year and examining the option to bring down government stake in some banks below 51 percent such as in IDBI Bank. But, given the stressed asset situation in the banking sector, the financial sector was expecting more infusion, as reflected in the crash in bank stocks.
Remember, Jaitley, as finance minister, has failed so far to get hold of the root of the problems that has engulfed India’s Rs 95 trillion banking industry. He underestimated the capital needs of state-run banks in the initial days of this NDA government when he allocated merely Rs 11,200 crore and refused to think of radical reforms in the banking sector such as merging small banks and bringing in private capital.
Jaitley’s banking sector strategy fell short of what was needed to revive state-run banks. Though the finance minister recognised the issues later and offered more capital (Rs 70,000 crore over five years), it was too late and too little. India’s banking industry, 70 percent dominated by state-run banks, is in the midst of a crisis with their total bad loans exceeding Rs 4 lakh crore at the end of December and more likely to come from the restructured loan segment if economic recovery doesn’t occur as expected.
Arguably, the ‘Indradhanush’ package announced by Jaitley last year to revive PSBs isn’t adequate to set these institutions on safer path.
Financial sector reforms
Jaitley reiterated the promise of big reforms saying this process will continue, taking ahead the process to enact an effective bankruptcy code, but there wasn’t any solid roadmap for the high-profile GST law as such.
One must remember that the Modi government’s trump card in the run-up to the Lok Sabha elections in 2014 was rapid economic growth through big-ticket reforms. It has indeed achieved progress on several small-ticket reforms such as the Insurance Bill, opening up the FDI in several sectors, bringing in the JAM (Jan Dhan, Aadhaar and Mobile) movement to facilitate financial inclusion and subsidy rationalisation process by way of Direct Benefit Transfer (DBT).
But the investors want promised large-ticket reforms such as the long-pending GST, amendments to the land acquisition process for industries and easier labour laws. On this part, the Narendra Modi government hasn’t yet managed to make any meaningful progress since a consensus is absent between the incumbent BJP and opposition parties on key issues including GST. As Firstpost highlighted in an earlier article, the Modi magic that worked wonders for stock markets is long dead and gone as reflected in the domestic equity markets. It is time for the government to acknowledge the actual state of the economy and work on solutions.
Dealing with bad loans projects
Jaitely announced changes in SARFESI Act and more amendments to laws that permit further investments in asset reconstruction companies. This is important since there is a Centre for Monitoring Indian Economy (CMIE), the number of stalled projects has been on the rise in recent quarters after a period of improvement. The bad loan crisis in the banking sector has severely constrained the ability of the banks to fund long-gestation infrastructure projects.
That apart, delays in project implementations have resulted in huge cost-over runs to companies. The corporate sector will eagerly look for measures that can ease their burden, especially in the infrastructure projects. Can Jaitley’s 2016 budget provide relief to companies?
At first glance, Budget 2016 is more a Modi budget, than a statement of purpose from Jaitley. Packed with several small-steps initiatives but lacking major bold steps to undertake much needed reforms .
(Kishor Kadam contributed to this story)