Ahead of crucial state polls, finance minister Arun Jaitley has managed to offer a good blueprint for rural India with proposals to push rural sector growth, affordable housing and small companies with a slew of schemes, higher infrastructure spending and tax rebates, but disappointed on the big reforms front much needed for Asia’s third largest economy hit by the demonetisation-induced cash crunch. Big industries, who were hoping for steep tax rate cuts, were disappointed.
Also, the budget carried the design of a bold, reformist agenda with steps to cleanse the political funding and proposal to unlock value in firms like IRCTC. The budget will aid India’s consumption story by putting more money into the hands of people but won’t be a quick fix to the economy struggling to regain the growth momentum post the note ban.
To begin with, Jaitley spent the first part of his budget speech to aggressively defend the Narendra Modi government’s deomonetisation that had received much criticism from both political opponents and a section of economists. Jaitley said the note ban was a much-required step to eliminate the informal economy in the country and listed its long-term gains. The FM repeated the RBI’s promise that things will be back to normal soon. This is critical since a prolonged cash crunch has hit the economy severely in the last two months.
Jaitley has basically repeated what the RBI has said on the demonetisation impact saying the impact is ‘transient’. But, the reality on the ground suggests that only time will reveal the full impact (negative or positive) on demonetisation on Indian economy.
Also, Jaitley offered relief to companies with turn over less than Rs 50 crore, cutting their tax rates to 25 percent from 30 percent. This is good and will help 96 percent of the companies in terms of volume, but big companies who were expecting a steeper rate cut in corporate tax were disappointed.
Jaitley's speech reaffirms this government’s aggressive focus on the rural push, a key item in the government’s agenda. Jaitley said this government wants to take one crore households out of poverty by 2019 and complete rural electrification by 1 May 2018. The FM has almost started from where PM Modi stopped in his New Year speech as far as the government’s big rural push is concerned. More sops were doled out for the farmers. As usual, the bank credit target for agriculture was further increased to Rs 10 lakh crore. Whether the banking system have the capacity to take up the additional burden given the existing high level of bad loans from the segment is a question.
The additional sops for the farmers include increase in Fasal Bima Yojana coverage to 40 percent and crop insurance coverage by 50 percent, a Rs 5,000 crore micro irrigation fund and Rs 8,000 crore dairy processing fund. Further, the government will support NABARAD to digitalise 63,000 primary agri societies, the FM said. Rs 48,000 crore has been allocated to MNREGA from Rs 37,000 crore last year, Jaitley said.
The government has increased the allocation for rural agriculture and allied sectors by 24 percent to Rs 1,87,223 crore, which should ideally help revival in the rural sector post the demonetisation impact. But are job losses factored in?
Jaitley's announcement that affordable housing will be given infrastructure status is an important step. This is a big move that can, in one stroke, give a major push to the affordable housing sector since banks can now lend money to such projects under the infrastructure category. This can also work to boost real estate and construction activities that has slowed in the recent months.
The announcement from Jaitley that Railway-related state-run companies like IRCON and IRCTC will be listed on stock exchanges is a bumper move that’ll enable the government to unlock the big value of these giants. This is a proposal that has been in the discussions for too long, but no definite decisions have been taken so far. Jaitley’s move, in this context, is significant.
The second promising move was when the FM said maximum cash donation a political party can accept from one source has been brought down to Rs 2,000. As per the current norms, any political funding less than Rs 20,000 didn’t require to show source. This new change is a step in right direction and will hopefully bring down the flow of black money in political funding. Here, the execution is key since political parties typically find a way around the rules to get unaccounted cash donations.
The big disappointment
Arun Jaitley said government will infuse Rs 10,000 crore this year in public sector banks, which constitute 70 percent of the industry. This is part of the ‘Indradhanush’ plan to infuse Rs 70,000 crore in PSU banks over five years. Given the mess the banking sector is in, the kind of bad loan problem, analysts were expecting much bigger capital infusion to equip public sector banks, beyond what is planned.
At present, state-run banks are severely undercapitalised. At least 7 of the PSU banks have less than 8.5 percent Tier-I capital adequacy and one bank less than 8 percent. The problem is worsened with their non-performing assets (NPAs) hitting the roof (nearly Rs 6 lakh crore as of September 2016 or nearly 8 percent of the total bank credit), and total chunk of stressed assets (bad loans and restructured loans together) jumping to 12-13 percent of the total bank credit.
Under the government’s Indradhanush plan, of the Rs 1.8 lakh crore capital needed by banks under Basel-III, the government has offered to infuse Rs 70,000 crore over four years till 2018-19 and wants the government banks to fend for themselves for the remaining Rs 1.1 lakh crore from the market. This is not enough. Also, it is almost impossible that weak state-run banks will find takers. This compounds the problem. So far, there is not much progress on the banking reform front.
Though the FM has assured that government will make sure banks get additional capital, past evidence shows that capital is yet again going to be a major problem for the sarakari banks.
On the whole, the budget offers a fine blueprint for rural India but failed an opportunity to bring in major reform moves, particularly in banking sector neck-deep in troubles.
Published Date: Feb 01, 2017 03:42 pm | Updated Date: Feb 01, 2017 04:18 pm