Bud-get or Bud-give?

J Mulraj | Updated on January 31, 2020

The Union Budget, to be presented on February 1, is an event that is more hope and hype than it ought to be. Budgets ought not to be a method to tinker fiscal policy with, but they often do.

There are lots of expectations that this year’s Budget will have lots of measures to boost a flagging economy. With tax revenues being lower than expected, there is little fiscal room to indulge in a lot of giveaways. Instead, it ought to concentrate on cleansing the system.

Look, for example, at how the process to take defaulters into bankruptcy has been twisted and the resolution delayed. The time frame for resolution is long overshot as a result. The acquisition of Essar Steel by Arcelor Mittal has finally been completed; look at the impact on the results of banks. ICICI Bank, one of the lenders to Essar which got back a chunk of the money after the resolution, saw a 158 per cent jump in its Q3 profits to ₹4,146 crore, and provisions halved. In comparison, the resolutions of large cases to which Bank of Baroda had lent is not completed, and due to the provisions it had to make (up 54 per cent) for bad loans, it has incurred a ₹1,407-crore loss. The woes of public sector banks are largely legacy issues caused by ‘directed’ lending; politicians directing them to lend to favoured borrowers. This is the crux of the bad loans problem.

So if the budget talks about ways in which the government would speed up the NCLT process and would work with the judiciary to stanch frivolous litigation which delays the resolution, that would be a good step.

The judiciary also needs to be tougher with fraudsters; there is no surer way to deter crime than punitive punishment. Sadly, it treats fraudsters with kid gloves, which only encourages more frauds. This week came news that the promoter of listed company DHFL, a non-banking finance company (NBFC)) had siphoned off ₹12,700 crore by showing them as loans to one lakh fictitious individual customers!. How can one lakh fictitious individuals open bank accounts in order to siphon off money? What is the purpose of a KYC exercise? Was it carelessness (a chalta-hai attitude) or collusion?

We saw, for example, the unrealistic assumptions made by bureaucrats whilst trying to divest Air India. Earlier, they wanted the buyer to assume all liabilities and to allow the GOI to retain 26 per cent. There was no interest. After more losses piled up, and with coffers running empty, the same bureaucrats are now willing to assume liability for two-thirds of the debt, and to allow full ownership to the buyer.

So if the Budget provides pointers to a willingness to heed the market, when reasonable, and for the government to strengthen the judiciary so that it can impose time limits for completion of trials, that would be encouraging.

The biggest threat, almost a black swan event, is the coronavirus. It will affect not only China’s economy, which will slow down (and could induce a better Phase 2 deal with USA), but also global economies. For example, 75 per cent of TV components and 85 per cent of smartphone components of India are imported from China. If the virus results in a disruption to the supply chain, prices of TVs and smartphones in India would rise. The same, elsewhere.

Stock markets are liquidity-driven and so long as individual investors keep diverting savings from fixed income into equities, the money flow will keep them buoyant. Unless there is a black swan event such as coronavirus.

The writer is India Head — Finance Asia/Haymarket. The views are personal.

Published on February 01, 2020

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