Hardly the time for a tightfisted Budget

B Yerram Raju | Updated on January 03, 2020 Published on January 03, 2020

Nirmala Sitharaman (file photo)   -  The Hindu

With banking in disarray and industry and agriculture in the doldrums, a demand stimulus should override deficit concerns

The Finance Minister, Nirmala Sitharaman, has to do a fine balancing act in her second Union Budget. GST revenues, among other indicators, are looking down and input tax credit — the key for success of GST — is mired in data upload controversy and an inverted duty structure. The stock market, however, does not seem to be worried about the headwinds.

Public sector banks (PSBs) have absorbed all the government infused capital, but are yet to perform. On top of this, some banks have acquired notoriety in manipulating balance sheets. Frauds in the financial sector have risen like never before, to touch ₹71,543 crore — a rise of 74 per cent over the previous year. NBFCs, too, are now clamouring for capital and regulatory relaxations.

Out of the claims lodged through the legal process — IBC, SARFAESI Act, DRT and Lok Adalats — the recovered amount was a mere 14.9 per cent in 2017-18 and 15.5 per cent in 2018-19. Recovery has been highest through the IBC (42.5 per cent), and lowest through DRTs (3.5 per cent), according to RBI-M&M Economic Research. No economic recovery will be possible when the banking sector is so crippled. The banks that offer insurance and mutual fund services are entrusting targets for these businesses to regular banking staff, taking away, in the process, their productive time for selling loans and deposits.

Demand in rural, semi-urban, and urban areas will rise only when people have enough money in their hands. Credit has not moved in tandem with demand, especially in the farm and manufacturing MSME sectors.

The RBI cut the repo rate by 135 basis points in 2019 but this has had little effect in boosting lending as banks have become risk-averse.

Knowledge of banking products and services has come down significantly among line staff and this is the prime reason for credit risk escalating and leading, thereby, to repayment failure. Capital infusion will not resolve the problems of banks unless this issue is addressed.

Economists, in general, accord too much emphasis to fiscal deficit. Both the Finance Ministry and the regulators do accept the slowdown is real and the economy needs demand boosters. There have been occasions when the fiscal deficit was 6-6.5 per cent of GDP (2008-11) and the economy registered growth thereafter.

The employment front is a cause for concern. Industry, despite the skill development initiatives, bemoans that it cannot find the right persons for the job.

Sector-wise, agriculture is growing at 2 per cent and industry at 0.5 per cent. ‘Make in India’, the flagship manufacturing initiative, has not shown an uptick during the last four years. Services sector growth also is showing a decline.

The focus areas

What measures should the upcoming Budget incorporate to boost employment? Which sectors will need more attention by way of, say, fiscal incentives? How can the States be brought on the same page as the Centre?

The slowdown is both cyclical and structural. There should be consensus between the States and the Centre on the way forward. The Centre should release post-haste all the payments for the pending works under MGNREGS.

The Centre and several States have to pay huge arrears to suppliers, contractors and sub-contractors for several project works. All the arrears should be paid at the earliest.

The paltry farmer pension of ₹6,000 per annum should be raised to ₹12,000 per cultivator, and even tenant farmers should be eligible for pension payment. Since the scheme envisages contributions by farmers between 40 and 60 years of age, several farmers who are 60 and above now do not benefit from the scheme. Adequate budgetary provision must be provided so that this segment of farmers too benefit.

Budget allocation for the health sector should go up significantly, to a minimum of 6 per cent of the total outlay of both the Centre and the States. The health infrastructure is pretty poor and needs improvement. The Centre and several States have rolled out schemes such as Arogyashree, Kudumbashree, and Ayushman Bharati, but these still face implementation issues.

The Budget should target universal education up to Class 12 and this can happen only when the teacher-pupil ratio and school infrastructure improve significantly.

The upcoming Budget should convert intent into actionable allocations in critical sectors.

The author is an economist and risk management specialist.

Published on January 03, 2020

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