INDIAN ECONOMY: OVERVIEW, GROWTH & DEVELOPMENT
Budget 2019: old wine in old bottles
If you were expecting bold reforms in the maiden Budget speech of Finance Minister Nirmala Sitharaman, after the Narendra Modi-led NDA came back to power with an even greater majority, you are bound to be disappointed. The boldest step the newly anointed Finance Minister took was to completely avoid any statement on allocations in her more than two hours long Budget speech. The only allocation she mentioned in her entire speech was the Rs 70,000 crore for public sector bank recapitalisation. Beyond that, she pointed out that all numbers were in the Budget papers and could be looked up. And at the end of her speech, she mentioned that she was aiming for a 3.3 percent fiscal deficit target for the year.
Beyond that, the Budget did not try to announce any big steps. Not in agriculture. Not in terms of helping improve exports. Not even in terms of improving savings rate or giving incentives to the private sector to invest more. Not in steps for direct tax reforms. Not in steps to boost consumption. Not even in new ideas about creating more jobs.
Despite the list of achievements of Modi 1.0 that Sitharaman talked about, and the new targets she laid out – in terms of piped water to rural households, a common power grid etc – there was actually no tough decision or new idea that the Finance Minister announced.
In agriculture, apart from the direct income transfer (PM Kisan) allocation, there was no new idea presented. There was a mention of many new Farmer Producer Organisations (FPOs) – as many as 10,000 of them – being set up. But FPOs have had limited success so far, and how they will help in doubling farmer incomes is still uncertain.
More importantly, there seemed an acknowledgement that the government has run out of ideas about how to push growth. The original thought of spending heavily on infrastructure, in the hopes that government spending will continue to hold up the GDP growth, continues. The talk of reducing corporate tax to 25 percent is marred by incrementalism. Sitharaman is right when she says that over 99 percent of companies are covered by the reduced tax. What she forgets to mention is that bigger companies are driving big investments and job creation – as the Economic Survey points out – and they are not covered by this tax reduction.
FM Sitharaman’s budget banks on public expenditure for economic revival
If Piyush Goyal’s Interim Budget of February 2019 was all about the farmer and to an extent the middle class, Nirmala Sitharaman’s first Budget revolves around business. One needs to look at both the Budgets together to see the whole picture. However, coming in the backdrop of a decelerating economy, declining consumption, slowing agriculture, services economy and global trade, Sitharaman had little room to manoeuvre. Hence, Budget 2019 is all about give-and-take. In fact, it may have taken more than it has given. Sitharaman’s debut Budget may not aide the revival of the consumption cycle as it has not added to the consumer’s disposable income. As a result, it will defer the economic revival until the public expenditure can turn around the economy by itself. And by focusing on FDI, the Budget appears to be relying on foreign investment to revive growth rather than domestic private investment. There’s a lot in Budget 2019 for the industry to look forward to. First, it benefits from the government’s continued infrastructure-building programme, including PPP in railways and rural road modernisation. It’s another question how the government will spend Rs 20 lakh crore per annum on infrastructure alone when its annual earning is around Rs 20 lakh crore. At least some of the industry’s demand was addressed by the FM with the decision to reduce corporate tax from 30percent to 25percent for all companies with revenue of up to Rs 400 crore. It will be a Rs 4,000-crore setback to the government and hence implies companies will have at least this amount of investible surplus to put in capacity expansion and new capacity creation. Several industry bodies’ representations to the FM also bore fruit with the government deciding to hike import duties on newsprint and books, split ACs, auto parts, optic fibre, stainless steel products, plastic, paper, gold and silver. The hike in import duty allows them to raise prices, adding 2.5 to 10percent of revenue to their profits, but raises cost for the consumer.
Indian railways’ profitability decreased 7.8pc
Indian Railways reported a drop in profitability during the first 5 years of Modi govt at the centre. During Modi 1.0, Railways’ profitability decreased by 7.8percent. In the financial year 2017-18, the Indian Railways reported its worst ever operating ratio of 98.4, the highest ever since the year 2000-01 when it was 98.3. An operating ratio of 98.4 means the Railways spent 98.4 paise to earn Re 1 in the last financial year, implying a tiny surplus. Operating ratio is used to measure the operational efficiency of an organisation. High operating ratio means a lower profitability. Higher the operating ratio, lower the resources available for expansion, growth. The drop in profitability is because of higher borrowings in the past to fund expansion in the first term of Modi government. It was being funded through borrowings which included financing from banks, institutional financing, and external investments. An increased reliance on borrowings eventually worsened the financial situation of Railways. The first half of Modi 1.0 witnessed the Railways struggling with growing staff and increasing pension costs after the execution of the Seventh Pay Commission and low earnings. The first rail budget of Modi 1.0 was presented by Sadananda Gowda and it lacked clarity despite him pitching for FDI in Railways sector, dedicated freight corridor, a diamond quadrilateral high-speed rail network, enhanced passenger amenities and augmented cargo-carrying capacity. Gowda was substituted by Suresh Prabhu within six months. Prabhu, in his inaugural speech, talked about bringing in investments and bringing the finances of the country’s biggest employer back on track. Prabhu presented a 5-year plan wherein he sought to bring Rs 8.5 lakh crore investments, a marked increase from Gowda’s Rs 65,445 crore figures presented in 2014-15. However, railway finances and infrastructure investment were stuck in a vicious cycle as poor finances didn’t allow for investments and low investments meant that the infrastructure and services took a major hit. India’s rail network is currently facing capacity constraints and network has already reached saturation. In the last few years, railways’ transportation business has been declining, and consequently, its ability to generate its own revenue has been on a decline. A decline in the growth of internal revenue generation has meant that Railways has been funding its capital expenditure through budgetary support from the central government and borrowings. An increased reliance on borrowings could further exacerbate the financial situation of Railways. On the other hand, Railways’ expenditure on salaries has been gradually increasing with a significant jump every few years due to Pay Commission revisions. The pension bill is also expected to increase further in the coming years, as about 40percent of the Railways staff was above the age of 50 years in 2016-17. Despite the seemingly dark clouds, Union minister Piyush Goyal, in his interim budget speech, was hopeful and said that operating ratio of the railways is set to improve from 98.4 in 2017-18 to 96.2 in 2018-19 and to 95 in 2019.
Domestic car sales slump for eighth straight month in June
For the domestic passenger vehicle industry, which not long ago was touted as the fastest growing in the world, it is an unprecedented and unwanted run. With another steep double digit decline in sales in June this year, sale of cars, SUVs, MUVs and vans in India have now declined for eight straight months in a run that stretches as far back as October last year. Worse, sales have now declined in 11 of the last 12 months. Market leader Maruti Suzuki that accounts for one of every two passenger vehicles sold in the country posted a 17.2 percent dip in its tally in June at 111,014 units. The decline at 19.1 percent was the steepest in its ubiquitous small car segment that includes bestsellers like the Alto, Wagon R, Swift, Dzire, Baleno and Celerio. The next in line in the business, Hyundai also saw a 7.3 percent fall in sales at 42,007 units even though it has two brand new mass-market models – new Santro launched in October 2018 and the Venue compact SUV launched in May this year.
Mutual fund industry wants new govt to act on consumption, investment
The industry welcomed Modi’s win for a second term, saying this will ensure policy certainty. “market will focus on steps taken by the government to encourage investment and give push to consumption, which is hitting a soft patch,” Kotak Mahindra Mutual Fund’s Managing Director and Chief Executive Nilesh Shah said in a statement. He added that the voters have shown a “maturity” in voting the same government, which will help do away with the policy uncertainty. Industry body Amfi’s Chief Executive N S Venkatesh said he expects the political stability to drive pro-reform economic agenda. “We now look forward to the new government creating a conducive investing environment for the financial asset class,” he said. The new government will have to “deftly” handle issues like head winds like growing oil prices and global trade wars which are being faced by the economy, LIC Mutual Fund’s Head of Product and Business Development Lav Kumar said. He added pace of reforms in various sectors will gain pace and the growth rate will also accelerate. As per the results and trends available, the National Democratic Alliance is set to retain power, with the BJP alone having single party majority.
Around 15pc hike in tribal affairs ministry budget
The budgetary allocation for the Tribal Affairs Ministry for 2019-20 has been hiked by around 15 percent, with the central government focusing on critical infrastructure projects for the welfare of Scheduled Tribes. However, the budgetary allocation for tribal education saw a marginal increment — from Rs 1,953.03 crore in 2018-19 to Rs 1,953.50 crore in 2019-20. The government has earmarked Rs 6,814.96 crore for the ministry as compared to Rs 6,000 crore in 2018-19. Grants under proviso to Article 275 (1) of the Constitution have been increased from Rs 1,820 crore to Rs 2,662.55 crore — an increment of over 46 percent. Under this provision, grants are given to 23 states having notified Scheduled Tribes (STs) and four tribal-majority states for creating critical infrastructural projects in tribal areas for raising the level of administration of scheduled areas. Grant-in-aid for state governments has been increased from Rs 4,946.74 crore to Rs 5,659.24 crore. However, the provision for Union Territory governments has been reduced from Rs 1.02 crore to just Rs 3 lakh. The provision for the Vanbandhu Kalyan Yojana has been hiked from Rs 374.97 crore to Rs 406.52 crore — an increase of 8.4 percent. Under the scheme, grant-in-aid is given to states concerned for the development of particularly vulnerable tribal groups (PVTGs) in a comprehensive manner while retaining their culture and heritage. Also, as a measure of social safety for minor forest produce (MFP) gatherers, who are mainly STs, fair returns are ensured for identified MFPs collected by them, along with necessary infrastructure at local level. The allocation for scholarships to ST students for higher education and overseas studies remains unchanged at Rs 102 crore. The monetary support for tribal institutions, including the Tribal Cooperative Marketing Development Federation of India Limited (TRIFED) — responsible for development and marketing of tribal products — and voluntary organisations working for Scheduled Tribes, has been increased from Rs 72.5 crore to Rs 83 crore.