Published On : Mon, Feb 29th, 2016

#Budget 2016 : Jaitley offers cheers to Bharat, but fails to impress India Inc. on reforms

Nagpur: The Union Budget 2016 had the imprints of Prime Minister Narendra Modi than finance minister, Arun Jaitley. It offered a fine blueprint of several small steps to lift India’s rural villages, 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 high growth path.

The 2016 budget, a big test for Jaitley himself, 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 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.

Rural push

The major highlight of the budget was Jaitley’s big push on agricultural and rural India. For rural development Jiately announced a package of Rs87765 crore in fiscal year 2017 as against Rs79526 crore. That apart, Jaitley announced subsidy scheme for BPL families for cooking gas and said the government targets to double the income of farmers by 2020 and Rs200o crore for new LPG connections. Jaitley allocated Rs 35,984 crore for farming sector, Rs 86500 crore on irrigation for five years, and Rs1500 0 crore interest subvention for agricultural loans.

For crop insurance, Jaitley announced Rs 55,500 croer and Rs38500 cror for MNAREGA as against Rs Rs34699 crore in last year. He also laid out plans to electrify all Indian villages by 1 May 2018 and allocated Rs8500 crore for rural electrification in fiscal 2017. As in every year, the agriculture credit target has been increased to Rs9 lakh crore from Rs8.5 lakh crore.

Fiscal deficit on target

For fiscal year2017, Jaitley announced a fiscal deficit target of 3.5 per cent and for the fiscal year 2016, the fiscal deficit target has been met at 3.9 per cent. This news can make the rating agencies happier, investors and the RBI 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 Jaitely promised that there won’t be compromise on the spending side announcing a 11 per cent increase to Rs 19.78 lakh crore in Fy2017 from Rs 17.77 lakh crore BE year before. Of this, plan expenditure is up by 15 per cent to Rs5.5 lakh crore and non-plan expenditure increased by 9 percent to Rs 14.28 lakh crore.

Infra spending

But, the government lowered its spending on the infrastructure segment. For fiscal year2017, Jaitely set aside Rs2.21 lakh crore crore for the infrastructure sector , a decline of 12 per cent, compared with Rs2.51 lakh crore announced last year. Of the total, Jaitley allocated Rs55,000 crore for roads and railways and another Rs15000 crore from bonds will be raised by NHAI. For Railways and roads , in 2016-17, total capital allocation is Rs2,18,000 crore. One should note that Jaitley’s big task remains making sure engines of economic growth aren’t failing. This year, the increase in infra spending is merely Rs30000crore as against Rs70000 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 in the economy. On Friday, The Economic Survey announced on Friday, ahead of the tbudget, 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.

Turn off for banking sector

For fiscal year 2017, Jaitley announced a capital infusion of Rs25000 for government-banks, which was part of the Rs70000 crore announced for five years announced in last year and examining the option to bring down government stake in some banks below 51 per cent in 1DBI 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 refusing to think of radical reforms in the banking sector such as merging small banks having synergy and bring in private capital.

Jaitley’s banking sector strategy fell short of what was needed to revive state-run banks. Though Jaitley recognised the issues later and offered more capital (Rs 70,000 crore over five years), it came too late and too little. India’s banking industry, 70 percent dominated by state-run banks, is in the midst of a crisis now with their total bad loans exceeding Rs 400,000 crore at the end of December and more likely to come from the restructured loan segment if economic recovery doesn’t happen as expected.

Arguably, the ‘Indradhanush’ package announced by Jaitley lasy year to revive PSBs isn’t adequate to set these institutions on safer path.

Financial sector Reforms

Jaitley reiterated promise of big reforms saying the reforms 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 insurance Bill, opening up the FDI in several sectors bring in JAM (Jan Dhan, Aadhaar and Mobile) movement to facilitate financial inclusion and subsidy rationalization process by ay of Direct Benefit Transfer (DBT).

But, the investors want the promised large-ticket reforms such as the long-pending GST, reforms in land acquisition for industries and easier labor laws. On this part, the Narendra Modi government hasn’t yet managed to make any meaningful progress since a consensus is absent yet 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 changes in laws that permits more 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 again 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 give provide relief to companies?

At a first glance, the budget2016 had clear imprints of Narendra Modi, than a budget from Jaitely. Packed with several small-steps initiatives but lacking major bold reforms steps to undertake much needed reforms .