Tuesday, February 7, 2017

Budget 2017: Impact of Increased Infrastructure Spending

Infrastructure sector is a key driver for the Indian economy. Infrastructure sector includes power, bridges, dams, roads, rural/urban infrastructure development and also Affordable Real Estate (Housing). As evident in the 2017 budget speech by our FinMin, this sector enjoys intense focus from Government for initiating policies that would ensure time-bound creation of world class infrastructure in the country.

In my previous broad review article, I had mentioned that this Infrastructure spending would be beneficial to our country and our economy but I did not get into details. So, here we go…

Just How Much got Allotted toward the Infrastructure Space in Budget 2017?

Total Allocation for Infrastructure in this year’s budget stands at a record 3,96,135 crores. This is significantly higher than what was allocated last year and like I said before, is expected to give a boost to our nation’s Infrastructure growth.

Effects of Increased Infrastructure Spending

You may be wondering, what the benefits of this Increased Spending would be. An Increased Road & Rail coverage network is just the tip of the iceberg. The Infrastructure Sector plays a vital role in the development of the country and this increased spending is going to have a wide range of benefits.

Better Global Recognition

In August 2016, India jumped 19 places in World Bank's Logistics Performance Index (LPI) 2016, to rank 35th amongst 160 countries. With this increased spending on the various segments of our Infra sector, we can be optimistic of further favourable jumps by India in this LPI for 2017.

Increased Job Creation Across the Country

When a country invests in improving its Infrastructure, it can help create both Direct and Indirect job opportunities in the areas where the projects are being executed. You need manpower to build whatever it is you are building like roads, railway lines etc which creates direct job opportunities for people. And these Infra projects are going to need raw materials which will result in indirect job creation in the corresponding manufacturing areas.

Housing for All by 2022 – A Key Driver in Job Creation

The Prime Minister recently made public the Government’s intention to build approx. 6 crore houses as part of two housing schemes: The Pradhan Mantri Gram Awas Yojana (for Rural areas ) and Pradhan Mantri Awas Yojana (for Urban areas). A paper jointly released by KPMG and NAREDCO (National Real Estate Development Council) suggested that with our increasing Urbanization, there may be a further shortfall of about 5 crore homes by 2022.

Apart from these Affordable Housing projects, the Government had indicated in 2016 that it is planning to build more than 100 Smart cities across the country which means, the growth of the Real Estate & construction side of our Economy is expected to be very strong. Rs. 23,000 crores has been set aside for the Pradhan Mantri Awas Yojana in this years Budget.

Experts predict that the Real Estate and Construction Sector is expected to generate about 7.5 crore jobs by 2022.

Improved Connectivity via Roads

Roads have been a focus area for the government to revive our Infrastructure sector. The Finance Minister mentioned that the construction of roads is progressing at a brisk pace of 133 KM per day. This year Rs. 19,000 crores have been set aside just for improvement of Rural roads as part of the Pradhan Mantri Gram Sadak Yojana. Rs. 67,000 crores have been set aside as part of National Highway Development in this budget.

With the upcoming projects lined up and the government expected to spend such astonishing amounts to improve road connectivity, the Roads Sector Alone is expected to generate approx. 50 lakh jobs across India by 2022. Not to mention the jobs that could potentially get created through the allied manufacturing sector that supports the laying of these roads.

Improved Rail Connectivity & Infrastructure

This year Railways received a budget allocation of 1.31 lakh crores of which Rs. 55,000 crore is coming from the Government. A Multitude of projects have been announced this year. They key highlights that would help boost job creation and our economy include the sanctioning of about 3500 kms of new railway lines. At least 25 new stations would be developed and 500 stations would be enhanced to support the differently abled by fitting elevators & escalators. 7000 stations have been identified to be fit with Solar Power and there is an ambitious target to fit Bio Toilets in all coaches by 2019.

Though the amounts aren’t as high as what Railways or Roads have received, the Government has set aside budget to modernize our Ports as well as to build new Airports in Tier II Cities.

Investing in Renewable Energy & Power Generation

Solar Energy has the potential to create huge job opportunities in India. The Installed capacity in Solar power generation has grown at about 151% CAGR in the last 4 years. Our capacity was a mere 35 MW in FY11 and has gone up to over 8700 MW in FY 17.

Last year, the Government set itself an ambitious plan of ramping up our Solar capacity to 100,000 MW by 2022. This year, 1.26 lakh crores have been set aside for Energy Production based investments across the country. This year’s target for Renewable Energy projects is 20,000 MW.
Furthermore, the Government has already set out an ambitious plan of ramping up this capacity to 100,000 MW of Solar capacity and 60,000 MW of Wind Energy by 2022 which will require an investment of about 5 lakh crores in the next 5 years. According to experts, this sector could generate about 10 lakh additional jobs by 2022 if the Government is able to work towards reaching this goal of 100 GW (gigawatt) of Solar energy and 60 GW of wind energy.

This Installation solar panels and wind turbines will also result in strong business opportunities and job creation for those equipment manufacturers in India.

A Positive Contribution toward the Indian GDP Growth

The Infrastructure Segment (Including Real Estate) is the third largest contributor to the Indian GDP. With this Increased Spending, we can expect our Indian GDP to get a strong contribution this year as well. With the government’s move to restrict all Cash Transactions above 3 lakhs, more and more real estate transactions are expected to come into the fold of the formal economy which again would contribute positively toward our Economy and Tax revenue.

What do you think about the Budget allocation toward the Infrastructure Sector and how it would benefit the nation? Sound off in the Comments section…

Saturday, February 4, 2017

Budget 2017: A Broad Review

The last couple of days have been quite busy for experts in the various sectors of the Indian Economy. Everyone has been buzzing about the Indian Union Budget that was tabled by our Fin Min on 1st Feb 2017. As expected opposition and their loyalists are claiming this budget has nothing fruitful and the ones in power and of course their loyalists claim this budget to be the next best thing since sliced bread. There are numerous articles that are listing down all the budgetary highlights so I don’t want to bore you guys with yet another bullet point list type article.

Where do we stand as the common man? How does this Budget impact our lives and livelihoods? Is this budget a Hit or a Miss? Hopefully this article will help you get an answer to that.

Budget 2017 Hit or Miss?

Speculation for what the Government has in-store for the people of this country had been ripe for weeks prior to the budget. Everyone expected super-sops to help sway the upcoming state elections in favour of the ruling party after months of hardships post Demonetisation has left the voters unhappy.

But, this budget did not carry much sops or anything to appease voters. It was focused on Infrastructure Growth, Improving the Rural Economy and Farmers of our nation. Many minor changes have been introduced across various aspects of our economic functioning but overall if I were to rating this budget on a scale of 10, I would give it a 5 out of 10.

Budget 2017: Impact Score 5 / 10

Why only 5?

Let’s start off with the notable misses that would’ve helped bump the score higher and then we will talk about the points that helped this budget garner this score of 5 / 10.

Post Demonetisation, the honest taxpayer has had to brave a lot of struggles in the past 3 months. Despite having no black money, the honest taxpayers and the low-income group that doesn’t earn enough to beat the starting tax slab braved the cash crunch. Apart from the 5% tax rate reduction for the 2.5 to 5-lakh range, there was nothing worthwhile for the citizens who fall in the low and middle income group. Yes, additional cusses have been introduced for the super-rich but that would not impact the common many whose income is much lower than 10 lakh in a year. Even, all of the Deductions and limits that were set many years ago when the Indian Rupee had a much higher value & buying power were left untouched. This was a huge let down.

The Finance Minister also quoted that only 24 lakh individuals have filed tax returns in the previous year with incomes of over 10 lakhs. This is a miniscule number and shows off the obvious fact that, there are numerous individuals out there who are evading taxes. How do I know that? Just go around your city and count the number of luxury bungalows or luxury cars plying on the roads. This number would probably be lower than the count you will get in just a few major cities of our country. What about the rest of the nation? With the government emphasizing on the Demonetisation being just the starting point in the fight against black money, I was seriously hoping for the government to introduce some stringent regulation about identifying and dealing with tax offenders which didn’t materialize either. This again was a huge let down.

You might have seen in some of the prior articles in my blog about the huge NPA (Bad Loans) problem plaguing our banks. Nearly 10% of all loans given out by banks in India are in the NPA category. That’s an amount closer to 7 lakh crores and counting. Though the Demonetisation resulted in a huge liquidity rush into the banking system and helped avoid a catastrophic collapse, the government (or the RBI for that matter) hasn’t taken any steps to address the root of the problem. Loans were granted to non-creditworthy borrowers with little to no due-diligence resulting in this mess. Willful defaulters who owe crores to banks have either gotten away with it or are enjoying their lives while borrowers who owe a few thousand rupees and don’t have any means to defend themselves by enlisting the help of fancy lawyers are being harassed by the banks. With so much social media attention about our Bad Loans problem, this budget was an opportune moment for introducing regulations about the lending practices of our banks, which again was given a miss. Yes, the government did set aside 10,000 crore as recapitalization fund and is open to infusing more capital to PSU Banks but for me, this is just too little and may not be enough if we don’t address the root of the problem.

Is there nothing Good in this Budget?

No, of course not. There are some good aspects of this budget too, that’s why the review score is a 5 out of 10.

The Infrastructure Sector has received a massive push in this year’s budget. A record-breaking amount of 3.96 lakh crores (as against 2.21 lakh crores from the previous budget) has been set aside for Infrastructure projects across the country. This includes roads, railways, ports and even affordable housing projects that have been brought under the infrastructure umbrella. This will help boost the economy and infuse new life into our banking industry that has been sulking with bad loans. In fact, many of the bad loans plaguing our banks are from the infrastructure space and this infusion of money will help get some of those ailing businesses on their feet.

All infrastructure projects need manpower for implementation and this level of funding will help generate millions of direct jobs across the country. Not to mention the boost the manufacturing industry would get from getting contracts to manufacture the items needed for these infra projects. In my opinion, this investment is a step in the right direction and will help generate tons of employment across the country at a time where the generation of new jobs in the past few years hasn’t been that spectacular. 

Agriculture and Farm sector too has been recipient of a sizeable funding and development programs that is going to help boost the Agricultural Production of this country. Special schemes have been announced to help the women of our country to find employment and contribute towards our nation’s economy. 

Bad habits like smoking, pan masala, gutkha etc. have as usual received further hikes in taxes and cesses which are going to make them dearer to those that buy them on a regular basis. I have intentionally added this point as a reason toward the score of 5 because; these bad habits cause cancer & other deadly ailments to millions of people. With Affordable healthcare a distant future vision, increasing the price and making these evil habits out of reach is probably the only option (outside of banning them which is practically impossible) to continue to persuade more people to quit these habits.

Abhishek Bhattacharya, Director and Co-Head - Financial Institutions – India Ratings and Research, shares his opinion

For the banking sector, the budget reinforced India Ratings thesis on rationing of growth capital for PSU banks, while keeping the option of providing bailout capital open. Modest growth target for agricultural lending also points to the fact that Government is cognizant and comfortable with PSU banks inability to grow at a rapid pace. India Ratings expects this to keep the demand for Additional Tier-1 bonds high even in FY18. The budget continues to incentivize affordable housing and builds on the announcements made by PM on December 30th. Affordable housing has been given infrastructure status enhancing funding access as well as reducing borrowing costs,  pace of lending through NHB continues, eligibility parameters on tax benefits for developers have been expanded and higher spends are being directed through PM Awas Yojna. The budget also proposed 30% increase in MGNREGA while increasing allocation of women workforce to 55% from 45% earlier. In India Ratings view this could provide a big boost for women borrowers availing MFI loans.

Some Last Words:

To summarize this budget, I would say that Cautious Optimism prevails toward Economic Growth that would be powered primarily by Strong Infrastructure Spending. The common man’s life has been pretty much left unchanged.

What are your thoughts on the Budget 2017 and its impact on the Banking Sector in India? Sound off in the comments section.

For more insights visit India Ratings Union Budget FY18 Page

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