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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