July 2019

There were 2 posts published in July 2019 (this is page 1 of 1).

Revitalizing the Infra Sector

India’s annual budget for the FY2019-20 was presented on the 5th of July by the first woman Finance Minister of India, Nirmala Sitharaman. She aimed to make a sweeping change across a range of sectors, and introduced several measures and methods to contain India’s deficits and maximize growth and output. Amidst a host of other ventures that she (and the government) envisages over the course of the next decade, the numero uno spot is occupied by the dream to scale up India’s physical and social infrastructure. While the latter has had considerable success in the form of an affirmative social sector framework, the former has been found lagging.

The FM introduced a brand of new schemes that will pump in fresh life to India’s wailing infrastructure development story, to the tune of approximately $300 billion dollars a year. A great amount of work needed to be done to bridge the rural-urban gap, and physical connectivity was an essential cogwheel attainment of the objective. The Pradhan Mantri Gram Sadak Yojana (PMGSY), with an ambitious target set to cover 125,000 kms worth of rural roads in the country, has had a budgetary allocation worth Rs ₹80,250 crores and is presently in its third phase. In earlier phases, 30,000 kilometres of new roads in rural areas were constructed, and the construction in all such phases were through applications of green technology. The Highways department was infused with a remarkable ₹83,016 crores for the present fiscal year, its highest ever. The increased spending however, is not misdirected. The Railways, which serves as the lifeline of the nation, was also accorded the limelight, with FM Sitharaman promising to ramp up investment in the Railways to ₹50 lakh crores before 2030. State investment in infrastructure in the long run is almost always beneficial to the economy. Several studies over the course of decades have corroborated the fact.

In India, with private investments falling and several economic indicators in the red, an impetus to the otherwise neglected infra sector will help bring about a transform in the economy. The development of this sector will have an instantaneous cascading effect on other ancillary sectors, and help propel a bullish trend to look out for. Projects such as the UDAN scheme, or the dedicated freight corridor, industrial corridors, Bharatmala and Sagarmala were touted as key highlights with respect to the renewed thrust on such a spending. The government also intends to exploit the riverine advantage unique to India; cargo transporation through the Ganga is set to expand four-fold in volume. The creation of transport hubs will be initiated at Varanasi, Sahibganj and Haldia. This will amplify inter-State trade volumes and help de-congest the arterial highway networks that are overly burdened.

FISCAL INTERPRETATION:

While budgetary announcements are easier said on paper, implementation makes the real difference. The fiscal interpretation to deliver on such high power promises rests on how and when the projects are to be financed. The Economic Survey estimates that an investment of the order of $4.5 trillion over the course of the next twenty-five years would put India in a phase of robust growth and development.

The government is in urgent need of heavy private investments in the infra sector if it is to achieve its agenda. Yet, with structural difficulties embedded in every nook and corner of the legal corridor, and with a generally negative investor sentiment, getting such a high quantum of investments is an uncertainty in itself. The IL&FS’s ₹91,000 crore debt botch-up, an ongoing liquidity crisis in the NBFC sector, and the bank’s NPA woes have only marched ahead to compound the problem.

Sitharaman’s primary thrust was to ease the liquidity crisis that the NBFCs find themselves embroiled in, which would consequently go a long way to provide relief to the strained banking system. While bank credit had increased in the past fiscal year, the credit obtained from banks fell considerably from ₹9.64 lakh crore in March 2016 to ₹8.90 lakh crore in March 2018. The government has devised a panorama of ways to come up with the numbers required for the behemoth capital funding that the infrastructure sector urgently requires. One of the key takeaways from the budget speech was the proposed establishment of the Credit Guarantee Enhancement Corporation (CGER), which would act as an interface for borrowers with assurances and guarantees of repayment to the lenders, and at the same time provide the borrowers with lowered interest rates. The vision to deepen the market for long term bonds, including that for corporate bond repos, credit default swaps, and the like, were extensively discussed. In a watershed moment, the government also permitted investments made by the Foreign Institutional Investors (FII) and the Foreign Portfolio Investments (FPIs) in debt securities, that has to be sold or transferred to domestic investors within a fixed lock-in period.

ON THE ROAD TOWARDS PPP:

In consonance with PM Modi’s dream to turn India into a $5 trillion economy, FM Nirmala Sitharaman divulged investment figures required to take India up the ladder. That is when she highlighted that India’s investments would have to scale up to ₹20 lakh crores a year ($300 billion). The Railway Budget alone would have the lion’s share, clawing into a sizeable ₹50 lakh crores for infrastructural upgrades and system designs between 2018 and 2030.  

The FM put forward the idea of modelling the investments on a Public-Private Parnership (PPP) structure. This would, in the eyes of the government, reduce bureaucratic delays, maximize profit, and turn ailing ventures into lively setups that focused on long run benefits and outputs. She proposed to unveil a blueprint for completion and fast-tracking of several projects under the PPP model for works under the NHAI, gas grids, waterways, regional airports and more.

Despite such bullish trends, all that glitters is not gold. Several analysts feel that if the government does not take concrete steps to implement changes in the PPP model on the lines of the Kelkar Committee, the dream to attract investments worth ₹20 lakh crore would only be a dream. Arun Jaitley, a lawyer by profession and the former Finance Minister of India, lamented the fact that despite India being the largest market for PPPs with almost 900 projects, PPP contracts were riddled with “rigidities”, and the failure to develop quick grievance redressal systems plagued their effectiveness. For 2019-20, the PPP component of the extra budgetary resources (EBR) is projected to be 33%. The share of PPP in railways’ EBR in 2016-17 was 51%. Clearly, share of private investors in India’s infra sector is on the decline. A report by rating agency Icra Ltd paints the dismal picture of NHAI, whose debt has risen from ₹25,000 crores in 2014-15 to ₹1.7 lakh crores in 2018-19. The primary cause of the unbelievable rise in debt can be attributed to the linear focus on entirely publicly funded engineering, procurement and construction (EPC) projects.

THE WAY FORWARD:

The Kelkar Committee made a smorgasbord of recommendations that were aimed at simplifying the PPP model, and actually encouraged private players to take interest in State-sponsored projects. Certain recommendations were striking. Model PPP agreements need to be re-drafted to ensure an optimal share of risk-taking among all stakeholders and full disclosure of associated benefits and revised costs must be prominently included. It also proposed to set up independent regulators that are going in for PPPs. It also established four mechanisms to combat operational losses suffered by private players when the project timespan extends for around 20-30 years. In a nutshell, the Kelkar Committee Report on PPP was pro-private investment, and its timely acceptance and implementation can help smoothen out the rough edges of policy-making in this regard.

All in all, unless the government hits the right note and builds an air of confidence in the infrastructure sector, India’s $5 trillion dream would be very difficult to take off. The drive to open the floodgates for increased expenditure on infra investments will pay off in the long run, when the benefits become quantifiable and more visible. It is important that stress is laid on reforming the PPP model, and direct hordes of investments to the infra sector. This would also have parallel benefits, as it would push employment statistics up and support ancillary industries in the process. Tentative benefits are all around, but when do we catch the train to sustainable long run growth?

Union Budget 2019-20: An Analysis

The annual Union Budget is a subject of unique importance in the working of any parliamentary democracy such as India’s. The Budget, with one sweep, has the potential to churn out a stronger economy, and yet on the other hand, an ability to carve out a bearish effect on the markets. 2019’s interim budget was a departure from tradition in more ways than one; the general principle that an interim budget must not bring about macroeconomic instability was thrown up for a toss. The interim budget drew widespread condemnation for pushing populism over fiscal prudence. This time, however, Nirmala Sitaraman did not leave gaping voids, and played a spectrum of cards that could potentially have long-term ramifications on the economy as a whole.

The 2019 budget presents many positives to take away, which would over time simplify and streamline operations. The government’s pet project, Aadhaar, was in particular highlight. Sitaraman’s maiden budget proposed to make the Aadhar and PAN interchangeable when it comes to filing tax returns. As such, those who do not have access to a PAN card can quote the Aadhaar number wherever deemed necessary. Furthermore, NRIs who arrive in India will from henceforth be issued an Aadhaar card without the existing mandatory waiting frame of 180 days. This would both reduce the bureaucratic hurdle and provide Aadhar-linked benefits to the NRIs without a rather long cooling period. Yet, in its drive to push the Aadhaar as a proponent of unity, the government must ensure that all deserving citizens are provided with an Aadhaar card, and not ostracized from public records. At present, several inconsistencies with the Aadhaar have been earmarked. The administration would do well to lend a ear to the concerns and fix the issues as early as possible.

A focus on a greener India was also on the government’s mind, as it proposed to slash the higher taxation slab of 12% on Electric Vehicles to the base 5%. Sitaraman claimed that the government had moved the GST council to put into effect the change as was mandated above. In consonance with the decision, it was also announced that tax rebates upto ₹1.5 lakh would be awarded for interest paid on loans to buy the electrically-operated vehicles. The move is commendable as it puts India at a head-start when it comes to ensuring cleaner mobility. However, it will not solve India’s auto-sector woes. Neither does it seem pragmatic to throw in bonanzas when the average cost of an electric vehicle is beyond the means of the Indian middle class, which for long has been burdened. India, like the European Union, has decided to not put a compulsory cap on manufacturers to dole out a percentage of their products in the electric vehicles sector. The decision to provide a sudden impetus to electric vehicles proved to be a jolt for many leading analysts and businessmen, who had expected sops elsewhere.

When it comes to the banking sector, there were several eye-grabbing headlines that poured in throughout the day. The government announced a ₹70,000 crore capital fund to replenish public sector banks. This was done to boost credit availability in the midst of an ongoing liquidity crisis. Non-Banking Financial Companies (NBFCs), which were in a difficult spot, in essence got a breather from the budget. The government agreed to provide a partial guarantee to all the State banks for the acquisition of ₹1 trillion worth of highly-rated assets from NBFCs. A revival in the fortunes of NBFCs would cascade into higher credit facilities for the MSME sector, ultimately equating to a stronger output and growth potentialities. Additionally, Sitaraman hailed the Insolvency and Bankruptcy Code (IBC 2016), the promulgation of which had led to the recovery of over ₹4 lakh crore worth of bad loans over the course of the preceding four years. Yet, the issue of a ₹70,000 crore dividend brought up passionate sentiments of the issue of the RBI’s independence as a central bank, which might possibly be under threat for the first time in decades.

The Modi 2.0 government fulfilled its electoral emphasis on the social sector, with capital outflows in other sectors not hampering the grants alloted for the sector. The total expenditure on Centrally-sponsored social sector schemes was pegged at ₹3.31 trillion. A marginal increase in allocations on all fronts were observed in comparison to the interim budget that was presented earlier this year. Subsidies in LPG cylinders and houses for the poor were retained. Under the Pradhan Mantri Awas Yojana (PMAY), spending on rural housing has been valued at ₹25,853 crores. Pradhan Mantri Gram Sadak Yojana (PMGSY), which was a feature mention in Sitaraman’s speech, was alloted ₹19,000 crores for the purpose of establishing rural connectivity through a better road network. Pradhan Mantri Shram Yogi Mandhan Yojana, a new scheme that was shown the red carpet in the interim budget, would now cover 30 lakh workers, each of whom are eligible to receive ₹3,000 as a monthly pension after they turn sixty.

The 2019 Budget also drew a fair share of flak and criticism for a wide number of reasons. Start-ups and investors, however, were left a tad bit disappointed. The speech declared that “… start-ups and their investors who file requisite declarations and provide information in their returns will not be subjected to any kind of scrutiny in respect of valuations of share premiums”. The Budget mentioned that a mechanism of ‘e-verification’ would be put in place to establish the identity of the investors and the source of their funds, without providing an approximate timeline for its rollout and implementation. This provided little clarity and was ambiguous, at best. Furthermore, in what could possibly signal bureaucratic interference, the government spoke of a ‘special administrative arrangement’ for prompt redressal of grievances and pending assessments of newfangled firms.

When it came to corporate tax, the government said that companies with an annual turnover of ₹400 crore or less would now fall under the 25% tax slab, as compared to the ₹250 crore cap earlier. Many critics slammed the government for providing reliefs to a specific pie in the industry rather than bringing about significant changes in the tax structure for the corporate world. For a government that relies on hyper-nationalistic sentiments and openly flaunts jingoistic tendencies, no specific mention of the Defence sector was indeed a surprise. Also, when the job distress is at its peak (CMIE, December 2018 report), there were no specific measures that were adopted by the present dispensation to ease the aching pain that jobseekers across the country felt. In what could generate a lot of political friction, additional levies were planted on diesel and petrol supply to the tune of ₹1 per litre. Most interesting of all, however, was the government’s “expectation” of a higher dividend payout from the RBI- bringing back the thorny topic on the autonomy and independence of the RBI into the forefront.

The annual budget that was presented on the 5th of July seemed more expedient when it comes to governmental spending and providing sops. However, contentious issues and fears were not allayed by the government, thus evoking several questions. The fiscal deficit target was set at 3.3%, and the government has stated fiscal consolidation as one of its primary agendas that it seeks to pursue. The deficit margin is in close proximity to the NK Singh Committee’s recommendations on the FRBM Act, 2003, which proposed a fiscal deficit of 3% till 2020. In all probability, though, the deficit will exceed 3.3%, and it will be an extremely hard job for the men in North Block and beyond to contain the deficit at the proposed figure. The 2019 budget, which was expected to be a high-octane event, was rather meek by its standards. Amidst the fanfare of the cricketing season, perhaps Anand Mahindra adeptly summarised it when he remarked that all that Nirmala Sitaraman took was ‘steady singles’, when all were looking forward for the ball to be hit out of the park!