Sunday, 5 February 2017

Budget 17 - Main Analysis of Proposals

So far, I have looked at what could have been in terms of the budget; and the overall Macro-Economic Scenario and the Budget assumptions, and asked myself three questions : namely, in short. Will the budget give a boost to investment, demand and boost agriculture? But, before we move to looking at answering these questions, let me first of all appreciate and point out the most significant changes made from this year onwards :
1.    Merging Railway and Union Budgets
2.    Plan and Non Plan heads done away with, replaced by Capital and Revenue heads
3.    Moving forward of the date of budget presentation and unveiling
4.    This has gone unnoticed : rationalization of schemes, and focus on the key schemes

I would also like to point out that, at least in those articles I read, there was not a sufficient presentation of the viewpoints of both sides, that is, for and against these changes given above. A detailed study of the accompanying budget documents brings out the Government’s viewpoint fully; my article is not meant to analyse these moves – except the 4th. This has been clearly stated in the Fiscal Policy Strategy Statement, pg 18 pt 10 and pg 26 pt 56; and in the Budget Speech Point 18; this rationalization, first begun last year, is being carried forward this year. In my opinion, this deserves a deeper study. That said, off the cuff it can be seen that a more directed and rationalized scheme structure will aid their implementation. This is a truly laudable effort that has been started, and needs to be highlighted. Granted that key will be the selection of schemes but that someone is thinking along a defined implementation ease is laudable.

This year, the budget in the first part focuses on Farmers, Rural Population, Youth, The Poor, Infra, Financial Sector, Digital Economy, Public Service and Prudent Fiscal Management.
1.    Farmers : In my analysis of June 2015 { html}, I had identified the major ills of this sector – please visit link.
a.     PLUSES :  Increase in Ag Credit to 10 Lakh Crore,  up from 9 Lakh Crore : Pg 9 Pt 22; interest waiver 60 days; PACS Computerisation in 3 yrs Pg 9 Pt 23; Focus on Soil Health Pt 25; Long term and Micro Irrigation Funds Pts 26 & 27; Dairy Fund is a good start, though needs more focus Pg 10 Pt 31
b.    COULD HAVE BEEN BETTER : Farmer Realised Price improvement requires a far more focused approach, and tackling Mandis and their power, which has not been done. A start has been made, let us see how this is carried forward {Pts 28-29}. On Insurance, a reduction in provision from RE 16-17 is, in my opinion, hasty a good monsoon notwithstanding – Pt 24
c.     MISSES : The factor of rationalization of Fertilizer Subsidy, and link it to NPK ratio has been totally passed over;  as are the other inputs like seeds etc.
2.    Rural Sector :
a.    MNREGA : {Pg 11 Pts 34-36}  Restrained yet again; kept at nearly the same level as RE 16-17!
b.    For the rest, from Pts 38-45 on Pgs 11-12, the budget speech Rural roads, skill development, electrification, and most critically clean drinking water to 2800 arsenic and fluoride affected habitations. These are all good intentions, and, when implemented will decidedly have a positive impact. But it needs to be noted that the impact will be in the Medium to Long Term!
3.    YouthPgs 12-14 Pts 46-58  : The only creditable and far-reaching point I found in this section dealt with focusing on secondary education for 3479 backward blocks; question is the implementation. Do we have requisite funds? And the direction? Still, good that someone has thought of this. For the rest, while the intentions are good – skilling initiatives, online courses – how practical are these? Online courses certainly aren’t the solution; and skill initiatives in both Farming and Rural sector – well, let me just say they cant replace a proper education! Yes, the Incredible India Campaign 2 is a good thought – let us see its implementation
4.    The Poor : Pg 14-16,  Pt 59-70 : Increased allocation by nearly 28,000 Crore for women and children, but this is in comparison with BE, not RE. Another great point – affordable housing, which I analyse separately as it features in several sectors. Action plans for major diseases is also appreciable, as is mention of tertiary health care and specialized doctors, and drug pricing. Excellent!  But the best is the reforms contemplated in labour laws …
5.    INFRASTRUCTURE : The Big One, Pg 16-20, Pts 71- 94 :
a.     This includes the Railway budget, which is pretty standard, though with a welcome focus on clean trains &  solar stations. The part I like the best was the end-to-end solution for some commodities in partnership with logistics players.
b.    While 2.41 Lakh Crore has been allocated as a whole to Rails + Roads + Shipping, I could not find any comparison with RE 16-17 in the budget documents. Allocation for Transport is higher than RE quite significantly, almost 15%, up from 1.07 Lakh Cr to the current 1.24 Lakh Cr.
c.     For Telecom, while allocation is increased, {up 2200 Cr for IT & Telecom}, the plan for the OFC will, when complete, bring rich dividends.
d.    Our effort to develop IT, Telecom and Electronics as a competitive advantage on a national scale continues, with focus again. That said, it is high time we as a nation started thinking of growing up the value chain – from assembly lines to original equipment, own brands and innovation in technology.
6.    FINANCIAL SECTOR : Pg 20-22, Pts 95-110 :
a.    Banking Reforms given a near-total miss
b.    Again, the focus is on elex platforms for commodities – this is good, clearly so. But it requires ground-level reforms, which are still awaited!
c.     Special mention for the Stand Up India scheme in point 110 – a laudable scheme, please see references section of this article for details
d.    Another good thought here is the resolution mechanism for financial firms & the dispute resolution mechanism for infra contracts
7.    DIGITAL ECONOMY : Pgs 22-24, Pts 111-120 : This is the weakest section of the budget; I could not relate to it. While the points are all good, with great intentions, the on-ground reality in terms of connectivity, options and cost has a long way to go. Already, there is indication of a fall in online transactions post remonetisation. Neither is there anything specific in this section…
8.    PUBLIC SERVICE : Pg 24-25 Pts 121-130 : There is nothing specific here; these are all laudable words, but once again, like above, I could not relate. What is this section doing in a budget is beyond my understanding is all I can say here.
9.    PRUDENT FISCAL MANAGEMENT : Pg 25-27, Pts 131-138 : The best part of this section is the increase in capital expenditure by 25.4%, and the increase in capital expenditure to 14.43% of total expenditure. It needs to be noted that this percentage is the highest ever in the past 10 years at least; it was 13.89% in RE 16-17, 14.13% in 15-16, and 13.08% in 10-11.  A standing ovation for managing the CE  @ nearly 14% for two years running, and planning for it for a 3rd straight year! Further, as things are shaping up, we could actually see the Govt Debt at sub-60% of GDP in the next few years!

PART-B – Tax Proposals

For this, before we proceed, The FM’s budget speech pt 140, Pg 28 needs to be highlighted for all of us to read. Of 4.2 Cr organized sector employees, 1.74 Cr file returns. For informal sector, the numbers are 5.6 Cr and 1.81 Cr. Out of the 13.94 lakh companies registered in India upto 31st March, 2014, 5.97 lakh companies have filed their returns for Assessment Year 2016-17. Of the 5.97 lakh companies which have filed their returns for Assessment Year 2016-17 so far, as many as 2.76 lakh companies have shown losses or zero income. 2.85 lakh companies have shown profit before tax of less than ` 1 crore. 28,667 companies have shown profit between ` 1 crore to ` 10 crore, and only 7781 companies have profit before tax of more than ` 10 crores. These are shocking numbers, and full marks for highlighting!

The best part about this section is the treatment to the MSME, which starts by highlighting that 2.85 Lakh companies making profit of less than 1 Cr pay tax @ 30.26%, while the 298 companies making profit of more than 500 Cr pay @ 25.90% {effective rate}. The section then goes on to give a series of measures including reducing income tax to 25% for companies with turnovers upto 50 Cr.

The next good point is the attempt at transparency in electoral funding; while this has been panned by some – at least this is a start. The declaration of Rs. 2000 per person is actually a reduction from the current level of Rs. 20,000. That said, there is some logic in the criticism as well – as stated on BS, Page 10, article “FM Acts Tough on Political Funding” dated 2nd Feb that as long as there is no limit on the number of such transactions,  the impact might just be meaningless!

On personal taxes, I am not in agreement; this could have been done next year, or even in 2019; that would have freed 15500 Cr for other avenues – my personal favourite would be defense.  This is frankly a move I do not support, though it benefits me personally.

This deserves a special mention, since my initial call on it was wrong by a degree of just about 100%! I was initially surprised, a thought that we need other measures to stimulate demand other than housing. Then, I researched the economics behind the housing aspects, going first to a book by Bimal Jalan, and then further studying the examples of Singapore, Turkey and some other places with respect to housing. The research establishes the ability of affordable housing to stimulate demand both up-stream and down-stream, a factor noted in at least two previous examples. And this budget not only focuses on housing, it also focuses on rural housing. The copies of the sources I studied are attached with this article

We started with questions – will it stimulate investment, demand and agriculture? The focus on MSME – which are 40% plus contributors to GDP, is a definite plus, as is the focus on housing, which I have supported with empirical evidence from 2-3 nations. Then you have the increased allocations for Transport, Telecom, increased Agricultural Credit as well as a focus on the Poor and the Farmers. Add to this the fact that the Agricultural plus Unorganised sectors contribute well over 70% to the economy, and we can arrive at a conclusion that there is a definite stimulus to investments as well as demand

But, at the same time, there are misses that we have to account for, some of which I have alluded to above. Fact of the matter is that we are still not focusing on Health Education and Defense as much as we should; this needs to be done. However, given the current macroeconomic challenges that we analysed earlier, this budget does a pretty decent job. That said, my initial views stand vindicated – a bland and safe budget which could have done far more, given that general elections are still 2 plus year away. The biggest challenge is that the measures will take time to stimulate, and in the meantime we have the slowdown and the macroeconomic factors to contend with.

The reason is that the basic assumption that the economy will get better from Q1 2017-18 after a slowing Q3-Q4 of the current fiscal is an assumption. Then you also have the basic challenges mentioned in Pt 6 on Pg 4 of the Budget Speech. Thus, the basic criticism of some people also stands – that the revenue side challenges might remain, and that the fiscal target  undertaken might prove to be a challenge if the assumptions do not pan out as planned. I sincerely hope, for all our sakes, that it does work out, that the stimulus given will be enough… that remains to be seen.



2) An Analysis of the Relationship between Housing and Economic Development

3) Union Budget 2017 is a total miss on banking reforms, economy will pay a price for it

4) Budget 2017 opinion round-up: Scathing criticism and praise for Arun Jaitley

5) Farmer Distress in India - {Self Article}

6) Stand Up India Scheme

7) Pradhan Mantri Mudra Yojana

8) Budget 2017: Can lower cash limit make political funding transparent? Critics divided INDIA Updated: Feb 02, 2017 00:55 IST

9) FM acts tough on political funding

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