The forthcoming Union Budget 2020-21 is keeping hope alive at a time when the economy is in a worrying state of slowdown hitting a low of 4.5% of the GDP growth in Q2 of FY20, from 5% of Q1. The slide continues. The nominal GDP at current prices is down to 7.5% from the estimated level of 12% during the period. Retail Inflation has jumped to 7.3% breaching the RBI’s comfort level of 6%. The Index of Industrial Production (IIP) slowed to 4.5% in September 2019. The agriculture sector grew at 2.1% in Q2 of FY20 as against 4.9% in Q2 of FY19 while the service sector grew lower at 6.7% as against 7% in Q1.
Direct and indirect tax collections are reportedly down while expenses remain high that can widen the fiscal deficit beyond the targeted level of 3.3% of the GDP. In order to bail out the sagging economy through budgetary provisions, it is necessary to drill into the precise reasons for the current economic malaise.
Reasons for Slowdown
Among many multipronged reasons, the most significant stems from the rampant bank credit growth during 2007-12 at over 25% immediately following the global financial crisis of 2007-08. Non-fund based facilities that do not reflect in credit growth also grew high. Since bank credit was available, the corporate sector and large borrowers went on a borrowing spree that led to unmindful, unsustainable diversification. It ended up with bloated balance sheets of borrowers and banks accumulated poor quality of assets. This phenomenon is popularly known as the twin balance sheet malady. Banks then had to develop a nexus with borrowers to stymie the asset quality by granting more loans to repay past loans – known as ever greening of loans.
Vexed with this practice, the RBI imposed enhanced scrutiny on loan classification through asset quality review (AQR). This brought out the actual state of the non-performing assets (NPAs) of the banks. Then, NPAs skyrocketed to double-digit. Some public sector banks breaching even 20% mark attracted RBI’s retaliatory tool of prompt corrective action restricting lending to large borrowers and expansion of the branch network. It led to a cut in bank credit starving the various micro sectors of the economy.
While the economy was struggling with scarce bank credit flow, demonetisation came as a big blow in November 2016. The cash crunch that followed sent many entities out of business while some sliced activities. Informal and outsourced employment was drastically cut increasing unemployment. PSU banks could not keep up fresh lending. Small and medium sector was the worst victim. Private banks, however, continued to lend to mighty borrowers and not necessarily to the vulnerable sections.
Then came the Goods and Services Tax (GST) in July 2017. The economy at the bottom of the pyramid is led by illiterates/semi-literates. Their understanding of tech-driven GST norms is poor. Some units scaled down business to evade the GST or exited. The economy could not absorb the compounded impact of such structural changes in quick succession, which resulted in shocking retardation in growth. The non-bank fiasco, inevitable disruption due to mega mergers among the PSU banks and a series of mega frauds added to the gloom.
Based on the reasons for the slowdown in the economy, the Union Budget may articulate measures that can ensure:
• Speedy flow of funds to the commercial sector – revive bank credit – it may need capital infusion in some of the PSU banks that are still struggling with poor asset quality.
• There is a lack of propensity to consume. Common people should have spendable resources that have severely come down due to low business levels, unemployment and low profits of the commercial sector. It may need slashing income tax as has been done to the corporate sector.
• The investment climate needs to be revived. Propensity towards expansion, capacity building, diversification, spending on capital expenditure requires to be galvanised through a combination of liberalising overseas funds and allocating budgetary resources for infrastructure/large projects.
• Housing sector has multiple impacts on employment generation and demand for construction material. Eligibility criteria for Pradhan Mantri Awas Yojana may be liberalised to benefit more. It will enable another step towards the target of housing for all by 2022.
• Farmers may get more interest subvention, subsidies for fertilizers and enhanced crop insurance. Revision of minimum support price cannot be ruled out in a bid to move towards the goal of doubling farmers’ income by 2022.
• Relief to auto and fast moving consumer goods sectors to revive demand that was at a low ebb and accumulated huge unsold inventory. Direction of relief could be to revive demand in the hinterland that has suffered the most due to credit crunch and demonetisation.
• More allocation is expected for MGNREGA to generate employment opportunities among deprived sections of society
• Reinforcing thrust on ‘Make in India’ mission could get increased attention by way of tax holidays and better Centre-State collaboration.
• Moderation of GST rates to create demand for white goods and luxury goods, which attract a prohibitively high 28 % GST now.
Seen from a holistic perspective on reasons that gradually infested the economy and pushed it into a deeper malaise of slowdown, the Budget should logically turn out to be a tool to encourage consumption and spending to create demand for goods and services that can be ploughed back into the GDP and trigger revival. It is a tough balancing act that needs not only allocating efficiency of budgetary measures but also the ability to strengthen micro governance structure and interdisciplinary cooperation.
It calls for greater collaboration and synchronisation of implementation strategies at the micro-level to construct a strong value chain with the policies and schemes to deliver intended relief. It is easy to be strong on announcements and allocations that often turn fragile when it comes to implementation resulting in unintended adversities that prove to be counterproductive diffusing the very purpose.
(The author is Adjunct Professor, Institute of Insurance and Risk Management)