Vijay Kumar Gaba

Thursday, February 6, 2020

Budget2020 - Intent vs action

The department wise allocations made in the budget make some noteworthy readings. Some of the key highlights could be noted as below:

The department wise allocations are highly skewed. Out of the total 67 departments & ministries, the top 7 account for 75.4% of the total budgetary allocation. Next 21 departments are allocated 19.76% of total allocation and the rest 39 departments get a meager 4.84% of the total allocation.
Food & Agriculture together account for 28.5% of the total budgetary allocation. Out of this 9% of total is allocated alone for the PM Kisan scheme. In FY20RE, 28% of the budget allocation to this item remained unspent.
Despite the urgent need for raising agriculture productivity and government emphasis on this, the department of agriculture research and education is allocated a paltry 0.3% of the budget.
Despite strong emphasis on the alternative medicine and promotion of traditional methods , the Ministry of Ayush is allocated a paltry Rs136cr or 0.01% of total allocation.
The budget speech emphasized on lower use of chemical fertilizers. Accordingly Urea subsidy has been reduced to 5.7% of total allocation from 6.2% FY20RE. However it continues to be 2x of the nutrient based subsidy.
Despite ambitious target for regional connectivity, the allocation to this head has been reduced as compared to FY20BE.
The allocation for promotion of industry and internal trade has been reduced to Rs57.27bn against Rs58.34bn in FY20RE.
Department of Food and PDA is allocated Rs1.21trn in FY21BE. However, only a measely Rs1.9bn are allocated towards capital expenditure by this department. This is depsite hge promise to improve food warehousing.
The ministry of culture is allocated 0.07% of the total allocation. Despite the big promise, only Rs1.8bn are allocated to development of museums.
Rs269bn are allocated for procurement of aircrafts and aeroengines by the Air Force.
Ministry of Electronic and IT is allocated 0.48% of the total allocation. The allocation for promotion of digital payment has been less than halved to Rs2.2bn as compared to Rs4.8bn in FY20RE.
The Mof Environment, Forst and Climate Change is given 0.12% of the total allocation. Rs12cr are allocated for Hazardous Substance Management, and Rs460 crore for pollution control.
Allocation for Nepal, under Ministrty of External Affairs has been cut to Rs8bn vs Rs12bn in FY20RE.
Nothing is provided for bank recapitalization in FY21BE. Rs69.5bn are provided for recapitalization of insurance companies.
The allocation for Ministry of Housing and Urban Affairs has been reduced to 2.5% in FY21BE from 2.8% in FY20RE. 81% of this allocation is twoards metro projects.
A princely Rs10cr are allocated to Pradhan Mantri Innovative Learning Programme (DHRUV). Overall, Department of School Education and Literacy gets 0.06% of total allocations.
Department of higher education gets 1% of the total allocation. But 50% of this allocation is for Higher Education Financing Agency (HEFA) and Interest Subsidy and contribution for Guarantee Funds.
The allocation to National River Conservation Plan has been cut for Rs12bn in FY20RE to Rs8.4bn in FY21BE. Rs60cr are allocated for much talked about implementation of National Water Mission.
0.3% of the total allocation is reserved for PM employment generation program (PMEGP).
4.28% of the total allocation is appropriated towards LPG subsidy.
Railways is allocated 8.4% (Rs700bn) of the total budgetary allocations. However only Rs2.7bn is allocated for creating/improving passenger amenities.
Ministry of Road Transport & Highways is allocated Rs916.56bn or 11% of the total allocation. However, a meager Rs3.8bn are given for Research, Training, Studies and Other Road Safety Schemes.
Department of Science and Technology gets 0.4% of the total allocation.
Ministry of Tourism gets 0.02% of the allocation. Half of this allocation is towards Integrated Development of Tourist Circuits around specific themes (Swadesh Darshan)
Ministry of Youth Affairs gets 0.2% of the total allocation. Half of this allocation is towards Khelo India program.

Wednesday, February 5, 2020

Is government implementing reforms to cement economic recovery?

The medium term policy cum fiscal policy strategy statement, that forms the part of the budget documents states that the "Government has initiated structural reforms both on the supply and the demand side." It is argued that these structural reforms "have fiscal implications and are important tools to boost economic performance" and the "impact of these measures initiated is anticipated to have spill-over effect in the next financial year."

By implication, the government is claiming that the short term growth has been sacrificed to cement the high growth trajectory in the medium term. The statement claims that "the measures initiated by the Government to cement the economic recovery are anticipated to have effects in the next FY as well."

This leads me to revisit the debate whether the administrative changes to improve efficiency & eliminate redundancies; and incremental changes in the current practices, policies and programs could be terms as "structural reform". Besides, it is also critical to examine, whether the incremental changes made in FY20, are adequate to launch a sustained economic recovery in FY21.

As per the Macro-Economic Framework Statement for FY21, the government implemented the following measures that are claimed as "structural reforms" in the medium term policy cum fiscal policy strategy statement.

Hike in minimum support price of agricultural crops for 2019-20;
Reduction in corporate tax rate;
Policy initiatives for development of textiles & handicrafts and electric vehicles;
Outreach programme for growth, expansion and facilitation of micro, small and medium enterprises;
Incentives for start-ups in India;
Scheme to provide a one-time partial credit guarantee to public sector banks(PSBs) for purchase of pooled assets of financially sound non-banking financial companies (NBFCs);
Recapitalization of public sector banks;
Relaxation of external commercial borrowing guidelines for affordable housing;
Realty fund worth Rs250bn for stalled housing projects;
Additional tax deduction of interest for affordable housing;
Merger of 10 public sector banks into four entities;
Revised Priority Sector Lending (PSL) norms for exports;
Streamlining of many labor laws at the central government level;
Steps to boost manufacturing; employment generation; financial inclusion; digital payments; improving ease of doing business via schemes such as Make in India, Skill India and Direct Benefit Transfer; and
Announcement of the National Infrastructure Pipeline (NIP) of projects worth Rs1.02trn, which will commence in phases from 2020-21 to 2024-25.

In my view, most of these measures do not even pass the muster for being called reforms. Treating them "structural reform" would be a grave mistake.....to continue

Tuesday, February 4, 2020

Mr. Market victim of his own expectations

A full reading of the Economic Survey for financial year 2019-20 makes is unambiguously clear that the policy advisory organ of the incumbent government is overwhelmingly dominated by the 'market economists'. These economists want the government to follow the global best practices to make India a vibrant market economy.

Hitherto the domain of Indian policy making had been predominantly occupied the left leaning development economists, who focused more on the government's role in poverty alleviation and inclusion. The policy documents therefore mostly spoke about the government achievements and future targets.

But now, not only the jargon like Wealth creation, private enterprise, free market, decontrol, pro business, stock market, privatization, creative destruction, etc has recently entered the policy corridors of the Indian government; the formats of the policy documents have also changed their appearances dramatically. The colorful graphics, literary quotations, statistical models, global comparisons, elaborate bibliography, etc make the boring documents like Economic Survey a thematic dissertation made by a team of research scholars.

The problem however is that the political establishment is not fully in synch with the policy advisory organ. The political leadership may be attracted to the idea of laissez faire but usually the political compulsions are seen dominating the behavior. This two dimensional incongruence - (a) between policy advisory and political behavior and (b) between leadership's aspirations and political compulsions - has created humongous expectations gap in the markets. The documents like Economic Survey and vision documents published by the NITI Aayog raise the expectation levels of the financial markets to very high levels. Whereas the delivery in terms of actual policy statements usually fails to meet the market expectations leading to disappointment amongst market participants.

These frequent episodes of inflation and deflation of expectations have led to weakening of the faith in policy framework. The market volatility around important announcements like Union Budget, Monetary Policy Statements must be seen in this context.

The key for investors therefore is to stop anticipating the policy changes, especially on the basis of the statements made by the policy advisory organs of the government; statement of intent made by the political leadership; and thoughts expressed by the experts considered close to the corridors of power. The investment strategy must be based on the crystallized policy framework, fully and unconditionally accepting that wishes of the market participants are not a significant factor in the actual policy making.

The investors also need to notice that in recent past almost every "former policy advisor" has written forcefully about what the government is doing wrong, and how the current economic slowdown could be reversed without much pain.

People like Arvind Subramanian (former CEA), Arvind Pangharia (Former Vice Chairman NITI Aayog), Raghuram Rajan (Former RBI governor), Subhash Chandra Garg (Former Finance Secretary) have written and spoken extensively about the measures government should take to make course correction and also the things government is doing wrong, almost immediately after relinquishing their respective offices.

A reasonable assumption is that these people did not attained enlightenment overnight and had these thoughts while still being in office. A corollary would be that either the environment in office did not permit them to express their honest opinions or the political establishment did not care to follow their advice. In either case, there is no basis for an investor to believe what the Economic Survey and NITI documents present. After reading 941 pages of Economic Survey, I have realized this. You can trust me or try it yourself. I leave that to you.