As the first full-time lady Finance minister of Independent India, N. Sitharaman has a lot to be proud of. For India as a country too this is sort of a milestone - female power busting another historically male dominated domain.
Having said that, her record either as the Commerce Minister or as the defence minister has been a disaster. So one was disappointed to see her becoming the Finance Minister at a very important juncture for the Indian Economy. She is one more in the series of appointments under the Modi government who is in her position because of an unflinching loyalty to the king.
Be it what it may, did she do something to change my perception of her in the Full Budget presented on 5th July 2019 (if we still think that Piyush Goyal presented just a vote on account in Feb, that is) Let's do some detailed analysis.
Background
One sympathises with Nirmalaji because she inherited an economy that is largely in a mess and she cannot now blame the previous Government too (well magic !? the previous government was also her own - times change don't they).
Arun Jaitley will probably go in the annuls (at least that's my opinion of him as the FM) as a Finance Minister adept at managing media narratives but who did little to reform or restructure the Indian economy in its most crucial decade and as someone who lied his way through his entire tenure - on data (Fiscal Deficit/Disinvestment for eg), on narratives (demo for cashlessness for eg) too. He missed on an opportunity to radically restructure/reform the economy.
So what does Nirmala Sitharaman inherit from him as an economyAn NPA mess in the Banking Sector
A Banking system that is burdened with an NPA (Non-Performing Assets) mess. According to the MOF data the gross NPA more than tripled from below 3 lakh crores to more than 9 lakh crores. Yes, these NPAs are a legacy of the UPA era. However, Jaitley failed to address the mess and mitigate the crisis despite pumping in record amount of money in the financial system. Five years down the line the NPA balloon is more inflated. This despite the fact that there has been record recovery of Loans due to pressures built by the IBC (Insolvency and Bankruptcy code) act and also despite the fact that the Government has been pumping money (Remember the Indrdhanush scheme of Jaitley that was supposed to solve the NPA issue) that is growing in every budget.
A shadow banking crisis
The non banking Financial Institutions (NBFC), often called the shadow banks as they operate approximately like a bank but without the strong RBI regulations unlike banks, are undergoing a crisis of their own - which is still unfolding. The default on bond repayments by ILFS that alone holds more than 91,000 crores of debt has raised alarms as more than 1 Lakh crores of CP are coming up for redemption in the next three months. There is severe liquidity crunch. Read details here.
Not necessarily Fiscally "prudent"
One of the credits that Jaitley has always given to himself is that under his stewardship the fiscal deficit has been under control and has largely kept to the roadmap decided upon in the last Chidambaram Budget. On paper this looks like true too. The government estimates 3.4% fiscal deficit as against a target of 3.3%. This does not look bad at all - but is it possible??
Specially because the Government revenues from almost all sources fell below its target (budgeted revenues). This is true even on account of direct taxes which otherwise have risen robustly. So much so that the Government fell short of budgeted revenues of close to 1.5 Trillion rs. - yes thats 1.5 Lakh Crores. So how did government manage the fiscal deficit figure by cutting spends in the last quarter, delaying payments in the last month of the year and hence the payment was made after April and managing subsidies levels by keeping them on off balance sheet items for example loans taken by FCI to pay for those subsidies which will have to be paid by the Government in the next financial year but that helped them keep the value away from govt balance sheet for the current financial year. Read a more detailed account of this jugglery here.
One real headache have been lack of enthusiasm among corporate to bring about robust investment in private businesses. This despite push to Make in India, Improved ease of doing business, and focus on startup india. Probably this is an indication of lack of confidence in the Indian economy for now. This may also be because of after-shock of demonetisation and a patchy implementation of the GST regime. Fresh investment in the economy has plunged to a 15 year low.
A robust private investment requires availability of fund in the economy to invest. Out of many indicators that point to availability of funds to invest is the savings rate of the economy. The historically high domestic saving rate in India has been steadily declining and that should worry policy makers because it is an indication of investments that can happen in the future of the economy.
Is there something positive in the scenario ??
Second, despite low exports the Forex reserve situation is not just comfortable but has been further growing too. So we are nowhere near the 1999 situation. This has been possible because of steady FDI inflows in the economy. We have been helped on this account because of Global economic slowdown followed by Quantitative Easing in the US and the Europe, is my guess.
What does budget deliver
Disappointment in nutshell. The budget actually cements the perception that N Sitharaman is an overrated minister - she hasn't performed in any capacity and that there is no expectations from her as the FM as well
The budget actually simply continues the trend of overestimating revenues - aready the Government has fallen short of revenues in all front but the budget estimates a 20% jump in collections over the last year's unmet targets by a huge gap I showed above how economy seems to be sloeing down everywhere - this 20% jump is almost an impossibility.
To generate these impossible figures - all kind of bad economic ideas are back
1 The cess on FPIs is a retrograde measure - will only lead to volatile and negative sentiments on the stock market.
2. The extra tax on super rich is a walk back to years when high effective tax rates led to wide tax evasion and flight of capital to tax heavens. In fact it is not even clear how the additional will help because it cannot be substantial amount even.
3. Criminal charges and punitive action on failing to utilise the CSR fund mandated by law is out of dictators book. Government departments routinely miss utilising funds that they get towards development expenditure - by this logic all of them should be prosecuted under criminal laws. This is insane - criminalising a civil offence - in fact to me this is not even an offence
4 Government borrowing from International markets is a very very bad idea. Someone should make the FM read the history of east asian economies their boom based on foreign borrowings and then their overnight meltdown. In India where governments of all hues and cries have been irresponsible and opaque about the quality of their spending - borrowing overseas is sure recipe for disaster.
5. Government finally seems to be waking up to the enormity of the NPA mess and so has allocated lion's share to recapitalising of PSU banks. However required this step is - it means the government will have further less to spend on developmental expenses.
Very bad budget overall.
All in all the budget fails to understand the mess
Having said that, her record either as the Commerce Minister or as the defence minister has been a disaster. So one was disappointed to see her becoming the Finance Minister at a very important juncture for the Indian Economy. She is one more in the series of appointments under the Modi government who is in her position because of an unflinching loyalty to the king.
Be it what it may, did she do something to change my perception of her in the Full Budget presented on 5th July 2019 (if we still think that Piyush Goyal presented just a vote on account in Feb, that is) Let's do some detailed analysis.
Background
One sympathises with Nirmalaji because she inherited an economy that is largely in a mess and she cannot now blame the previous Government too (well magic !? the previous government was also her own - times change don't they).
So what does Nirmala Sitharaman inherit from him as an economyAn NPA mess in the Banking Sector
A Banking system that is burdened with an NPA (Non-Performing Assets) mess. According to the MOF data the gross NPA more than tripled from below 3 lakh crores to more than 9 lakh crores. Yes, these NPAs are a legacy of the UPA era. However, Jaitley failed to address the mess and mitigate the crisis despite pumping in record amount of money in the financial system. Five years down the line the NPA balloon is more inflated. This despite the fact that there has been record recovery of Loans due to pressures built by the IBC (Insolvency and Bankruptcy code) act and also despite the fact that the Government has been pumping money (Remember the Indrdhanush scheme of Jaitley that was supposed to solve the NPA issue) that is growing in every budget.
A shadow banking crisis
The non banking Financial Institutions (NBFC), often called the shadow banks as they operate approximately like a bank but without the strong RBI regulations unlike banks, are undergoing a crisis of their own - which is still unfolding. The default on bond repayments by ILFS that alone holds more than 91,000 crores of debt has raised alarms as more than 1 Lakh crores of CP are coming up for redemption in the next three months. There is severe liquidity crunch. Read details here.
A Data Credibility Crisis
For many years now reams of paper have been written questioning the new GDP series data that is showing robust growth in the GDP while most other economic indicators like export, consumption, savings and jobs have been showing a decline. In fact on many occasions the Government stopped publication of data, or delayed release of reports or simply hid the data behind bureaucratic walls to keep the narrative positive. However now there is increased discussion on the issue.
There was a celebrated leakage of unemployment report from the NSSO that showed unemployment at an all time high which NITI aayog had termed as unofficial. However now the data is official and the unemployment rate indeed is at a 45 year high.
The former chief economic advisor to the Modi Government has written a research paper that claims that the Indian GDP growth rate may have been overestimated by as much as 2.5% and so claims that the GDP growth rate may actually have been between 3.5% to 5.% and not close to 7% as estimated. While this has been disputed - no cogent analytical defense has been put to counter this by the Government. However even the Economic survey has accepted a slightly downward revision of GDP estimates.
Economy slowing down
There was a celebrated leakage of unemployment report from the NSSO that showed unemployment at an all time high which NITI aayog had termed as unofficial. However now the data is official and the unemployment rate indeed is at a 45 year high.
The former chief economic advisor to the Modi Government has written a research paper that claims that the Indian GDP growth rate may have been overestimated by as much as 2.5% and so claims that the GDP growth rate may actually have been between 3.5% to 5.% and not close to 7% as estimated. While this has been disputed - no cogent analytical defense has been put to counter this by the Government. However even the Economic survey has accepted a slightly downward revision of GDP estimates.
Economy slowing down
After initial state of denial the Government has now accepted that the economy is indeed slowing down. The Quarterly GDP growth rate in the last two quarters of 2018-19 were 6.6% and 5.8% respectively.
Not necessarily Fiscally "prudent"One of the credits that Jaitley has always given to himself is that under his stewardship the fiscal deficit has been under control and has largely kept to the roadmap decided upon in the last Chidambaram Budget. On paper this looks like true too. The government estimates 3.4% fiscal deficit as against a target of 3.3%. This does not look bad at all - but is it possible??
Specially because the Government revenues from almost all sources fell below its target (budgeted revenues). This is true even on account of direct taxes which otherwise have risen robustly. So much so that the Government fell short of budgeted revenues of close to 1.5 Trillion rs. - yes thats 1.5 Lakh Crores. So how did government manage the fiscal deficit figure by cutting spends in the last quarter, delaying payments in the last month of the year and hence the payment was made after April and managing subsidies levels by keeping them on off balance sheet items for example loans taken by FCI to pay for those subsidies which will have to be paid by the Government in the next financial year but that helped them keep the value away from govt balance sheet for the current financial year. Read a more detailed account of this jugglery here.
The government also showed better collection on the disinvestment front but even that was jugglery because it generated money by cross disinvestment (meaning one PSU buying another). This generates money for the govt but does not address the basic problem of loss making PSUs eating way government resources. Also the new MPC with the last dissenter Viral Acharya having resigned is more amenable to offer higher dividends to the govt to fill the gap. But as you may have understood none of these is a structural improvement in the management of the economy.
The nut and shell of the above mumbo-jumbo is that the real fiscal deficit is much higher and that the government show of fiscal prudence is largely window dressing.
Stagnant/declining exports
The nut and shell of the above mumbo-jumbo is that the real fiscal deficit is much higher and that the government show of fiscal prudence is largely window dressing.
Stagnant/declining exports
The exports sector has been languishing for more than half a decade now. There has been no economy in the history that has grown at 8+ percent without a robust export scenario. This is one area where the Government also has not tried to hide data (as if they could have) but at the same time has done precious little to boost it up. One of the reasons I find Sitharaman a wrong person for the FM' job is her failure to do anything on this front as the commerce minister. Our export to GDP ratio needs to improve if we are serious about 8+% growth.
Consumption slowdown is real and large
In March 2019, sales of cars, motorcycles, scooters, commercial vehicles (CVs) and tractors fell in comparison to March 2018. They fell by 6.87%, 14.27%, 25.19%, 4.71% and 14.97%, respectively. Data over the last five years (between April 2014 and March 2019) shows this is only the second time when growth of all five economic indicators has fallen during the course of a month. Before March, the only other time this had happened was in February 2019, when sales of cars, motorcycles, scooters, CVs and tractors dropped by 4.33%, 0.58%, 12.14%, 8.77% and 0.52%, respectively. (Data : Mint). The economic survey now accepts this severity in slowdown.
Private Investment stagnant/declining
Private Investment stagnant/declining
One real headache have been lack of enthusiasm among corporate to bring about robust investment in private businesses. This despite push to Make in India, Improved ease of doing business, and focus on startup india. Probably this is an indication of lack of confidence in the Indian economy for now. This may also be because of after-shock of demonetisation and a patchy implementation of the GST regime. Fresh investment in the economy has plunged to a 15 year low.
Household Saving declining
A robust private investment requires availability of fund in the economy to invest. Out of many indicators that point to availability of funds to invest is the savings rate of the economy. The historically high domestic saving rate in India has been steadily declining and that should worry policy makers because it is an indication of investments that can happen in the future of the economy.
Is there something positive in the scenario ??
Obviously yes, there are a few -
For one our fiscal deficit may not be as rosy as Government makes it look but it isn't something to be worried too. A more honest government would have accepted that there are headwinds and so to stimulate growth certain substantial slippages in fiscal prudence has been allowed to happen.
Second, despite low exports the Forex reserve situation is not just comfortable but has been further growing too. So we are nowhere near the 1999 situation. This has been possible because of steady FDI inflows in the economy. We have been helped on this account because of Global economic slowdown followed by Quantitative Easing in the US and the Europe, is my guess.
Third positive is that inflation is well under control - this has largely been because of strong monetary policy control under RRR followed by urjit. The MPC without viral may not be so hawk eyed anymore.
The other positive is that oil prices remain moderate and hence government is able to generate a bounty of sorts in taxes on petrol/diesel. The only six months when the crude had started climbing in 2018 is when modiji for the first time started to appear a weak PM. So in that sense modi government has been very very lucky.
Final positive is that the infrastructure spending under modi 1.0 is real and widespread. One can expect it to kick in sooner or later. FM must be badly hoping that it kickstarts the consumption.
I can go on and on (for example I did not mention agriculture distress because it is so much talked about) but I think you get a drift of the economic mess that Jaitley left us with. Is this time running out - only time will tell.
I can go on and on (for example I did not mention agriculture distress because it is so much talked about) but I think you get a drift of the economic mess that Jaitley left us with. Is this time running out - only time will tell.
But one thing I can say for sure. A supposedly economically right wing government with brutal majority in the house should now not be incremental about economic reforms - otherwise our demographic dividend, the economic sweet spot that we have been at for almost a decade now, and the real opportunity to grow and become a world power will truly be missed. My fear is that Sitharaman is not the person to trust with such a humongous task and I will be happy if proven wrong. But at least now she cannot hide behind the names of Nehru, Gandhi and Manmohan Singh for her woes.
What does budget deliver
Disappointment in nutshell. The budget actually cements the perception that N Sitharaman is an overrated minister - she hasn't performed in any capacity and that there is no expectations from her as the FM as well
The budget actually simply continues the trend of overestimating revenues - aready the Government has fallen short of revenues in all front but the budget estimates a 20% jump in collections over the last year's unmet targets by a huge gap I showed above how economy seems to be sloeing down everywhere - this 20% jump is almost an impossibility.
To generate these impossible figures - all kind of bad economic ideas are back
1 The cess on FPIs is a retrograde measure - will only lead to volatile and negative sentiments on the stock market.
2. The extra tax on super rich is a walk back to years when high effective tax rates led to wide tax evasion and flight of capital to tax heavens. In fact it is not even clear how the additional will help because it cannot be substantial amount even.
3. Criminal charges and punitive action on failing to utilise the CSR fund mandated by law is out of dictators book. Government departments routinely miss utilising funds that they get towards development expenditure - by this logic all of them should be prosecuted under criminal laws. This is insane - criminalising a civil offence - in fact to me this is not even an offence
4 Government borrowing from International markets is a very very bad idea. Someone should make the FM read the history of east asian economies their boom based on foreign borrowings and then their overnight meltdown. In India where governments of all hues and cries have been irresponsible and opaque about the quality of their spending - borrowing overseas is sure recipe for disaster.
5. Government finally seems to be waking up to the enormity of the NPA mess and so has allocated lion's share to recapitalising of PSU banks. However required this step is - it means the government will have further less to spend on developmental expenses.
Very bad budget overall.
All in all the budget fails to understand the mess
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