Budget 2019: Great Expectations

Nirmala Sitharaman has her task cut out as she prepares to present her first Budget. Will she be able to address the challenges in banking, agriculture, infrastructure and consumption? What are the measures that can give a shot in the arm to these segments? A low-down

Agriculture: Dire need for farm reforms

The clock has started ticking. Only three years left to 2022-23 — the year by when Prime Minister Narendra Modi had promised farmers’ incomes would double. With the past few years being a washout for rural India, and the agri GDP growth having plummeted to 2.89 per cent between 2014-15 and 2018-19 — versus 4.27 per cent during the UPA-II — doubling farm income has become a big challenge.

The farm distress of the past five years can be explained by the failure of monsoon — two years of deficient and two years of below-normal monsoon rains.

However, food production recorded new highs thanks to improved irrigation facilities and government’s incentives on MSP (Minimum Support Price). But farmers couldn’t draw the benefit of higher output as market prices crashed and the Centre failed to procure enough output to keep prices up. This was true especially in the case of pulses where production growth far exceeded demand growth. Sugar couldn’t be exported as international market prices were down.

 

In the past five years, the NDA government has increased Budget allocation to the agri sector every year with higher farm loan disbursement, too. But this has not had brought any visible improvement in the livelihood of farmers.

Schemes, including the PM Krishi Sinchayee Yojana, the PM Fasal Bima Yojana, Soil Health Card and Electronic National Agriculture Market, have helped, but not to the desirable level of improving farm income and alleviating rural distress.

Over the next five years, however, with continuity of the government at the Centre, the agri schemes can get a fresh push.

Infra push

The one agri segment which has not been getting much attention in the last five years is infrastructure. In the upcoming Budget, the Finance Minister is expected to introduce measures to encourage private investment in agri infrastructure and give a road map on how the promised ₹25 lakh-crore will be invested in the sector over the next five years.

Currently, infrastructure at the mandis in the country is very poor. They lack basic facilities including electronic weighing scales and covered warehouses, and not many mandis have proper road connectivity.

Thus, farmers are forced to sell their produce to buyers/commission agents from the same place and lose pricing power. The government can ease the entry of private investment in agriculture by building a sound regulatory framework and some tax incentives.

For promoting investments in warehousing and agro-processing, the Centre can consider tax holidays and simplified licensing procedures.

Also, with monsoon becoming more errant now, it is expected that the government will increase allocation to micro-irrigation schemes and try to drought-proof farming.

Moving beyond building large dams and subsidising irrigation equipment, the government must also make sure that farmers do not waste water by going in for more water-intensive crops. The Centre may announce a few incentives for crop diversification — from paddy, wheat and sugarcane to millets and oilseeds.

Agri credit is expected to be further increased this year, but it looks like the government will also focus on how this credit would be used, and place checks on it.

Consumption: Hoping for a boost

With private consumption contributing 50-60 per cent of the GDP (at constant prices), the need for the government to boost consumption in a slowdown year becomes imperative. The NDA-II begins its term on a challenging note, with a well-entrenched consumption slowdown taking the wind of out of the consumer sectors such as automobile, FMCG (fast-moving consumer goods) and consumer durables.

 

Growth in the ‘Private Final Consumption Expenditure’ component of the GDP trickled down to 7.2 per cent in the quarter ended March, the slowest in FY2018-19. Automobile sales is on first gear and the volume growth for FMCG companies, too, have been moderating.

Weak footing

The note ban in November 2016, quickly followed by the move to GST in mid-2017 dampened the spirits of consumers. But companies quickly recovered from the same. Price cuts induced by the GST pushed up demand for certain products such as soaps, toothpastes and hair/personal care products. Besides, strong urban consumption tilted towards preference for premium and ‘natural’ products, coupled with a pick-up in rural demand from increased spends for rural India, drove sales for FMCG players post the demonetisation and GST hiccups. Auto sales, too, looked up. In 2017-18, industry sales volumes grew 14 per cent year-on-year, double that of 2016-17.

While 2018-19 began on a positive note, demand for discretionary items such as new vehicles and durables faced rough weather due to headwinds such as high interest rates, rise in fuel costs and tight liquidity among NBFCs, which affected lending. The rural consumer also had it tough, due to patchy monsoons coupled with a crash in farm prices. This trend has continued into this fiscal as well.

Auto sales growth, for instance, slipped to 5.2 per cent in 2018-19 year-on-year. It has worsened in the first two months (April and May) of this fiscal, shrinking 12.5 per cent year-on-year. While FMCG companies initially remained more resilient, many began seeing a slowdown in volumes in the January-March 2019 quarter.

What’s expected

While a boost to consumption is the need of the hour, limited fiscal headroom may make it difficult for the government to announce populist moves in the upcoming Budget. Already, the interim Budget has brought in a tax rebate for the middle-income group, raised the standard deduction for the salaried class, and announced tax concessions for home owners and a pension scheme for unorganised workers, to put money in the hands of the consumer. Rural consumption was also given a leg-up through an income support scheme for small and marginal farmers, which was later extended to all farmers. The effect of these measures may be seen this fiscal.

To reverse the slowdown in the auto sector , a scrappage scheme for old vehicles (especially commercial vehicles) may be announced in the Budget. To leave more disposable income in the hands of the consumer, enhancement of the Section 80C deduction limit from the current ₹1.5 lakh and an increase in the tax-free limit for long-term capital gains on equity, from the current ₹1 lakh, are expected. Making the NPS (National Pension System) corpus entirely tax-free as promised earlier may also indirectly boost the disposable income of those retiring soon.

Banking: Call for structural changes

After the tumultuous ride under the BJP-led government’s first term, the banking sector is discernibly hoping for long-awaited structural reforms within the sector under the Modi government’s second innings. Aside from the slowdown in the overall investment activity impacting credit growth, governance issues, weak balance sheets, a steep rise in bad loans and growing reluctance on the part of bankers to take hard-hitting decisions have left the sector in a limbo, impacting the economy at large.

True, the stock pile of banks’ stressed assets is a result of excessive lending between 2009 and 2013 (pre-Modi era), particularly to sectors such as infrastructure, power, textiles and metals.

 

Bad loans for PSU banks have galloped from 4-5 per cent in FY14 to 13-14 per cent in the past two years. But past sins and massive clean-up of books aside, the fortunes of the sector have been in the doldrums also due to lack of the much-promised structural reforms.

Fizzled attempts

In the 2015-16 Budget, the Centre had proposed the constitution of an independent Bank Boards Bureau (BBB) to usher in an independent selection process for top bank officials. It took one year for the BBB to be operationalised, and as it stands now, it has proved to be a damp squib.

The expectations of a drastic overhaul in the governance of PSBs that ran high — with more autonomy to bank boards and Centre reducing its stake — have fallen flat.

The Centre mindlessly infusing capital into PSU banks has also achieved little. The ₹90,000 crore earmarked in FY18 was a humongous amount to be pumped into PSU banks in a single year (between FY15 and FY17, capital infused totalled about ₹50,000 crore).

This last-ditch effort, along with the over ₹1 lakh-crore infused in FY19, has been sucked into the banks’ bad loan provisioning, rather than aid growth.

PSU banks, which constitute over two-thirds of the lending in the country, continue to report modest credit growth; larger banks, too, have shied away from lending to riskier segments to conserve capital.

The progress on the much-touted Insolvency and Bankruptcy Code (IBC) — implemented to speed up resolution and unlock capital — has also been disappointing.

The report card on banks’ performance has been dismal over the past five years. For private sector banks, while loans have grown by a decent 16 per cent CAGR (between FY14 and FY19), profits have shrunk 4 per cent during this period, owing to 30-40 per cent rise in bad loans annually. For PSU banks, modest growth in loans (6 per cent CAGR) and over 30 per cent rise in delinquencies have exacerbated their poor performance.

From profits, the earnings for PSU banks (listed) have slipped deep into the red in the past two fiscals — ₹50,000-75,000 crore of annual losses.

The weak financials of banks and growing stress in the NBFC space have created a crisis of sorts in the financial sector, which the government will have to address in this Budget.

A clear roadmap for consolidation, diluting of government’s stake, and a change in governance structure for PSU banks are imperative. Removing the chinks in the IBC process, addressing NBFC woes and pushing forth reforms to revive investment activity should be high on the government’s list of priorities.

Infrastructure: Betting on more investments

In the first term of the Modi government, road construction progressed at a brisk pace, increasing from 12 km per day in FY2014 to 27 km in FY2018, and budgetary allocations to the sector grew steadily — from about ₹61,000 crore in FY2018 to ₹79,000 crore in FY2019 (revised estimates), and further to ₹83,000crore in FY2020 in the interim Budget in February 2019. Orders awarded for road construction were also steadily on the rise until FY2018.

But over the past year or so, the sector seems to have run into roadblocks. Among other factors, the troubles faced by NBFCs and banks have meant a funding squeeze for many road players. Issues related to land acquisition and the slowdown in decision-making due to the general elections also took a toll.

 

Consequently, the order book-to-revenue ratios of many road players shot up. At 32 km a day, there was a miss in achieving the target of constructing 40 km a day in FY2019. The year also saw a steep fall in orders awarded.

The unease in the sector is reflected in the sharp fall over the past year in several road construction stocks such as Dilip Buildcon, Sadbhav Engineering, IRB Infrastructure and Ashoka Buildcon.

Road players will be hoping that the Budget will announce measures to make funding more easily available to them. A special road construction fund, for instance, could help. So could issue of tax-free bonds by a government-controlled entity that could facilitate further lending to road players. Measures that make the process of land acquisition simpler and less litigious will also help the sector get going again, and help achieve the government’s ambitious road construction plans including those under Bharatmala.

Lights out

Reforms in the power sector have, however, failed to help power companies in Modi 1.0. Between FY2015 and FY2019, the aggregate profit of S&P BSE Power index constituents grew by a compounded annual growth rate 4.5 per cent, while revenues grew at 8.75 per cent. During this period, the BJP-led government kicked off a mega reform in the power sector to untangle the bottleneck of distribution of power to consumers.

Due to heavy losses, State power distribution companies (discoms) couldn’t connect all parts of India with electricity. The Modi government’s UDAY scheme to deleverage discoms and the Saubhagya scheme to extend power supply to hitherto ‘dark’ parts of the country have helped shore up demand for power in India, which has come close to a power surplus, in the past few years. However, power generation companies such as NTPC, Adani Power and Tata Power were impacted as discoms couldn’t pay their dues to generators on time. This has led to working capital cycle getting stretched, and rising interest costs for some. A new UDAY 2, with strict focus on improving operational parameters of discoms would give a boost to the sector. So would the much delayed reform of separating the carriage of power (through power lines) from the retail sale of power.

After the roaring success of renewable power generation under the previous Modi regime, the industry is expecting renewable power to be given ‘priority sector’ status so that they can access cheap credit to meet the Centre’s 175 GW target by 2022. A policy thrust to boost domestic production of photovoltaic cells is also keenly awaited.

Building hopes

A slew of reforms aimed at making the real estate sector more transparent were introduced in Modi’s first term. But initiatives such as the GST and RERA dampened the demand initially. The unsold inventory levels rose to over 6.5 lakh in 2016 and new product launches declined — from over 3 lakh units in 2013, it fell to less than 2.3 lakh units in 2017. The sales of companies such as Godrej Properties and Oberoi Realty fell 25 and 21 per cent y-o-y, respectively, in FY17.

Though demand slowly recovered in the early part of 2018, the tight liquidity situation in the market could spoil the scene. As NBFCs are among the primary sources of funding for realty players, the Centre could infuse funding in the system so as to prevent delays in projects and aid revival in the sector. Further, to stimulate the demand in affordable housing, the Centre could take additional initiatives such as enhancing the eligibility criteria for Credit Linked Subsidy Scheme (CLSS), re-introducing ITC (input tax credit), single-window clearance and granting infrastructure status for the sector.

Though the revenues of most realty firms improved in FY19, if the expectations are met, players in the middle- and lower-income housing segment could get an additional boost.

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