As the Union Budget 2020-21 failed to enthuse different segments of investors and consumers, the question that remains is: How long to wait for economic revival?
The sum and substance of reactions to the Union Budget 2020-21 presented by the Finance Minister Nirmala Sitharaman was that it has belied the expectations that there will be some "big bang" measures to stimulate demand and investments in the sagging economy, and that this was a missed opportunity to push some major economic reforms.
This year's budget has given thrust to agriculture, irrigation and rural development, infrastructure, skill development and the beleaguered financial sector. There were some measures to support MSME sector and affordable housing too. The idea was to touch upon every aspect that could help revive the economy, with an expectation that at least a few of them will click. However, those ideas were not backed by sufficient resources, ultimately due to existing funds crunch. Though the Finance minister claimed to have announced some personal tax concessions, they are unlikely to make big difference in their disposable incomes and overall consumer demand.
The budget has also proposed to tap global sovereign funds to finance infrastructure projects, mainly due to drying up of long term domestic sources and fiscal constraints. Taking a leaf from the US president Donald Trump, the budget has hiked customs duties to protect the domestic industry from external competition. "There is some support to growth, but nothing substantial in the short term. However, the government is still eyeing the long term and has, therefore, pushed capex (the government's capital expenditure on infra etc.). The multiplier impact of this will be positive but lagged,"said leading rating firm Crisil, in its report on budget.
The economists and analysts argued for employing all means, including deviating from fiscal roadmap in the short term, to pump prime the economic activity, but that was not to be. Tough increasing the fiscal deficit target by 0.5 per cent to 3.5 per cent deviating from its roadmap, a recent study by former Economic Advisor to the Finance Ministry Dr Arvind Subramanian, estimates the fiscal deficit figure at 5.5 per cent, after including deals kept out of government accounting.
Recently, referring to such off-balance sheet expenses resorted to by the government, its auditor, Comptroller and Auditor General of India (CAG), advised the government to make thorough disclosure on such liabilities made by the government and public enterprises to the parliament, to impart more sanctity to its accounting practices.
The government had been in denial mode of economic slowdown for some time, the latest statistics baring the ominous state of the economy prove that it hs come to terms with the reality.
Infrastructure push given by the budget is expected to provide support to Cement consumption, albeit not in a big way. "The demand for the commodity (cement) will pick up due to infrastructure, housing and rural development related announcements," said CARE Ratings in its report, while terming it a "Positive" impact of the budget.
Adding 100 more airports by 2024, Rs 1.7 lakh crore allocation for transport infrastructure in 2020-21, development of five new smart cities and continuation of incentives to affordable housing are some of the new proposals in the budget. In the previous budgets the government has already announced its grand infrastructure plans National Infrastructure Pipeline & Accelerated Development of Highways and increased focus on inland water ways.
However, Crisil has given "thumbs down"on the sector citing falling allocations for the sector in the coming fiscal and reduction in off-budget allocations. "For the first time in years, overall infrastructure capex has fallen to Rs 4.7 lakh crore for fiscal 2021 from Rs 5.1 lakh crore in fiscal 2020 RE (revised estimates). Moreover, a 16 per cent reduction in IEBR (Internal and Extra Budgetary Resources) implies a higher burden on budgetary support and strain on government finances. Lower spend on infrastructure would also lower chances of revival in allied sectors, particularly steel and cement."
The past implementation pace on the grand plans the government had announced in the past like National Infrastructure Pipeline and Accelerated Development of Highways, on the other hand, have nothing to boast about. The national infrastructure pipeline of Rs 103 lakh crore over fiscal 2020-25 includes investments in core and allied infrastructure sectors. Excluding allied sectors such as industrial, digital, and social infrastructure, the annual core infrastructure investment amounts to Rs 15 lakh crore, or Rs 90 lakh crore over the five-year period."Of this, Rs 4.7 lakh crore would come from the Centre and Rs 2.6 lakh crore from states, leaving ~52% to the private sector. However, considering the limited number of private players and low risk-appetite of banks, private participation is a key monitorable in achieving these targets,"Crisil added.
Allocation for railways has increased by a meagre three per cent to Rs 1.6 lakh crore. "But this falls way short of the Rs 3.8 lakh crore annual investment envisaged as part of Rs 50 lakh crore investment over fiscals 2018-30. A capex of Rs 6 lakh crore was incurred between fiscals 2016 and 2020, missing the Rs 8.5 lakh crore target set for this period," Crisil pointed out.
However, CARE Ratings billed the budget impact on railways as "positive", stating, "Stable Budget for Railways with similar capital expenditure allocation and opening up of private investment for railway infrastructure creation."Setting up large solar power capacity alongside rail track to optimise electrification cost and railway electrification of 27000 km track are also positives for the sector.
The government, in August 2014, had opened up few activities (comprising suburban corridor, high speed train project, railway electrification, passenger terminals etc.) of Indian Railway for FDI and the budget re-emphasises Government focus on same. The capital outlay allocated towards the Roads and Highway sector is Rs 0.77 lakh crore. "The allocation is not in lines with the NIP where the centre is involved in providing 25 per cent of the investment,"says CARE Ratings. The budget also proposed to monetise at least 12 lots of highway bundles of over 6,000 Km before 2024, but CARE Ratings says the timely fructification of this proposal holds the key for the sector.
Though Bullet Train project figured again in the budget, it has been a laggard in implementation. While it is envisaged to operate 15 passenger trains and re-development of four stations on PPP basis, the low rate of success in the past does not inspire confidence.
In line with the budget thrust to rural infrastructure, Prime Minister Gram Sadak Yojana (PMGSY) allocations were up 39 per cent to 19,000 crore, even as achievement ratio has fallen by 74 per cent in 2019-20 from 94 per cent in 2016-17, making the budgeted target for fiscal 2021 aggressive. Moreover, rural road construction targets over the next five years under PMGSY III are lower at 125,000 km, compared with 218,000 km constructed over the past five years.
Vimal Kejriwal, MD & CEO of KEC International says, "The budget's infra focus is expected to provide a significant fillip to KEC. Allocation towards power and renewable energy, and transport infrastructure, upgradation of stations and developing solar in railways, setting up of 100 new airports, 5 new Smart cities and linking one lakh gram panchayats with BharatNet augurs well for our businesses."
CRISIL Research's analysis of 106 airports already awarded under UDAN reveals that 62 of these remain non-operational due to lack of basic airport infrastructure. An estimated capex of Rs 4,500-5,000 crore is needed for their revival. Thus, plan for 100 more airports would be achieved only with a lag.
Overall, tax exemptions for sovereign funds to increase foreign investor participation across infrastructure sectors is a positive with investments already visible in roads, power and airports.
Power sector too has got some nudge in the budget. Sabyasachi Majumdar, Senior Vice President & Group Head, Corporate Ratings, ICRA Ltd., says, "Shutting down of old thermal power plants will shift generation to newer generation thermal projects and thus provide a moderate boost to their plant load factors (PLF). Abolition of dividend distribution tax and lower tax rates will encourage fresh investments in the power sector, especially renewable energy and transmission sectors."
Budgetary allocation for Pradhan Mantri Awas Yojana (PMAY) at Rs 27,500 crore is up by 9 per cent over the last fiscal's RE. PMAY-Urban has an overall target of constructing 1.12 crore houses by 2022. Of these, 1.03 crore houses have been sanctioned as of January 2020. PMAY-Rural has an overall target of 2.95 crore, of which about 0.9 crore units stand completed as of December 2019.
From the affordable housing buyer's point of view, the additional deduction of up to Rs 1.5 lakh for interest paid on loans taken has now been extended till March 31, 2021.
Hardik Agrawal, CEO of Radha Madhav Developers says, "This budget stimulates the supply of affordable houses a tax holiday is provided on the profits earned by developers of affordable housing project approved by 31st March, 2020. Even in order to minimize suffering in real-estate transactions and provide relief to the sector, FM proposed to increase the limit of transaction from 5% to 10% (of deviation from circle price for tax scrutiny). Overall this was a consoling budget."
Malady & remedy
What is it that made this budget special? It has come in the backdrop of growth deceleration for six consecutive quarters driven by low growth in consumption and investment. The burden of two failed budgets presented in 2019 – before and after the general elections – were also weighing on the Finance Minister. Pre-poll sops were targeted towards the poor and farmers, while the post-poll budget targeted at the companies and businesses.
A drop in private consumption growth played a big role in bringing down GDP growth to an 11-year low. Private consumption growth slowed to 5.8 per cent in fiscal 2020, from 7.2 per cent in fiscal 2019. A dent to incomes, declining household savings ratio and higher household leverage have kept the consumer's risk aversion high.
Crisil in its analysis of demand side impact of the budget, projected that some support to rural demand was expected from higher allocation to schemes like PMGSY and PMAY, which will augment incomes. "PM Kisan spending for fiscal 2021 has been maintained at the previous fiscal's budgetary level, but the focus should be on ensuring that part of the amount does not remain unspent," Crisil suggested. Investment growth dropped to one per cent in fiscal 2020 from 9.8 per cent in fiscal 2019. While private investments have been weak, the government's ability to fund capex also remains constrained. The budget focus on infrastructure spending will support investment to an extent as central PSU investments are projected to decline, says Crisil. However, the rating agency did not exude the same kind of confidence in growth of private investments during in the next fiscal.
Government consumption spending, mostly on the social sector schemes, supported growth in fiscal 2020. "The government has continued to focus on social sector schemes (including those that augment rural incomes, such as PMGSY, PMAY, NREGA and PM Kisan)," Crisil added.
The budget's support to MSMEs is a "mild positive" for exports going ahead, says Crisil. Decelerating global growth, falling trade intensity, and uncertainties from the US-China trade war are hurting India's exports. India's exports is estimated to fall 2 per cent in fiscal 2020, compared with a growth of 12 per cent in fiscal 2019.
However, the budget is a mixed bag for the current problem in the financial sector. While bringing some relief to the beleaguered non-banking finance companies (NBFCs) by expanding scope for recovery of their bad loans is positive, seeking to remove exemptions in personal income-tax is expected to reduce savings and insurance premiums. However, increasing the bank deposit insurance coverage from Rs one lakh to Rs 5 lakh is expected to increase the confidence of bank depositors, which touched its ebb with the recent failure of co-operative banks.
Worst is not closer than it appears
For cement industry to thrive the overall economy has to be robust. The budget has pulled some levers feebly, that may not be enough to spur the economic growth pace. When private sector is not forthcoming to make investment, it is incumbent on the government and the Reserve Bank of India (RBI) to take steps to revive the economy. Even as RBI had cut the repo rate cumulatively by 135 basis points (bps) through calendar 2019, banks have cut lending rates only by just 40-50 bps.
Crisil says, "In the absence of growth kickers, growth pick-up in fiscal 2021 is expected to be largely led by the base effect and supported by somewhat better farm income (led by a good rabi crop) and the delayed impact of monetary easing. Critical to this forecast is the assumption of a normal monsoon in calendar 2020 and benign global crude oil prices."
Kapil Gupta of Edelweiss Research says, "Overall, from a business cycle standpoint, aggregate fiscal push is missing. We think, given weak demand, consolidation could have waited. Thus, the economy, at best, will see a modest bounce aided by liquidity easing, normalisation in farm cash flows amid rising food inflation, and stabilisation in exports. But the virtuous economic cycle may still be distant."
This kind of consensus among analysts leave us with the question: How long we have to wait to see economic revival?
Infrastructure in Budget
Past announcements continued: