Banking Sector in FY18: A roller-coaster ride for sure: Financial Express 4th April 2018

The banking sector, in FY18, went through a lot—from mounting NPAs & the IBC coming into force to governance lapses and talk of privatising PSBs.

The banking sector has gone through another tumultuous year, having its ups and downs. The focus of both the government and the Reserve Bank of India (RBI) was to make the system robust and ensure it was on the right track. It was particularly challenging, as all solutions that appeared to have been found confronted new obstacles that made them look like mirages.

First, the NPA issue, which is at the top of the mind, appears to be still on an unknown road. It was hoped that the asset quality review process would have been completed by March 2017. But, these assets have been increasing every quarter, and while it is now hoped again that March 2018 would be the end of the tunnel, one cannot be really sure about it. The NPA ratio is close to the 10% mark, while the stressed asset ratio is above 12%.

Second, the Insolvency and Bankruptcy Code (IBC) came into force and the 270-day norm would be coming up for some of these cases. There was an evident haste in concluding that the IBC would be a panacea for NPAs. What has been noticed during the course of the stories playing out is that the resolution processes are complex and the bidding system controversial, as promoters have been trying to get back their own assets. To top it all, promoters are quite expectedly using litigation to prolong the resolution process, which builds another hurdle. It does look like that the haircuts would be deep for most of these cases, which means that the balance sheets of banks would be affected further. And, this would drag into FY19.

Third, the government has worked relentlessly to capitalise public sector banks. This has been done through direct infusion as well as recap bonds provided for in the Budget. The allocation has been pragmatic to all banks, which deserve the same. There has been some apprehension on the approach of using accounting practices to capitalise banks, but it definitely does help the concerned banks. However, until the NPA issue is resolved for these banks, the infusion of capital will, at best, help keep them afloat and address the issue of provisions, and may not be adequate for funding future growth. Therefore, more infusion may be required by the government.

Fourth, all the talks on disinvestment of the government stake in PSBs have not moved beyond discussion, with different views being expressed by government spokespersons at various points of time. Admittedly, it is an uphill task, as going below 51% is an ideological dilemma. Anything higher will help garner resources for the government, but not change the fundamental way of governance. Indradhanush had spoken of giving banks freedom in recruitment, ESOPs for management, and so on. But, there has been little movement here. This being the case, selling a part of the stake to, say, a private bank may not help in any kind of restructuring. The debate will carry on in FY19.

Fifth, governance lapses were noticed across all categories of banks. While the recent fraud emanating from specific companies in the jewellery segment has shaken the audit processes in the system, several non-PSBs have also been found to have understated their NPAs. This means that processes and procedures everywhere in the system need to be revamped and serious housekeeping is required to ensure that the probability of repetition of these deviances is reduced. The overhaul of the audit process would have to be taken up with alacrity by RBI in FY19.

Sixth, the combination of frauds in some banks and IBC presence has also slowed down banking activity, especially on the lending side. The threat of being referred to IBC, in case of a default, has made companies more cautious about investing money in new projects. This can be a serious problem for the economy, as such a fear can thwart the rate of growth of private investment, which is the missing piece in the growth story so far. Bankers are also wary of being caught in the web of the 3Cs—CBI, CAG and CVC—and could go slow on lending. This could be one of the inhibiting factors in the coming year when demand for credit picks up.

Seventh, there has been pressure on banks to push lending to the MSME sectors. This could be the next big challenge for banks from the point of view of a fresh build-up of NPAs. It should be remembered that the SME segment was affected the most by demonetisation and GST, and, hence, their ability to service debt could also come under pressure. While financial inclusion is necessary, aggressive lending to this sector could have its pitfalls, which is what should be looked at closely in FY19.

Eighth, banks were affected by the sudden hardening of yields on government bonds as a result of the prices falling, with RBI indicating that it expects inflation to go up. This led to a MTM problem for banks, which were already saddled with making higher provisions on NPAs. Further erosion has been prevented by the government in March by announcing a lower level of borrowing for the first half of FY19. But, we have only delayed the inevitable as the second half will turn sticky for banks.

Ninth, banks were caught in a situation where growth in deposits slowed down considerably. In FY17, they had increased sharply on account of demonetisation where households had to deposit their cash. In FY18, as currency entered the system, households withdrew money from their deposits, which led to a slowdown in growth. This got exacerbated when credit growth picked up, leading to a tight liquidity situation.

Tenth, lending has gravitated towards the retail-end, which has been a silver lining for the system. PSBs too have been aggressive here, as it is a safer avenue. In FY19, banks, however, will have to strike a balance with lending to other sectors to avoid concentration in assets as well as enable funding for other productive assets.

Banks have also witnessed some very positive developments in the form of successful IPO of a new bank, well-functioning of the payments banks and small banks. More importantly, there has been a jump in the use of alternative methods of payment through the electronic mode. The volumes registered on UPI, IMPS, NACH, cards, etc, have witnessed smart increases this year, thus, meeting the objective of the government to go digital.

FY19 will be a period of some serious house-cleaning for the banking sector so that the final balance sheet looks more reliable and credible. In a way, it was fortuitous that most of the slips took place in FY18, when such operations were on the way so that the spring cleaning can be extended to other parts of the system too.

Govt’s borrowing programme: Adopting a new approach: Financial Express 27th March 2018

The announcement of the borrowing programme for the first half of the year was an important signal for the market, considering that the liquidity is tight at present with greater dependence on the repo auctions (term).

The borrowing programme of the government for the first half of FY19 is quite unique. After a long time, the first half of the year will witness less than 50% of the targeted amount of Rs 6.05 lakh crore being issued. The market was expecting the ratio to be maintained at 60% or slightly lower, given the prevailing liquidity conditions. The latest announcement will assuage the market to an extent, but it has several implications, which could become serious during the second half of the year. First, the government expects liquidity conditions to remain tight for the next six months. Otherwise, there would have been a natural tendency to borrow more during this period. Normally, during the first half of the year, there is less demand for credit, and deposits increase at a higher rate, leading to excess liquidity that can be mopped up by the government through G-Sec issuances. This is not expected, as per the implication of the announced programme. Second, the government would be issuing more of floating rate or CPI indexed bonds, to the extent of 10% of the Rs 2.88 lakh crore being borrowed. This is, again, indicative of the acceptance that inflation would tend to be higher, which will get reflected in the bond yields too that, in turn, will be the cost for the government. Both these concepts are interesting and should find favour among the players.

Third, the press release also talks of the new benchmark securities being introduced. This is a good sign for the development of the G-Sec yield curve. At present, there is more liquidity in the five- and 10-year tenures, while the others remain fairly illiquid. By getting in more benchmarks, especially at the lower spectrum of two and five years, there could be generation of liquidity that, in turn, will help even the yield curve. This is quite desperately required in the market to set standards. Fourth, the development of a smooth yield curve is also pertinent in the context of the government’s and RBI’s attempt to develop the corporate bond market. For the development of a corporate bond market, we need to have an active secondary market, which depends on having available rates or prices for various maturity of securities. This will normally be benchmarked against the G-Sec yield, and while such spreads exist for the 10-year paper to an extent, the same is not visible for other bonds. Focusing on such period of maturities will also help develop prices for corporate bonds that are a prerequisite for the evolution of the same.

Fifth, the distribution of securities across maturities is also interesting. This time, it is being well spread across various tenures and not concentrated at the far end, which was the tendency in the last few years. This will eschew the threat of bunching up of debt repayments in future, which is the case today. While there was a strong argument for having long-term maturities to prolong the repayment cycle, spreading them across different maturities makes sense as it also reduces the cost of debt that would be locked in the current year, besides avoiding the bunching of repayment. It, however, remains to be seen whether this policy would be pursued in the coming years too, or whether this would be more tuned to the current liquidity conditions.

The announcement of the borrowing programme for the first half of the year was an important signal for the market, considering that the liquidity is tight at present with greater dependence on the repo auctions (term). Deposits are not increasing at the same level rate, while credit growth is relatively swifter. The aftereffects of an upsurge of deposits last year following demonetisation have got reversed in FY18, leading to a very low growth rate as households have taken their money out of banks. Banks, interestingly, already have excess SLR to the extent of 7-8%, which means that there are high MTM losses to be booked on March 31. (This was also the case in December 2017 when they had to book losses following the increase in yields). With interest rates expected to increase in the coming months as inflationary expectations look negative, banks may be less willing to invest in G-Secs since they will have to take on a higher loss on portfolio—do they have any other option in the face of rising NPAs? This could be another reason for lowering the quantum of borrowing in the first half.

The problem of liquidity, however, can get accentuated in the second half of the year, and the market could turn volatile if growth in credit picks up sharply, provided the monsoon is good. This is the typical busy season that witnesses increase in demand for credit from agriculture, industry and retail. If the government is going to push through a higher borrowing programme, then there will be liquidity squeeze that will necessitate intervention from RBI through some aggressive open market operations as well as term repo funding to ensure stability. It must be remembered that, for FY19, the government has also buffered in a high flow of small savings, which has been increased from Rs 75,000 crore to Rs 1 lakh crore, according to the announcement. In case there are any shortfalls here, as these flows are exogenous and depend largely on how households behave, the overall market borrowings may have to be increased unless the government resort to higher drawdown of cash balances to manage the deficit.
Also, the overall cost of borrowing could come under pressure during the second half of the year, if liquidity becomes tight. This is something that will be monitored closely by the market.

Putting tariff hikes in perspective: Business Line : March 21, 2018

oreign trade will slow down as the focus turns inward for developed countries. But this will be just another passing phase

The recent decision taken by the US to raise the tariff on steel and aluminium should be viewed against the broader framework of the fissiparous nature of globalisation today. Whether the jingoistic slogans are ‘America First’ or ‘Make in India’, the thrust is on reviving economies by focusing on nationalistic pride or security issues. Either way, implicit is the acceptance that globalisation may not be the best way as it is a one-sided process.

Skewed concept

As a concept, globalisation has been skewed towards the developed countries which have gained even more ever since the Washington Consensus was accepted by all nations. This meant that trade, services, investment, domestic policies and so on were geared towards what Washington thought was right.

The same dictum has been reinforced in a very subtle manner through two routes. The first is through global competitive benchmarking wherein a template exists on what countries should be doing to become more competitive (WEF) or become easy places to do business in (World Bank). Such regular ranking perforce tunes the policies of governments to becoming more open to global forces which, in effect, are imports and investment from the developed world. Local issues are often given a skip. The credit rating agencies have added their bit by imposing western norms of what is appropriate and all countries move towards these signposts.

The other route is even more subtle wherein domestic economists get very good jobs in the IMF or World Bank which then qualifies them to return to their home countries as policymakers. Automatically they get tuned to espousing the Washington Consensus. An added dose here is the WEF which is a big meeting place for the bastions of industry (who finance their own travel and stay at Davos) and get to interact with everyone who is involved with globalisation. These egotistic tours work well for multilateral institutions and developed countries as these people become indirectly their representatives when they practice advocacy for more liberalisation.

Further, the egos of the emerging markets were played up by relentlessly focusing on all the highly populated relatively higher income nations under BRICS — countries like Angola or Chad would never feature in global forums which included only potential markets for the West. Ironically, nations categorised as ‘developing countries’ suddenly got segregated from the others and were bracketed under emerging countries and also made their presence in wider groups like the G20 where they ended up speaking the language of the West.

If we compare these examples with what happens in India, the resemblance will be clear. The spread of globalisation has been good as it was a win-win situation for everyone. Countries welcomed imports and investment as it helped improve quality of life and gave access to foreign funds which supported markets as well as the balance of payments. In fact, emerging markets no longer look to the IMF or World Bank for assistance as the commercial borrowing route has opened up; these institutions are now more advocates of globalisation and supply experts to these countries for policymaking.

When internal growth stops

Western countries have been the drivers of liberalisation due to three reasons relating to limits for internal growth being achieved. First, high levels of income coupled with affluence have meant that there is little scope for expansion and emerging markets are the only way out. This has been done through FDI and exports, which are a legitimate manner of spreading economic imperialism. Second, the low growth in population affects the potential consuming class in these countries and poses a challenge to future growth. Third, a rapidly ageing population also means that consumption falls over time and governments spend more on healthcare. Hence, spreading the tenets of globalisation supports domestic growth.

The WTO came back into action to further these agreements but was heavily tilted to begin with. While all countries were to give up quotas and lower tariffs, movement of labour was never part of the deal. The reason was that the developed world retained the prerogative to regulate the inflow of labour while ensuring that their goods flowed seamlessly to the rest of the world. This is something India has opposed in all such forums.

These arrangements worked very well as long as the world economy did well and the developed countries which set the rules of the game were on the growth path. After the financial crisis, the US in particular has found it tough to move out of a low equilibrium trap with quantitative easing policies delivering only to a certain extent. This is also the case with the euro region and Britain where growth has been of a lower order in the last decade.

This is one of the reasons for them to indirectly oppose the rules of free trade, which have been exacerbated by the proliferation of xenophobia. The demand now is for more symmetric trade and investment rules. Donald Trump’s appeal at the time of the elections and the support for Brexit followed by similar tendencies in Italy and France are indicative of the realisation that unhindered globalisation does lead to loss of jobs, and this matters at the end of the day.

Inward-looking future

So, what will the next ten years look like? Definitely there will be a move to become more closed as domestic concerns dominate. Foreign trade will become a slower engine for growth, and this will impact smaller emerging economies. Foreign investment will still seek foreign frontiers but companies may have to also look internally to expand their capacities. Countries like China may witness fewer such outsourced production. The WTO would, for all practical purposes, be a ‘deferment congregation’ of suspicious members always keen to impose anti-dumping duties when they sense unfair practices.

The positive part is that this will only be another passing phase. While the next couple of years will lean towards protectionism, the change in the growth trajectory of the world economy should help restore a new equilibrium. This, despite being along the path of the Washington Consensus, will be more gradual and less stringent.

Debt Servicing: Caught in the fiscal debt trap: Financial Express 20th March 2018

Ideally, debt servicing should be resolved internally and receipts like divestments can be used to partly finance such redemptions. even options like spectrum sale can be used.

Whenever we speak of the Budget, there is an obsession with the fiscal deficit number to the extent that the edifice of any such document is built around this ratio (expressed as % of GDP). Foreign agencies also harp on the debt level, which leads to controversies on what should be included or excluded from the concept. But, the final deficit number of 3%, or 3.3%, or 3.5%, becomes the benchmark for evaluating the efficacy of the budget, and there are several critiques on the quality of such spending.

There is a sense of relief and satisfaction when we move towards this number. But is this the ‘be all and end all’ of budgets?

One aspect of the budget that has missed attention over the years has been the debt-trap, mainly because we were well away from this pitfall for quite some time. Further, the FRBM rules never speak of this concept, because, somewhere along the way, this idea has been given a miss. One of the reasons could be that since money is fungible, it is hard to say what part of the budget’s resources is used for financing development/non-development expenditure, or to repay the debt. But intuitively, if the debt servicing component of the government approached the gross borrowing number, then it results in a fiscal debt trap (FDT).

This concept is important because even while the prudent debt measures are maintained through some adept statistical handling, additional borrowing reckoned in time period ‘t’ has to be serviced through the years, until it is redeemed. Hence, larger quantities borrowed today would have to be serviced continuously, and add to the debt servicing cost. Progressively, governments have been elongating the borrowing time liability through issuance of longer term tenures of debt and often switched debt to ensure that bunching up does not take place. But, debt has an interest component, which has to be paid every year and increases rapidly over time.

In the last 10 years, for instance, gross borrowings of the government has increased at a CAGR of 3.9%, while interest payments have risen by 11.7%. As a result, the debt servicing component has increased sharply. In fact, the share of interest in overall size of the budget has been above 20%, which implies that a fifth of the budget is committed to the service aspect. Add to this, the redemption of loans, and the outflow can get quite substantial.

The accompanied table gives the FDT numbers over the years. Data is provided for the gross borrowings of the central government, interest payments, and the ratio of government debt servicing to borrowings calculated in two ways. FDT-1 takes into account normal redemptions, while FDT-2 includes also the switches that have been made during the year.

Interest payments have increased by around 2.7 times during this period, which is also the rate at which the normal redemptions have increased. Adding the switches to debt redemption increases the multiple to 4.5 times. Hence, the divergence between the FDT-1 and FDT-2 becomes stark after 2015-16, and has now peaked at 129% of borrowings in 2018-19. Even under the debt servicing, including only normal redemption, 2016-17 was the cutoff year when the ratio of 100% was crossed.

An FDT is significant because it underscores the fact that debt servicing has become a major burden for the government, and that the overall borrowings are not able to cover this aspect of debt servicing. This, in fact, puts more pressure on the revenue collections to meet other commitments like salaries, subsidies, defence expenditure and capex. The ability to increase these components, or those outside this circumference, will depend on higher revenue being generated.

This aspect of debt also needs to be looked at when working on the fiscal deficit and outstanding debt numbers. The debt servicing component will keep increasing over time as with longer maturities of government debt, interest payments will keep getting higher in magnitude. With upwards of `51 lakh crore of debt to be serviced every year, this pressure will keep increasing, and put pressure on the fiscal space.

Ideally, debt servicing should be resolved internally and receipts like disinvestments can be used to partly finance such redemption. Going ahead, even options like spectrum sale can be used for making redemptions. This would ensure that there is less pressure on the regular flows of revenue. Unfortunately, disinvestment is being used today to shore up the budgetary balances, and lower the fiscal deficit and, hence, borrowing programme. Hence, while the gross borrowing programme has been contained in the region of `6-6.25 lakh crore in the last five years, the progressive interest cost and redemption have pushed the government further into the debt trap.

There can, hence, be argued a case for lowering the size of the government expenditure in order to address this issue of debt trap, whereby resources are earmarked for addressing the issue of redemption and other channels used for making the interest payments like RBI surpluses, PSU dividends, etc. This is a tough call, given that the central government appears to be the only entity that has been spending on infrastructure in the last three years in three critical areas—roads, railways and urban development—where private investment is not forthcoming. A tradeoff exists.

Going ahead, as part of fiscal prudence, the government has to focus also on debt servicing. The narrow triangle of revenue deficit, fiscal deficit and debt-to-GDP ratio is passé as the concept of already being in a fiscal debt trap is scary—if the same of states is also added, the picture could look even more grotesque.

Book Review: ‘Demonetisation and the Black Economy' Financial Express 11th March 2018

The author is hard on the RBI, which preferred to remain silent rather than clarify various issues, considering that there were several changes made by the central bank in the conduct of exchange of old notes over the two-month period, which had bankers in a tizzy.

The subject of demonetisation has been immensely controversial, as almost everyone has a view on the motives behind the move, as well as its impact. Supporters aver that it has cleansed the system at the cost of a minor inconvenience of two months. The fact that digital transactions have caught on vindicates the move. More importantly, the way of doing business has been cleansed. Those against demonetisation argue that nothing much has been achieved and the economy took a big hit; and that the exercise was a failure. These arguments are well founded and can go to the extent of being driven by emotion. This is one reason why we require an academic examination of the subject that is based on strong arguments supported by facts. It is here that Arun Kumar, who is a well-known expert on black money, has gone into the details of this subject in his book Demonetisation and the Black Economy, where he critically examines each and every argument that was given at the time of demonetisation. Let us look at some of his arguments. First, demonetisation is never the solution to black money when the economy is going well. While it is definitely a major problem in the country, conceptually linking cash with black money is an egregious assumption that led to the unsuccessful results of the move. People can easily use cash for transactions and pass it on to others as working capital expenses. Second, the fact that the government changed the goal posts is a clear acceptance that the initial objectives of addressing issues of back money, counterfeit currency and terror funding were not addressed by this move. It also showed that the government was not sure of its motives to begin with.

Third, as virtually all the cash is back into the system, it can be argued that the intended impact did not work out. Being an economist with a socialist bent of mind, Kumar does talk eloquently on how two vulnerable sections of society were affected by this move—farmers and SMEs. He also links the effect on SMEs to the rise in NPAs with banks, as this section was affected perceptibly with large-scale unemployment in the face of collapse of business models that were driven by cash. Similarly, he attributes farmer distress to paucity of cash in a year when farm output had risen and prices had fallen. He takes this argument further and concludes that contrary to the GDP growth numbers put out by the CSO, growth would actually have been nil or negative if the full impact on the unorganised sector was taken into account. This is open to debate given the extreme conclusion that has been drawn here, but is nonetheless a view to be considered. A very insightful chapter in the book relates to the failure of institutions that came out in the open when demonetisation was announced in November and implemented over two months. This makes for interesting reading. While the reader may have her view on his argument, the author definitely provokes further thinking on the subject. On the political side, he points out that the Cabinet was not taken into confidence, which lowers the importance of this institution. Next, the Prime Minister did not think it proper to answer questions in Parliament on the subject, which the author terms as the institution of ‘accountability in a democracy’. He, however, admits that creating a Robin Hood-like image did pay rich political dividend in the elections held in various states, which cannot be disputed. He is also hard on the RBI, which preferred to remain silent rather than clarify various issues, considering that there were several changes made by the central bank in the conduct of exchange of old notes over the two-month period, which had bankers in a tizzy. The entire banking system came under stress and was severely damaged, as bankers spent months trying to deal with cash as a result of which normal business suffered. The RBI also paid a price in terms of lower surplus earned.

The next two institutions that he has spoken of are interesting. He believes that statistical organisations like the CSO and Niti Ayog went on to say that there was absolutely no impact on the economy in terms of growth or employment, which was incorrect given the ground reality. Last, even the Budget was drawn on the assumption that there was nothing abnormal in the economy on account of demonetisation, which raises the issue of credibility of such documents. All these arguments are hard-hitting and the author is direct in his view and steers clear of being diplomatic, which is typical of an economist from JNU. As there is a lot of research at the ground level that has been used to form these opinions, the author has done a thorough job and the views cannot be questioned. Even the protagonists of demonetisation would probably silently agree with most of the assertions made here. At the theoretical level, he has argued that the reason why demonetisation will never work to curb black money is because the people responsible for it—corrupt businessmen, politicians and the executive (which includes bureaucracy , police and judiciary)—what he calls the triad, has to be broken. Otherwise, black money will continue to flourish and by simply hitting the common man hard in a bid to draw out such wealth is futile and harmful for people. Does one chop off the nose to cure a cold? This is how he ends his book, which says it all.

Fiscal engineering is name of the game: Business Line 10th March 2018

Government has been smartly re-routing its borrowings from Budget to public sector entities. Is this sustainable economics?

The fiscal deficit number is probably one of the most intriguing variables in economics. This is so because there is an overemphasis on this number; it draws more attention than necessary, and the quality of the deficit is missed. The deficit ratio has become sacrosanct over the years with all the rating agencies and multilateral institutions focusing on this number. It is but natural that the Government too becomes defensive on this number, which becomes the ultimate parameter for judging the Budget.

The fiscal deficit is sum of all borrowings of the Centre, which includes market borrowings as well as other flows such as small savings, State provident funds, other deposits and drawdown of cash balances. The last component helps in keeping the fiscal deficit within the range that is targeted. Hence, if there is a breach in the target by, say, 0.1-0.2 per cent, such drawdowns are resorted to.

The other expenditure

As budgets are all about tracking actual revenue and expenditure, the first line of defence in maintaining the deficit ratio is to simply defer expenditure so that it gets rolled over. This way the deficit ratio can be geared towards what is desired through the rollover technique. This is a common method followed to ensure that the final number is digestible. Of late, another approach that has been used to balance the budget while targeting higher expenditures is to is to re-engineer the borrowing numbers to outside the Budget.

The task of borrowing is passed on to PSEs instead and included in the Budget discourse. The PSEs are strictly speaking corporate entities and run their own balance sheets and, hence, are responsible for their accounts. The Government steps in only in case there is a major problem as is being witnessed in Air India. But these entities operate in all major sectors that require heavy investment, such as roads, railways, power, oil and engineering. Here, there is a large demand for funds as investment requirements are high.

 

Public sector assistance

A way out of this conundrum is to shift the borrowing to the PSEs from the Budget. This way the fiscal deficit is well under control while the development programmes are still on as they are financed commercially by the PSE. The cost of borrowing will be higher here, albeit marginally, as they are considered to be as good as the Central government and have such implicit backing.

Therefore, in terms of an accounting entry, these borrowings become part of the contingent liability of the Government if they are guaranteed or remain completely out of the realm if done without such a backing. The PSEs borrow this amount on commercial terms and as they are the more successful ones do not face a problem in servicing these loans as they are rated the best in the market. Therefore, when the Budget speech is read carefully it will be seen that often the FM makes fairly elaborate announcements regarding investment in roads or railways and the numbers do not fit in the Budget allocation. This is so because the requisite entity like say Indian Railway Finance Corporation (IRFC) for railways or National Highways Authority of India (NHAI) for roads do the job where money is borrowed and used for financing investment in these sectors.

Since 2015-16, there has been a greater reliance on this form of funding which has doubled from around ₹60-70,000 crore in 2014-15 and reached almost three times that by 2017-18. This is when the Government has also been aggressive in its capex in the relevant sectors which have been identified with high growth potential.

Such engineering has ensured that the fiscal deficit seems to be asymptotically reaching the 3-per cent mark, though still missing the target. The comparable number including these PSE borrowings would be at almost the same level as in 2014-15 at 4.6 per cent. The difference between the two deficit numbers is now around 1 per cent of GDP — which was around 0.5 per cent earlier.

Is there anything incorrect about such a route being used? The answer is no, as this is plain financial engineering where borrowings are deflected from the Budget to the commercial entity which works like any private company. Should this be a part of the borrowing programme? Here there are divided views.

Number games

International rating agencies normally tend to look at public sector borrowing as being a part of the Government debt and, hence, would include in the deficit because at the end of the day the amount has to be paid. However, they miss the detail on the asset side as the Government and the PSEs own large assets whose monetary value far exceeds the size of the debt.

Second, at times it is argued that if the government can take in the profits of the PSEs as part of its non-tax revenues, then the debt should also reside with the Centre. It cannot eat the cake and have it too.

The counter arguments are that commercial entities which are answerable to their shareholders cannot be treated as the Government even in case majority ownership resides with it.

The Government’s support for such enterprises comes from the Budget through allocations towards say capital for banks or even PSEs which is already accounted for and hence the same cannot be double-counted.

However, those advocating the inclusion say if this were so then the Budget should not be talking about it as part of its plan, for these should then be taken to be external to the Government and part of their commercial decisions. This point is valid as if these plans are not part of the Budget then the same should not be mentioned in the document. The debate will go on.

Budget 2018: UPA’s and NDA’s starkly differing priorities: March 3rd 2018 Financial Express

The Union budget document is similar to a corporate annual report. There are some mandatory numbers that have to be presented in a fixed format. But, the tone, starting from the budget speech to the views provided in interviews, is similar to the other written parts of the annual report—like the management discussion or messages, where the prerogative is with the company. Therefore, when one looks at the speech of the FM, it is largely an ideological presentation that varies with governments.

Ideally, the same can be presented in 10 slides of a PowerPoint presentation. But, the purpose is to emphasise the ideology and, hence, there will always be a thrust on certain areas, according to the need of the day, so that it goes down well with the people. MGNREGA was the focus of the UPA government, while smart cities and Swachh Bharat have dominated the present regime’s proclivities. But finally, the actual allocations matter as they indicate where the money is being channelled.

Typically, every budget follows some standard operating processes. Outlays for various special schemes are announced, but invariably mean merging existing schemes with new ones, giving the impression of newness. Further, while the impact of the policy is made in one year, the commitment is not shown in the following one, as there are new priorities to be highlighted. Therefore, single year numbers are misleading. At times, the beneficiaries from a scheme are highlighted like the MGNREGA, without talking of the monetary allocation that could have missed the target. Or, at times, the revised numbers are lower than budgeted for the previous year, which serves well to highlight the proposed increase in the ensuing year.

To really get a taste of where governments have been spending, it would be interesting to look at allocations across various ministries, as it indicates amounts that are being channelled to different programmes. To make a comparison between the two regimes, the average for the two five-year periods has been considered, wherein the shares of various departments in the total budget are considered. The averaging concept addresses the issue of single-year spikes and troughs. Hence, the ratios or shares being compared will be the revealed preferences of the regimes in terms of fund allocations. The table below gives the average shares of various ministries in the total budget allocation for the two five-year periods of the UPA and NDA regimes. The differences in shares in the two periods are provided in the last column; these indicate the change over the two regimes. The first set of ministries consists of those for which budgetary allocations have come down, while the latter part, which has positive changes, is that where the government has allocated larger amounts relative to the budget size.

The interesting aspect of these allocations is that 16 of the 49 broad ministry-heads accounted for 92% of total allocations in both the periods. As a corollary, it follows that the others are relatively less important in the broader frame. Within the category of lower allocations in the NDA regime, the two ministries that witnessed significant changes were petroleum and fertilisers, which was mainly due to the decline in the respective subsidies. With lower crude oil prices, it was possible to lower oil subsidies—this was topped up with the linkage with DBT that helped channel these funds in a more effective manner.

The three surprise elements were rural development, water and sanitation and HR development, where the allocations in the current regime have come down, compared with the earlier one. This was notwithstanding the fact that the MGNREGA programme has witnessed higher allocations. Further, with the Swachh Bharat and HR-oriented policies being pursued quite aggressively by the NDA government, it would have been expected that it would have been spending relatively more, but this is not the case. The lower share could be reconciled with the higher emphasis in NDA budgets on the account of merging of schemes. On the departments that have received higher allocations, roads, railways, urban development, telecom, and agriculture are the sectors which are more productive and have benefited from them. The thrust of the NDA government has been on channelling the gains made from lower subsidies to those areas that add to the strength of the economy. Both defence and home have received larger quantum of funds, but this has been driven more by pensions—the capex in defence has received lower allocations. In fact, the share of defence capex was down by 0.98%, while the share of pensions increased by a similar amount in the second quinquennium.

The NDA has, however, continued to guard the consumers on the food subsidy front, as can be seen from an increase in share by 1.1%. There has been no compromise here, and if it is combined with DBT, the social orientation of the government comes to the fore. This is against the oft-held perception that the NDA is against freebies. The allocations for finance are largely driven by interest payments as well as other schemes such as providing capital to banks, financial institutions (including MUDRA loans). The conclusions that may be drawn are that there has definitely been a change in the allocation of funds, aided largely by benign commodity prices that ensured that the government did not have to make hard choices. The savings have been channelled in a manner that will help growth in the medium term, as they are the more efficient sectors where investment leads to both growth and employment.

Second, contrary to perception, there is a large human factor when it comes to agriculture and food subsidy. Third, the compulsions of maintaining the pension payouts continue to be a challenge that cannot be escaped, which had some collateral effect on defence capex. Fourth, there are some perceptions based on rhetoric that could be more in the nature of consolidation of scattered expenses under water, sanitation, women, education, etc, where the allocations have been lower. Admittedly, in these areas, states have to deliver more. This would be a practical way of reading these numbers.