The predictable hostile comments from diehard political opponents apart, a wide spectrum of neutral opinion has welcomed the Budget 2021-22 presented by the Modi 2.0 regime. The media celebrated it and so did a wide spectrum of independent and expert opinion makers. A respected ex-RBI governor hailed it as “A reasonably good performance”. Nirmala Seetharaman’s Budget has definitely passed the test of public opinion. The public discourse endorses that an unbelievably difficult situation, within and outside India, has been well-handled by the framers of the Budget.
Performance, not just promise
The Budget 2021-22 with a vision and mission for the entire tenure of Modi 2.0 is not just an annual affair. Modi transformed the shelf life of Budget ideas to five years. That was how the huge deliveries conceived in the individual Budgets could be achieved in Modi 1.0. This was a paradigm shift from the 25-year coalition politics from 1989. The scale of deliveries in Modi 1.0 — 9 crore toilets, 6 crore gas connections, 1.5 crore homes, 35 crore Jan Dhan bank accounts, Direct Benefit Transfer of Rs 6.32 lakh crore, doubling road building per day, to mention just a few — was not possible just because of the majority it commanded, but by taking them to a level no leader thought possible till Modi arrived on the scene. Till his advent, Budget speeches were regarded as a list of promises.
Behind this change of paradigm was a determined and courageous government that had the will to risk its political capital for what it believed in, be it in politics or economics. It is the outcome of the huge cleansing and development work that the Modi 1.0 regime did — from implementing the toughest idea of demonetisation, which organised the economy like no other single decision, doubling the number of income tax taxpayers, lifting the tax-to-GDP ratio from 9% to 11.4% or the GST law.
Modi 2.0, too, started with a bang on the health front by scaling up the PM health insurance scheme to almost 50 crore beneficiaries, with over 1 crore hospital admissions under the scheme. However, not all factors that make or mar growth fall within the ambit of the Budget. It needs a helicopter view to track the hidden risks outside the radar of the Budget that can trap the government and the entire economy into non-performance. And before that, a couple of quick comments on the Budget.
More on hard math, less on extras
The disaster that preceded the Budget 2021-22 is still not over. The Covid pandemic involved indefinite amounts of stimulus, for indefinite periods of time. But standing up to all criticism, the Modi 2.0 dispensation chose to be less generous in its handout while the world around was profligate. That was a difficult but well made choice as, one, the government did not know how long the disaster would last and how much more handout would be needed; and, two, if the disaster subsided, how much investment would be needed for the recovery. Team Modi seems to have reserved its energies for both options. The high infra and other spends in the Budget, applauded by all, is precisely because Modi 2.0 did not go overboard in its stimulus spend like the others did. This showed how a strong-willed leader could resist the temptation of being generous at the cost of the greater good.
The Budget has cautiously, perhaps purposefully, underestimated the revenues. The projected GST revenue for 2021-22 is far less than the monthly average GST revenue for the last quarter of 2020. With the nominal GDP projected to grow at 14.4%, the GST revenue for the coming year should be higher by like amount. Why then the deliberate under-projection? What if the seemingly ambitious divestment target of Rs 1.75 lakh crore is under-achieved? The idea seems to be that underestimation of the revenue would make up for it. The Budget rests more on hard math than on extra items.
DFS needs expansion
The decision to set up a Development Finance Institution (DFI) for infrastructure financing is perhaps the most welcome, but least celebrated aspect of the Budget proposals. But, to limit it only to infrastructure financing is not a great idea. It should be extended and expanded for all long term loans for large businesses. Industrial financing by banks has crashed in recent years because commercial banks are not best suited for that.
The credit to industry by the Indian banking system has remained static in absolute numbers for over five years, from 2015-16 to end-2020. When development finance institutions like the IDBI, IFCI and ICICI were funding the term loans, the commercial banks provided working capital credit. In 1995, the share of term loans in bank portfolios was just about 17% and working capital 83%. After IDBI and ICICI became banks, the commercial banks’ share of term loans shot up to 47% in 2005 and now it is 57%. The term loans are the root cause of the Non Performing Asset (NPA) pandemic of banks.
Theoretically, term loans are borrowal into future growth and they will be affected by adverse business cycles. Failure to pay the term loan instalment does automatically mean the business is bankrupt, but only that the current generation is inadequate to pay for the future. It is a liquidity issue, not a solvency issue. But contemporary prudential norms have turned this liquidity issue into a solvency issue and made provisioning compulsory. The results are: one, the borrower who has defaulted is disqualified by the entire banking system, which will proceed for recovery; and two, the provisioning by banks against viable loans eats into the banks’ ability to lend.
This kind of prudential rule is designed by the equity-led Anglo-Saxon economies and is inappropriate for an economy that is bank-led like in India. DFIs are better suited to handle the overdue problems associated with term loans than commercial banks. The reason is that when commercial banks with short term funds lend on a long term basis, there arises an asset-liability maturity mismatch. They cannot bear the stress of default. But the DFI, which will have no short term liabilities, will deal with defaults more comfortably. Had the IDBI and ICICI continued to be DFIs, much of the current NPA issues could have been avoided. Without doubt, there is a clear case to expand the DFI to all industrial term loans. Alternatively, a consortium of banks may form a DFI to term lend for non-infrastructure businesses.
Off-Budget danger
Most commentators agree that the philosophy and pillars of the Budget are well constructed for high growth. The huge investment proposed in the Budget through borrowing, banks on growth. But an off-Budget risk can sink the Budget and the growth. Here is a clue to that impending risk. The State of the Economy report of the RBI (21.1.2021) warns that the Gross Non Performing Assets (GNPA) of all commercial banks, which had come down from 9.2% in December 2019 to 7.5% in September 2020 may rise to 13.5% in September 2021 in the baseline scenario, and in the worse case, to 14.8%. In such an event, if RBI applies the sledgehammer Raghuram Rajan formula of 2015-16 to deal with the situation, it will impact the growth on which the Budget rests.
The Modi 2.0 regime needs only to recall what happened to its rising growth trajectory in Modi 1.0 when the RBI pressed a break on the credit side of the banks by suddenly invoking prudential rules that compelled the banks to make fast track provisions for past bad loans. The adverse impact of such rules could be absorbed by the Indian economy in favourable global and Indian conditions preceding the Covid disaster. But a repeat of such adversity when the Covid-hit economy desperately needs a steep upward swing — ambitious V-shape recovery — can switch off the growth to cause an engine failure when a plane takes off. To comprehend the possibility of the off-Budget risk and on how to deal with it, await the next part, “What can torpedo the Budget and economy.”
The projected GST revenue for 2021-22 is far less than the monthly average GST revenue for the last quarter of 2020. With the nominal GDP projected to grow at 14.4%, the GST revenue for the coming year should be higher by like amount. Why then the deliberate under-projection?
S Gurumurthy
Editor, Thuglak, and commentatoron economic and political affairs