In line with market expectations, the Union Budget emphasizes on the social and agrarian sphere, continues to focus on fiscal consolidation- albeit with relaxed targets. With a 10% increase in farm credit target and INR 100 billion being allocated towards augmenting non-farm primary sector infrastructure (such as fisheries, aquaculture and horticulture), the budget is well poised to aide asset creation in the agriculture and allied sectors.
Reforming Agriculture: The Pitfalls
‘Operation Green’ with an outlay of INR 5 billion (on the lines of Operation Flood) has been launched in order to bolster production of onion, tomato and potato. Coupled with the initiative to connect Agriculture Produce Market Committees (APMCs) to the e-NAM market platform, this is likely to facilitate market access and bring about transparency in agrarian markets. However, despite substantial capital outlay, the budget falls short of the addressing the ground realities in the primary sector.
This is because the Indian agricultural sector has been facing headwinds on the productivity front over the last several decades. It has resulted in a massive underutilization of farm capacity, slower than expected pace of disintermediation and sluggish growth in farm income. While the budget tries to address this issue by adopting a cost plus model for determination of Minimum Support Prices (MSP), it fails to make significant efforts towards measures such as consolidation of land holdings among others. By assuring farmers of a 1.5x return on the cost of produce and relying heavily on MSP to boost agrarian income, the government
exposes itself to the risk of stimulating inflationary pressures.
Therefore, while the Finance Minister’s move to aide capex in the primary sector is welcome – the expected benefits are unlikely to accrue in the absence of meaningful policy initiatives to boost agriculture productivity across the country.
ModiCare: Hype or Substance?
"Assuming that 5% of the total families covered claim 25% of the INR 5 lac insurance cover they have been guaranteed under ‘ModiCare’, the total incremental healthcare expenditure is likely to be in excess of INR 625 billion."
In addition to the primary sector, the budget provides major impetus to the healthcare and education sectors. The National Health Protection Scheme is not only expected to facilitate access to health care, it is likely to increase healthcare spending substantially over the near to medium term. Assuming that 5% of the total families covered claim 25% of the INR 5 lac insurance cover they have been guaranteed under ‘ModiCare’, the total incremental healthcare expenditure is likely to be in excess of INR 625 billion.
Similarly, the Revitalizing Infrastructure in School Education (RISE) scheme is a paradigm shift in the education policy – which is likely to drive major improvements in the education infrastructure. Ironically, the budget lacks adequate clarity on the means of funding both these schemes over the near to medium term.
Interestingly– despite major slippages in FY18- the performance on the fiscal discipline front has been encouraging. A major portion of these slippages is likely to be offset by higher disinvestment proceeds and enhanced tax buoyancy. The finance ministry’s decision to stick to a 3.3% fiscal deficit target reinforces the government’s commitment towards fiscal disciple. Higher tax buoyancy estimate on the back of a larger tax base, uptick in economic activity and an optimistic disinvestment target shall augur well for the finance ministry’s target of 14.63% revenue growth.
Disinvestment of PSUs
Given the lack of clarity on the funding pattern for various budget initiatives, the expenditure growth estimate of mere 10.2% seems highly optimistic. In order to stick to the budget target of 40% central government Debt to GDP ratio, outperformance on the disinvestment target would be indispensable.
With over 24 CPSEs already on the block, the performance of the capital markets shall be a key determinant of the government’s ability to monetize its holdings and deleverage itself.
Akin to the primary sector, however, the increased capital outlay in the absence of meaningful structural reforms in the banking, manufacturing and fiscal arenas is not likely to substantially enhance growth over the medium term. For instance, the INR 800 billion bank recapitalization program is unlikely to yield the optimistic credit growth targets primarily because of other factors. These include, existing asset quality pressures, uncertainty surrounding the level of haircut on stressed assets and increased provisioning requirements under the Ind-AS, and the increased capital requirement under Basel III which is likely to restrict annual asset book growth to under 7% over the near to medium term.
"On the private investment front, the budget falls short of expectations. With the private capex cycle continuing to bottom-out, economic growth shall continue to remain lopsided without meaningful recovery in the capex cycle."
On the private investment front, the budget falls short of expectations. With the private capex cycle continuing to bottom-out, economic growth shall continue to remain lopsided without meaningful recovery in the capex cycle. In particular, while the budget does make efforts to deepen bond markets in order to ease access to capital, specific initiatives by the regulators in a timely manner shall be critical on this front.
Moreover, expanding the investment mandate for investment vehicles to include A rated securities (a category of securities inferior to AA that they are not allowed to include at present) is likely to aide debt market access for issuers rated below AA categories by allowing a wider class of borrowers to enter the domain.
All in all, the budget does draw a diligent balance between fiscal prudence and the developmental needs of the economy. However, the government’s ability to launch Specific Action Plans to create a conducive framework to improve the quality of capital allocation shall be imperative in ensuring sustained economic growth.
Slower than expected economic growth typically has a cascading effect on government revenues and deficit – especially when driven by inefficient allocation of productive capital. This is something the Government must prevent.
Views expressed are personal.
About the Author
Arindam Som is an Analyst working with India Ratings & Research - the Indian arm of Fitch Ratings. He has completed his Financial Risk Manager Certification from the Global Association of Risk Professionals and currently provides coverage to various Indian Corporates across sectors including construction, agro-commodities and logistics and has also worked with NBFCs and PSUs.