India Union Budget Challenges

India Union Budget Challenges – 27th Jan 2018

India had the highest economic growth among the major  economies  in the world and in 2017, China became the fastest growing major economy in the world. Recent World Economic Outlook by IMF predicts that India will regain the position in 2018. The initiatives on Infrastructure development, Affordable housing and improving sentiments on economic growth should help to achieve the desired high growth in the next financial year. Since the budget is prepared in the year before the election year, there are many challenges in achieving the desired balance in budget.  

The government will not be able to plan for a very big increase in revenues and since the revenues will be growing at a slower pace, Governments expenditure has to be restricted.

GDP growth. In FY 17, the Economic growth was at 7.1% and in FY 18 it likely to end with 6.5%. Growth in Agriculture , Industry and Services, all of them witnessed a fall in growth rate. Higher growth in GDP is very important for achieving higher level of tax revenues. Industries are still operating at less than 75% of the capacity and before they start investing in new capital investments, the capacity utilisation has to go up above 85%. Stimulating the rural growth will help to achieve a higher economic growth.

Fiscal Deficit. Government was committed to meet the Fiscal targets. It appears that it would be difficult to achieve the fiscal targets this fiscal year and the next fiscal year. Government has to postpone the target date to bring the deficit below 3%.

US withdrawal of Stimulus. US started increasing the interest rates and the cheap money which has been deployed in Emerging markets would be gradually withdrawn from the markets. Further, USAs new found plan to make US regain its manufacturing competitiveness and reduction of income tax rates , will reduce the capital flows on account of FDI and FII, which was a good source of money to achieve a higher industrial growth.

GST. When the GST was introduced, the assumption was that it would help to increase the revenues from the indirect taxes. There is a mixed performance in collection of GST and at every meeting of the GST council meeting, many items were brought under the lower GST slab. Still the visibility of higher revenues is to be witnessed. Many more iterations on the rates have to be undertaken, before the GST rates stabilise. The rate of growth in indirect taxes has come down and it is likely to be lower in the next fiscal year also compared to earlier years.

Direct Taxes. The rate of growth in direct taxes also has shown a decline. Many large corporates reporting profits have seen their profit dwindle. The government has set a target to move towards lowering taxes. Already for companies having a turn over of less than Rs.10 cr, income taxes were lowered. But the scope to reduce taxes further on a large scale is very limited.

Government Expenditure. To support the Economic growth , the government was spending more money to sustain the high economic growth. This has helped to keep the economy growing at a good growth rate. To continue to spend more , the revenues have to continue to rise. To make up the shortfall in taxes, the government was able to mobilise more resources through disinvestment. It would be possible to raise large resources from disinvestment in the coming fiscal also. The major role played by government in sustaining the economic growth has to continue through government expenditure. There is a need to review the scope for reduction in expenses relating to non development expenses by the government.

Subsidies. Food Subsidies, Fertilizer subsidies and other subsidies continue to be at similar levels. Food subsidy alone is likely to cross  Rs.150,000 cr  and Fertilizer likely to cross Rs.70,000 cr . Since the large scale digital initiatives are in place both at the Centre and states , the scope for targeting the subsidies and reduction has to be explored with great speed. This will help to reduce the government expenditure.

Oil and Commodity Prices. When the oil prices were going down, Government was able to keep the final product prices and earn more revenue from the indirect taxes. Now that the crude prices are at much higher levels, the scope for increasing final products is very limited. The government has to cap the indirect taxes raised through keeping the prices at present levels. There may be a need for the government to reduce the indirect taxes to keep the oil prices at lower levels. Any rise in oil prices is likely to increase the inflation . Commodity prices , this year also at high levels due to synchronised up turn in economic growth across the world in 2017 and expected continued good performance in 2018. Since India imports commodities on a large scale, this will increase the import bill. But at the same time, exports continue to grow at much lower rate than imports . Government has to consider giving incentives to increase the export growth. This will put further pressure on government finances.

Infrastructure Projects. Government has drawn up a big plan to execute projects relating to Roads, Ports, Railways and Metros. The demonetisation has helped to increase the allocation of investors to financial products diversifying their portfolio away from Gold and Real estate . This is reflected in more money flowing into mutual funds and increased retail investor in the Capital markets. The government has big plans to raise bonds , long term loans directly from investors instead of seeking the bank borrowing . This is going to crowd the debt market and there will be lot of issues of debt at higher interest rates. This will keep the interest rates at high levels in the economy. Since the government is the largest borrower of funds, even the cost of funds for government will go up. The mobilising resources for implementing infrastructure projects at low rates of interest will be one of the challenges.

Since government has got lot of operating Infrastructure projects with  operating revenues, these projects should be taken through many InVits and the government should issue many Invits to make this product a success. Similar strategy could be thought of for the leased government properties for Issuing REITs. Apart from disinvestment, these sources also will aid in increasing the overall revenue of the government.

Jobs. About 15 million in a year are entering the Job market every year. More than 90% of the jobs in India are created in the informal sector and there is a limited scope for increasing jobs in the formal sector. Many new jobs in the informal sector is also in the form of entrepreneurship. After demoentisation / GST, the rate of growth in creation of new entrepreneurs has come down. India has one of the largest Unemployment Management Programmes in the world and schemes like MGREA is helping to create jobs for more than 50 million people. Already a big budget is provided for supporting the employment programmes. Further action plans have to be identified by the government to ensure no loss of jobs and new opportunities for creating entrepreneurs. Through start up initiatives, jobs are being created in new age sectors. But , there need to be action plans to create jobs in the traditional sectors.  

The government is likely to balance the interest of all the segments of the society and likely to continue its contribution to the development expenditure. It has already liberalised many sectors for FDI and it is likely to announce stimulus measures to increase the industrial , services and agriculture growth. The government can target a GDP growth rate of at least 7.75% and working backwards could identify the measures required in every sector. It would be necessary to keep the interest of investors on the capital markets high and continue the present sops given to Equity and Debt investors.

My Article on Crypto Currencies in Money control

Cryptocurrency a boon to digital transactions & financial inclusion

R. Kannan Cryptocurrency and its rapid valuation strides have made headlines globally. Forcing governments and regulators to take note of digital currency as an emerging asset class luring the average investor. Cryptocurrency is a digital asset created to be used as a medium of exchange -- like cash. Bitcoin, the most popular cryptocurrency has send ripples across global markets as it crossed the landmark $ 10,000 threshold. While most governments and regulators have cautioned investors against investing in Bitcoin and other cryptocurrencies, they continue to evaluate introducing their own digital currency. A group of experts at the Reserve Bank of India are examining the possibility of a fiat cryptocurrency which could be used as a digital currency. According to a few media reports the RBI’s digital currency is rumored to be called Lakshmi. Regulators across the globe including United States, Singapore, Japan and China are looking at regulatory measures to rein in the growth in cryptocurrency or digital currency.  In China cryptocurrency exchanges are shifting and improvising their business for domestic cryptocurrency traders. China allows private individuals to hold and trade bitcoin, but prohibits participation by banks and other financial institutions. Some countries explicitly permit the use of bitcoin which includes Canada and Australia. The US has adopted a positive stance in regards to Bitcoin. Meanwhile, it also has ordered several government bodies to assure that transactions in Bitcoin are carried out only in legal terms. In April, markets cheered Japan for recognizing bitcoins as legal tender and license 11 exchanges. India is on the brink of a digital revolution after the revolutionary reform –Demonitisation. Digital transactions in the country has seen an 80% jump during 2017-18, with the total amount expected to touch Rs 1,800 crore. The value of digital transactions till October this year stood at Rs 1,000 crore, which was nearly equal to that for the whole of 2016-17, according to the ministry of information technology. If the numbers are anything to go by there could be merit for the Indian government to weigh the pros and cons of floating its own digital currency to further boost digital transactions. Cryptocurrency or digital currency can revolutionize digital payments in India. Transactions through digital currency are cost effective, fast and transparent. Since, the transactions is traceable due to a public ledger it ensures transparency. Blockchain technology ensures the transactions are secure and hence the chances of frauds are minimal. Hassel free instant settlement of transactions in the age of smart phone penetration and internet connectivity has led to the increased acceptability and popularity of digital currency. Digital currency with the right regulatory environment could also help promote financial inclusion. It’s easier for individuals to open an e-wallet account than a traditional bank account given the increased mobile and data penetration. The usage of Aadhar in the country has made it easy for individuals to execute digital transactions and open e- accounts instantly. With the operationalization of payment and small banks the introduction of digital currency could change the way India banks or avails off and conducts financial services.  Regulators and governments globally are concerned that in the present form the digital currency is being used for money laundering and tax evasion. The concerns are valid considering this technology is new and its acceptance is increasing among the average investors. Considering the many advantages of this technology, Governments can no longer ignore its existence and there’s a need to frame a regulatory mechanism to monitor its usage. It’s not just individuals; corporates have also started using this technology for intra company transactions to reduce the cost of operations. Regulators and government in India need to collaborate and evaluate if this emerging asset class can be regulated by the current regulations of Know Your Customer, money laundering, foreign exchange and GST norms. Author is Head Corporate Performance Monitoring & Research, Hinduja Group Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol are their own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.

15^th December 2017

India Government Finances Apr17 - Nov17

Central Govt. Finances: Apr.-Nov. 2017-18

Highlights:

Total receipts during April- October 2017-18 were at Rs.1292648 cr, (LY: Rs. 1150843 cr), 12.3% rise over the same period last year. It was 60.2% of BE 2017-18. Out of which revenue receipts were at Rs.728768 cr (LY: Rs.697988 cr), 4.4% rise YoY and Capital receipts were at Rs.563880 cr (LY: Rs.452855 cr), 24.5% higher than the last year.

The revenue receipts are not growing as expected and the collections from GST was much below the expectations. To make up the shortfall in revenue receipts, the government has to opt for increasing the capital receipts which had shown a good growth over the previous year.

Gross tax receipt was atRs.973412 cr (LY: Rs.818884 cr), 18.9% growth YoY. Net tax revenue retained by the Central Government was at Rs. 633617 cr, 19.5% higher than the last year and it was 51.6% of the budget estimate for whole year.

Recovery of loans were at Rs.8394 cr, 5.7% higher than the last year.

Total Government expenditure from Consolidated Fund of India was at Rs. 1292648 cr (LY: Rs.1150843 cr), out of which, revenue expenditure was at Rs.1129853 crore (61.5% of BE) and capital expenditure was at Rs. 162795 cr (52.5% of BE).

Revenue Expenditure increased from the previous financial year by 10.1% and Capital Expenditure increased by 30.3%.

Revenue deficit was at Rs. 401085 cr (LY: Rs.327896), 22.3% higher than the last year and it was 125% of total budget estimate. This is an area of concern.

Fiscal deficit was at Rs.525321 cr(LY: Rs.423507 cr), 24% higher than the same period last year and it was at 96.12% of BE. Considering that another , four months to go , this will far exceed the budget.

Primary deficit was at Rs.267412 cr, 35.9% rise YoY. It was 1140% of BE.

Eight core infrastructure industries grew by 4.7 per cent in October 2017, as compared to 7.1 per cent in October 2016. The growth of these industries during April-October 2017 was 3.5 per cent, as compared to 5.6 per cent during the corresponding period of previous year. In Dec, there was traction and the expectations are that , the growth rate will rise. The forecast by various international and domestic agencies indicate that the growth going for ward will pick up.

Foreign exchange reserves stood at US$ 400.7 billion as at end of 24^thNovember 2017 as compared to US$ 370.0 billion at end March 2017.

The growth rate of IIP in Oct. 2017 was at (+) 2.2 percent. During Apr- Oct.17 the overall IIP contracted by 2.5percent compared to growth of 5.5 per cent during same period last year.

Foreign trade: Merchandise exports and imports increased by 30.5 per cent and 19.6 per cent respectively in US$ terms in Nov. 2017 over Nov. 2016. During Nov. 2017, oil imports increased by 39.1 per cent and non-oil imports increased by 14.6 per cent respectively over Nov. 2016.

Balance of Payments: India’s current account deficit (CAD) at US$ 22.2 billion (1.8 per cent of GDP) in H1 of 2017-18 increased from US$ 3.9 billion (0.4 per cent of GDP) in H1 of 2016 -17. During the H1 of 2017-18, the net invisibles balance (invisible receipts minus invisible payments) was US$ 52.5 billion as compared to US$ 45.7 billion in the corresponding quarter of 2016-17. Net FDI inflows during H1 of 2017-18 moderated to US$ 19.6 billion compared to US$ 20.8 billion in H1 of 2016-17. Portfolio investment recorded a net inflow of US$ 14.5 billion during H1 of 2017-18 as compared with US$ 8.2 billion in H1 of 2016-17. Net capital flows remaining higher than the CAD, there was net accretion to India’s foreign exchange reserves (on BoP Basis) to the tune of US$ 20.9 billion in H1 of 2017-18 as compared with US$ 15.5 billion in H1 of 2016-17

External Debt: India’s external debt stood at US$ 495.7 billion at end-September 2017, recording an increase of 5.1 per cent over the level at end-March 2017. Long-term debt was US$403.0 billion at end-September 2017 as compared to US$ 383.9 billion at end-March 2017.

Short-term external debt was US$ 92.7 billion at end-September 2017, as compared to US$ 88.0billion at end-March 2017.

As per the estimates of Gross Domestic Product (GDP) for the second quarter (July-September) 2017-18, released by the Central Statistics Office (CSO), the growth rate of GDP in Q2 wasat 6.3 per cent as compared to the growth of 7.5 per cent in Q2 of 2016-17.