The first Budget of Modi 2.0 is the harbinger of a New India. At the same time, it is just the beginning of the process of transforming and modernising our economy. There is a clear need for many more steps beyond the Budget, including real structural reforms across all areas, including macroeconomy and governance/regulation
The first Budget of Prime Minister Narendra Modi’s second term is robust, solid and focused on reviving declining consumption and expanding investment parts of the economy. It also continues the process of reforming and expanding the financial sector, and has clearly made attracting investments a priority.
NBFC liquidity crunch
The Indian economy and the economic activity in our country is largely driven by credit—estimates suggest that almost 80% of capital in the economy is credit. And, so, as do the credit markets go, so does the economy.
Ever since the banking system slid under the Congress government’s watch into crisis of NPAs and frauds, non-banking financial companies (NBFCs) have stepped up their credit delivery, filling the vacuum left by the retreating public sector banks. In fact, by 2018, NBFCs’ estimates accounted for almost 20% of all credit being delivered into our economy—into real estate sector-type corporate credit on one hand, and consumer financing on the other hand.
NBFCs depend a lot on public sector banks on refinancing and their own credit capital. The ILFS (UPA legacy NBFC) meltdown and fraud—leaving many public sector banks stuck with thousands of crores of unpaid and perhaps unrecoverable debt—has put this refinancing market and model into a gridlock, with public sector banks (naturally) becoming very risk-averse to financing NBFCs, and almost shutting down NBFC credit markets. The consequence on the economy was swift and visible—creating a marked slowdown on consumption economy as consumers failed to get consumer credit for their homes, cars, vehicles, etc—with further downstream impact on real estate, manufacturing and other sectors.
Therefore, tackling this liquidity and credit gridlock was vital, and this year’s Union Budget has taken the necessary steps for the same. Acknowledging the role of NBFCs in sustaining consumption demand as well as capital formation in SMEs, the government has facilitated the much-needed liquidity by providing a one-time, six-month partial credit guarantee to public sector banks to buy high-rated pooled assets worth Rs 1 lakh crore from NBFCs. Strengthening RBI’s powers vis-à-vis housing finance companies (HFCs) and NBFCs will ensure regulation on par with commercial banks.
Creating millions of jobs
During his first term, PM Modi built the micro-architecture to deliver government subsidies and public spending in a direct and corruption-free manner using Aadhaar, direct benefits transfer (DBT) and Jan Dhan Yojana (JDY)—breaking a seven-decade-old status quo of corruption in the name of the poor.
During this term, the PM is signalling his focus and determination on expanding the economy to a $5-trillion size to truly make India a global economic superpower. It is clear that to achieve this goal, the Indian economy will have to be reformed to absorb significant investment capital flows, and expand and deliver increased credit over the next five years to a surging job-creating economy. PM Modi is already being seen as Asia’s leading moderniser and I see him embarking on a process of fundamentally modernising and making our economy more efficient over the next decade. In her Budget speech, the finance minister made it clear that global and domestic investors are real job-creators and wealth-generators, and the government policies will support all of them.
Cleaning up financial sector
The clean-up and qualitative improvement of the financial sector during the first term of this government is bearing fruit, as NPAs declined by almost Rs 1 lakh crore for the first time since 2009—from Rs 8,98,000 crore to Rs 8,00,000 crore this year. According to the Economic Survey 2019, the gross NPA ratio of public sector banks decreased from 11.5% to 10.1% between March 2018 and December 2018. This signals a good time to start the recapitalisation of public sector banks with the proposed Rs 70,000-crore capital infusion providing a timely booster to credit growth, which is already increasing.
The Budget has also recognised the asset-liability mismatch in public sector banks and risk management gaps for efficient long-term credit delivery. The proposal for new development finance institutions (DFIs) to ensure real capacity for Rs 1 lakh crore of infrastructure financing is a welcome step. The Budget also lays out the use of PPPs and direct public spending to greatly accelerate and expand investments into infrastructure modernisation and growth of highways, railways and waterways.
The Budget signals Modi government’s determination towards making PSUs more efficient—by reforming ownership and management—with increased retail and market equity participation to create more value and competitiveness and possible higher value for disinvestment. Disinvestment model will now include sell-offs and, as I understand, also joint ventures with private companies, creating more flexibility for companies like Air India, MTNL, etc.
Boost to Start-up India
The Modi government’s commitment to start-ups is reiterated as the issue with the angel tax gets addressed. The proposed dedicated TV channel for start-ups will ensure growth and promotion of the start-up ecosystem in the nation.
The Budget has announced to set up the National Research Foundation to channelise all government grants and thereby develop a more coherent public-funded research focus than the current piecemeal; it’s a much-needed initiative to make every research rupee work harder and more effective.
The government has been placing a lot of impetus on using technology to enhance governance and delivery of services to the public. The Budget has further enhanced the use of technology in governance, such as simplifying tax administration with the use of technology tools for tracing cash economy and reigning discretion of tax officials on tax assessments. By announcing 2% TDS for business dealing in cash, the Budget has further incentivised cashless economy.
Sabka saath, sabka vikas
The Budget is just the beginning of the process of transforming and modernising our economy. There is a clear need for many more steps beyond the Budget, including real structural reforms across all areas, including macroeconomy and governance/regulation.
The most important part of these reforms is finding a macroeconomic model that works best for India’s unique demography and economy, instead of simply borrowing western ideas, as has been the norm for several decades. The first Budget of Modi 2.0 is the harbinger of a New India. It does not create any ‘special’ section for any ‘vote bank’. It is a Budget for all Indians, laying out the path of sabka saath,sabka vikas.
The author is a Member of Parliament, and Member, Parliamentary Standing Committee on Finance