How Budget 2019 handles the Immediate Challenges to the Economy? – A Perspective

In the run up to the Budget, 2019, a lot has been discussed around the major challenges in front of the Indian economy in the present scenario. Let us examine how the Finance Minister proposes to address these challenges.

WATER CRISIS

NITI Aayog reports suggest that India has been facing the biggest water crisis. Over 20 cities in India are anticipated to face a massive water crisis by 2020 and majority of the country faces a massive water crisis by 2030 as reported by many reports.

The Government of India aims to provide water to every household by 2024. Given this mission and the impending challenges in terms of the severe water crisis, in her maiden budget speech in the Parliament, Sitharaman highlighted that the government has formed a new Ministry to address all water issues- Jal Shakti, which will look at the management of water resources and drinking water supply in a holistic manner.The Ministry formed by integrated other existing Ministries – Water Resources and Ministry of Drinking water and sanitation would work with state governments to ensure Har Ghar Jal’ to all rural households by 2024.

In her budget speech, the finance minister mentioned that the government has identified as many as 1, 592 blocks in 256 districts which are facing acute water crisis and have reported over-exploitation of groundwater. Under the scheme the government will focus on rainwater harvesting and water conservation in 256 districts in the first phase and carry out other initiatives including renovation of traditional water bodies and tanks, reuse of water and recharge structures, watershed development and intensive afforestation. The second phase will begin on October 1 till November 30.

The budgetary allocation in this regard has been increased this year from 2018-19 period.  But it still stands depleted if compared to 2017-18. While in 2017-18, the planned outlay for the ministry was around Rs 23,938 crore, it has come down to only around Rs 20,016 crore only in 2019-20. In the interim year, the allocations were even poorer.

Source: Government of India (Union Budgets)

What this problem requires is more immediate action. The budget shows some direction. But the allocation seems to be less to focus constructively into this.

Unemployment

The recently released Annual PLFS report puts the unemployment rate at 6.1% , the highest in 45 years. The newly formed government created a high level committee to focus on unemployment. Job creation remains a major challenge in front of the government. The Union Budget mentions the word ‘jobs’ just two times and ’employment’ five times. While there is no direct employment generation scheme, if proposals made by finance minister Nirmala Sitharaman are implemented in spirit, and investments are made, there could be employment generation in the medium to long-run across sectors such as real estate, core infrastructure and food processing.

The Budget stressed on affordable housing and the creation of other infrastructure. Tax benefits announced on affordable housing has the potentiality to stimulate demand, and thereby, both construction and supply-related jobs.  The Minister announced the government would “support private entrepreneurship in driving value-addition to farmers’ produce from the field and for those from allied activities, like Bamboo and timber from the hedges and for generating renewable energy”. Dairying through cooperatives will also be encouraged by creating infrastructure for cattle feed manufacturing, milk procurement, processing and marketing.  This has a potentiality to generate jobs in the rural sector.

There has been specific focus in the SME and the MSME sectors. 350 crore rupees allocated for 2% interest subvention for all GST-registered MSMEs on fresh or incremental loan. Large-scale extensive reforms planned, government to create a platform for MSME payments. “Government payments to suppliers and contractors are a major source of cash flow, especially to SMEs and MSMEs. Investment in MSMEs will receive a big boost if these delays in payment are eliminated. Government will create a payment platform for MSMEs to enable filing of bills and payment thereof on the platform itself,” the Minister said. Along with these, there is the scheme where the MSMEs are supposed to get loans up to 1 crore within 59 minutes. Loans worth Rs. 350 crore already disbursed. All of these has a potentiality to create jobs in this sector.

The recapitalization of the PSUs and the measures taken with regard to NBFCs can lead to more capital for the private sector and can be a major boost up for more private investments. This can create more jobs in the private sector.

In terms of government jobs, Sitharaman has proposed for Rs. 50 lakh crore for Railway and certainly it will provide good opportunities for government jobs seekers youth. Finance minister Nirmala Sitharaman allocated Rs 60,000 crore for Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGS) for the financial year 2019-20. In the last three financial years, the government has continued to increase its allocation towards the rural job scheme. In 2018-19, the government had spent Rs 61,000 crore in the scheme, while in Budget 2016-17, Rs 38, 500 crore was allocated to the scheme, which was later revised and ramped up by 23 percent to Rs 47,499 crore, while Rs 41,699 crore was spent during financial year 2015-16. This year we see a slight decline in the allocation than the actual amount spent in this scheme in 2018-19.

All of the above measures has the potentiality to generate new jobs in the market. But whether that is sufficient enough to address the massive unemployment situation is something that needs to be monitored. Given the severity of the scenario, a more direct and vast scale measure for ensuring job creation was expected.

The Annual PLFS report shows that the unemployment rate has been maximum for the higher educated people.

There can possibly be two probable situations:

  1. There is lack of job opportunities for educated people across the country
  2. The educated people are unemployable and needs more relevant skill sets for the job opportunities that are available.

It can be any of the above two possibilities or it can be a combination of both. If it is the former then there is a need to focus on creating optimal job opportunities for educated persons. If it the later then a serious focus needs to be given on the higher and technical education policy. More focus needs to be given on courses providing right skill level required for the job market.

The Finance Minister allocated ₹94,853.64 crore for education sector in 2019-20. Of the total ₹94,853. 64 crore education budget, ₹56, 536.63 crore has been pegged for the school sector and rest ₹38,317.01 crore has been allocated to the higher education. The Finance Minister allocated ₹94,853.64 crore for education sector in 2019-20. The funds allocated for higher education as a percentage of GDP increased from 1.36% in 2018-19 to 1.38% in 2019-20. The same for school education, saw a small decline from 2.04% in 2018-19 to 2.03% in 2019-20.

In an absolute level an increase of nearly ₹10,000 crore of what 2018-19 budget estimates had pegged for the sector. However a scheme to strengthen teacher training institutions, which had received an allocation of ₹488 crore last year, has been completely dropped this year. A scheme to incentivise girls to enroll in secondary education has also seen its Budget slashed, from almost ₹256 crore in last year’s revised estimates to ₹100 crore this year. In her budget speech, Finance Minister Nirmala Sitharaman focused on the draft NEP’s recommendations for research, quality and governance in higher education. Stating that India has the potential to become a hub for higher education, she proposed to start a “Study in India” programme to encourage foreign students to enroll in Indian higher educational institutions.

Another major concern that comes out from the Annual PLFS report, is the decline in the labour force participation rate(LFPR) specially for women. There has been measures announced in this budget to boost women empowerment. It will be worth seeing on how that impacts the LFPR of the women.

Slowdown in the Economy

India’s economy grew slower than expected to a 20-quarter low in the January-March period, dragging overall growth to a five-year low in FY 18-19. The provisional estimates released on 31st May showed that GDP grew at 5.8% in the 4th quarter of FY 18-19 as compared to 8.1% for the same quarter in FY 17-18. Moreover there was a decline from Q3, FY 18-19. Overall growth of FY 18-19 slummed to a five year low and was pegged at 6.8% as against 7.2% in the previous year. There has been a steady rise in the GDP growth rate from FY 12-13 till FY 16-17 when it was as high as 8.2%. The gross value added(GVA) grew at 6.6% compared to 6.9% in the previous year. The per capita growth of GDP was pegged at 5.7%.

GDP GROWTH RATE ACROSS 4 QUARTERS OF FY 18-19

The quarterly growth rate of agricultural sector was as low as -0.1% in Q4, FY 18-19 as against 6.5% for the same quarter in the previous year. This has been a major concern area. Agriculture is very much dependent on monsoon. Monsoon this year has shown the slowest movement in 12 years. This has happened mainly due to the onset of cyclone Vayu. Moreover a vast section of India has registered lower than normal rains in the month of June. So agriculture sector which has shown a negative growth as of quarter 4 of FY 18-19 remains a major reason to worry.

In terms of budgetary allocation,  agriculture & allied activities received the biggest push among all sectors compared to FY19. Against the Budget 2018-19 (revised) estimates of Rs 86,602 crore for agriculture and allied activities, Sitharaman’s Budget 2019-20 proposed to invest 1,51,518 crore in this sector. This comes about an increase of 75 per cent in budgetary allocation over interim budget. However a huge chunk of this allocation is expected to go towards the PM Kisan scheme. 75,000 crores are earmarked for the PM Kisan scheme. In the Interim Budget FY20, government announced PM Kisan scheme or the Pradhan Mantri Kisan Samman Nidhi Yojana (PM KISAN) with an objective of providing direct income support to farmers, pegged at Rs 6,000 per year to be paid in three installments. So if one takes out the amount pegged for doll then only 76,518 crores are earmarked for agriculture which is less than the budget estimtes of 2018-19 ( there was no PM-Kisan scheme then).

Sitharaman proposed setting up of 10,000 new Farmer Producer Organisations (FPOs) to ensure economies of scale for farmers over the next five years. She said the Modi government will work with state governments to see that farmers get fair price through electronic National Agriculture Market (e-NAM) that was launched in 2016. In her budget speech, Ms. Sitharaman said that the government would invest widely in agriculture infrastructure and support private entrepreneurship for value addition in the farm sector. She also stressed on “zero budget farming”, a practice which involves zero credit and reducing dependence on chemical fertilizers. 

Agricultural experts wished to see bold decision-making on rationalisation of food and fertiliser subsidies and cropping patterns. Sitharaman’s Budget for 2020 made no reference to mounting arrears of food subsidy. In the five years of the NDA 2 government, subsidy on urea was not touched. The Budget for 2020 again does not provide any road map for that. The FM mentioned zero based budget farming, which has been undertaken in some coastal districts of Andhra Pradesh. Without any reform in fertiliser subsidy regime, it is unrealistic to expect farmers to use less urea and switch over to organic farming. Several regions of India are reeling under drought and water stress has become one of the most pressing challenges for farming.  A focus on rain water harvesting in a massive scale perhaps is a answer to this problem. While this finds some mention in terms of using MGNREGA scheme to work on rain water harvesting, there is no major investment earmarked for this purpose. While focus on agri-infrastructure finds mention in the FM’s speech, the question remains on where will the money come up given that the allocation for agriculture actually reduced if the allocation on PM-Kisan is taken out. This government has set up a goal to double the farm income by 2022. But there is no concrete direction provided in this budget on how this can be achieved. Agriculture provides employment to over 60% of the citizens of our country. A more focused and thorough approach is required for ensuring the set goal is achieved.

One more reason for slowdown of the economy was attributed to the NBFC crisis and the lack of liquidity in the market. The Union Budget will partially guarantee high-quality pooled assets of non-banking financial companies (NBFCs) and the Reserve Bank of India (RBI) has opened an indirect liquidity window for the sector to aid banks to give funds to the sector, which is on the verge of collapse. NBFCs play “an extremely important role in sustaining consumption demand as well as capital formation in small and medium industrial segment”, Finance Minister Nirmala Sitharaman said in her maiden Budget speech. Therefore, NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds, she said.

The FM proposed the government encourage public sector banks to buy high-rated pooled assets of up to Rs 1 trillion of financially sound NBFCs, for which the government will provide a one-time six-month partial credit guarantee for the first loss of up to 10 per cent. The banks can buy assets of NBFCs up to Rs 1 trillion during FY20. Moreover the Budget has given the RBI sweeping powers over housing finance companies (HFCs) and NBFCs, including the power to change the management at these firms. The Budget has relieved the National Housing Bank (NHB) of its regulatory powers over HFCs and handed them back to the RBI. Now how all of this will be impacting the NBFC sector and finally on the overall growth is to be seen.

There has been a lack of demand in the market as cited by some reports. There is a decline in auto sales figures. Overall the private consumption growth requires a major boost up. This budget does not directly address this issue. There is no significant tax deductions mentioned for the middle class apart from the affordable housing scheme. Moreover no concrete plan is mentioned on growing income of the farmers. Over and above there has been a two rupees increase in the prices of petrol and diesel. This increase will have a impact on prices of essential commodities as the cost of transportation is increased. The price of auto parts have also been increased. Hence there is a chance of more reduced demand. There has been some focus on electric vehicles. However on how much it will have a impact on generation demand in short to medium run remains questionable. There has been some indirect measures taken to generate demand by pumping more money in the PSUs and the focus on NBFCs. But the question remains on is it sufficient enough in the immediate run.

Conclusion

So in terms of all areas of challenges, the budget has adopted some measures to address them in a medium to long run. However the extent of focus and big push required for this is yet to be seen. While the intent is there, a more focused and constructive view is required for each of these major challenges especially in the immediate run.


 

One thought on “How Budget 2019 handles the Immediate Challenges to the Economy? – A Perspective

  1. First of all, I really appreciate your research work to build this content.
    It’s a precise but descriptive analysis of the major economic issues of our country.
    I really want to know more about the following points.
    1. Short term and Long term perspectives of budget allocation on Water Management in Indian Agricultural Scenario.
    2. What is the scope to increase employment opportunities with this critical spend approach on education.

    Like

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