Every budget has expectations. The last seven years have seen some reform programs like Jan Dhan, Real Estate Regulatory Authority (RERA), Insolvency and Bankruptcy Code (IBC), Make in India, Start-Up India, Stand Up India, revival of finance institutions of the development (IFD), and the establishment of a bad bank. The National Democratic Alliance (NDA) government has focused on gross domestic product (GDP) growth rather than poverty reduction. The results are the courageous fight against the coronavirus and the contribution of farmers to the stability of the economy during the pandemic, despite their agitation against the three farm bills. Can we now expect a reversal in jobless growth and see the big push into manufacturing? Can we see wealth moving to a fair platform?

The expected growth rate of 11% in the 20-21 economic survey is now pegged at 9.5% by the Reserve Bank of India (RBI) and several global rating institutions amid a negative growth rate of 7.7% in 20-21. In contrast, the World Bank raised India’s outlook for growth to 8.3% in FY22.

India’s Chief Economist’s V-curve expectation, during a webinar in August 2021, would at first glance seem real, with health infrastructure capable of withstanding the second wave of COVID -19 and the inevitable third wave of the Omicron variant of the pandemic rescue is in full swing. Inflation led to GDP growth instead of increased output and productivity.

Additionally, there is a decline in the Industrial Production Index (IPI) to 1.3%. The retail price inflation index reached 5.9% – a five-month high in December 2021.

The Organization for Economic Co-operation and Development (OECD) has ranked India among the four nations that would break through 6.4% inflation this fiscal year. According to the latest RBI survey, the share of private consumption has steadily declined since the pandemic hit. The SBI report indicates that per capita income fell due to the COVID-19 effect by up to 5.4%.

The ratio of private consumption to GDP fell to 54.7% in 21-22 from 55.6% in 19-20. The Mahatma Gandhi National Rural Employment Guarantee (MNREG) application from all states confirms that rural wages for agricultural and non-agricultural workers have remained stable.

The pandemic has also inflated debt and deficit levels.

The International Monetary Fund (IMF) estimates that India’s debt is around 90% of GDP, the highest among the peer group of countries in the same position, even at the end of the third quarter of the financial year 22 – an unsustainable level.

The report on financial stability from economists at RBI and Morgan Stanley gives hope in the financial sector. Banks’ asset quality improved and the growth in non-performing assets (NPA) over the year declined.

However, manufacturing micro and small enterprises (MSMEs) have taken a beating from banks, and NPA levels of non-bank financial companies (NBFCs) and fintech companies are on the rise.

While India could save many lives, its efforts to protect livelihoods have had only marginal impact, according to the CMIE working paper by A Gupta et al. quoted by The Economist in its January 14, 2022 issue. The first 20-21 wave saw poverty stagnate (measured at $1.9 a day in purchasing power parity in 2011) and oscillate in poverty poverty, while both urban and rural poverty declined, with urban poverty approaching zero and rural poverty reaching 18-19%, during the second wave.

It is debatable whether the increase in gross fixed capital formation after FY20, an indicator of private and public investment in absolute terms and as a percentage of GDP, reduced the number of poor people in the country.

Budget hopes

“It was the spring of hope and the winter of despair,” to recall Charles Dickens’ description in A Tale of Two Cities. Markets reacted very positively with several startups and initial public offerings (IPOs) mostly trading in the green. So, what could we expect from Nirmala Sitharaman, the Minister of Finance (FM)? Everyone expects taxes to be reduced and consumption incentives to be strengthened! What balancing trick would the FM do?

Revenue

GST revenues have been buoyant, but states want compensation for lost revenue, which could end by this fiscal year, to continue for two more years! With elections in five states announced and general elections to follow two years, the FM has little room to cut its revenue on this front. It can expect dividends from all public sector banks (PSBs) and public sector for-profit units (PSUs) to fill the revenue gap to at least 1.5-2% of the GDP.

The FM should increase non-tax revenues very discreetly. It is paralyzed by the budget deficit. This is expected to climb to 6% from the reported level of 3.5%. The RBI state survey also mentioned that all states crossed the 4-4.5% government debt benchmark.

Investor morale will not be badly affected even if it raises the stock transaction tax (STT) to 2%. This measure does not involve tax administration expenses but generates revenue every day instantly on the government account.

As part of agricultural reformsshe is expected to announce a separate budget for the sector which would include…

1. Minimum Support Price (MSP) insurance for some products with a sunset clause;

2. Encouragement of the digital agricultural market within the framework of the reform of the agricultural market;

3. Farm income tax for income above Rs25 lakh per annum at 5%;

4. Encouragement of agricultural mechanization and formalization of loans to sharecroppers;

6. Strengthening of rural cooperatives and

7. Restructuring of the National Bank of Agriculture and Rural Development (NABARD).

Allowances

The FM should strengthen the implementation of budget proposals towards reforms in the areas of justice, police and administration by even a symbolic allocation.

The health sector should get at least 6% allocation for infrastructure and functional efficiency.

According to the National Education Policy 2021, the education sector should receive a 3% stipend and compulsory schooling for wards of parliamentarians, legislators and civil servants in public schools. The midday meal program should be reinforced.

Research and development (R&D), the springboard for innovation, should attract more attention from the private sector compared to its current share of 1.2%.

The FM should have the audacity to introduce the abolition of surcharges of all types to demonstrate cooperative federalism.

Micro and small business sector

The Micro Finance Association has already demanded Rs 15,000 crore to compensate for the erosion of its capital due to the pandemic. While conceding to this demand, Ms Sitharaman is also expected to announce a new law to deal with micro and small businesses.

While 98% of MSMEs are owners or partnerships (mostly family owned), the benefits of the MSME Development Act 2006 have reached the medium and large among the small, to the extent of over 55%.

The threshold level of the Trade Receivables Discounting (TReD) scheme should also be reduced to the entry level at 50 crore turnover per annum to enable factoring and invoice financing as a funding channel independent. The group of manufacturing MSEs should be allowed to pool their limits and collateral under a separate agreement with banks and FIs to access inputs at lower cost and sell on the TReDs platform as a pool. All government departments should also be mandated to purchase from this platform by listing on TReDs.

Indiscriminate application of the Securitization and Reconstruction of Financial Assets and Security Enforcement Act (SARFAESI) by banks should be contained by announcing a state-sanctioned third-party review of NPAs in the MSE segment manufacturing.

The Small Industries Development Bank (SIDBI) should be restructured as it has hardly met the expectations of the sector during the last 31 years of its existence. Banks should be mandated to provide data on the number of businesses financed in manufacturing and services MSEs and not across multiple accounts.

While the financial services department should deal with most of the finance issues that fall under the union ministry of finance, they are directed to a response to the ministry of MSMEs which has no voice with the banks to resolve the issues. problems. The solution lies in resolving all of these issues across the table through a monthly meeting between DFS and DC-MSME on a pre-determined date.

Targeting priority sectors is a high point for banks – although they do not openly admit it as it carries interest rate risk and loan origination risk. Lending to MSEs has no charm for PSBs and large traditional private sector banks.

Under these circumstances, Small Financial Banks (SFBs) and Non-Banking Financial Companies (NBFCs) might be the best windows for MSE lending. The FM can announce appropriate measures for a better regulation of the sector. Ms. Sitharaman, the FM should resist the temptation of state interventionism to bring big business to heel.

(The author is an economist and risk management specialist. Opinions are personal.)