Rebooting Economy 66: Is India facing credit deprivation to warrant corporation banks?

 RBI's database, reports and other evidence show India is credit surplus; large industrial houses have high debt stress, and that easy credit poses serious macro-financial risks to the economy

Prasanna Mohanty | February 10, 2021 | Updated 18:39 IST

What compromises the Indian economy further is India's repeated failure to resolve stressed assets over the past few decades

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In November 2020, an internal working group (IWG) of the Reserve Bank of India (RBI) recommended that India's large industrial houses be allowed to run banks to increase credit-to-GDP ratio from the current level of 50% to more than 150%, in line with many developed economies, for higher growth. Now Prof. Arvind Panagariya, former Niti Aayog vice-chairman, is claiming that India faces "acute problem of credit deprivation" to support the same cause.  

In an article in a leading national daily, he wrote (co-authored with Rajeev Mantri) last week that India can't solve its credit scarcity "without recourse to investment resources of corporate houses" and hence, corporate entities should be allowed to run banks.  

This suggestion comes after his earlier one about recapitalising public sector banks (PSBs) in advance for facilitating credit was accepted and Rs 20,000 crore allocated in the budget for FY22. Given his immense influence on the government this suggestion is also likely to be taken seriously.

Also Read: Rebooting Economy 65: IBC has failed; will a bad bank succeed?

But is India really facing an acute credit deprivation, as he claims, and is his solution the right one?

Here is a reality check.  

Is Indian economy facing credit crunch?

Going by the RBI reports, India has credit surplus and that is a cause of great concern.  

For example, the RBI's "Monetary Policy Statement, 2020-21 Resolution of the Monetary Policy Committee (MPC) February 3-5, 2021" released on February 5, 2021 said: "Systemic liquidity remained in large surplus in December 2020 and January 2021, engendering easy financial conditions."

What is wrong with "easy financial conditions" and why is the RBI seemingly worried about it ("engendering")? Hasn't the RBI (and the government) pushing for easy credit (more liquidity in the economy) by keeping the interest rate (repo rate) and cash reserve ratio (CRR) low?

Also Read: Rebooting Economy 64: Budget numbers don't add up to 10% or more growth in FY22

The RBI Financial Stability Report (FSR) of January 11, 2021, explained the contradictions.  

It said easy credit posed "macro-financial risks" to the economy and that this was "unintended consequences" of the monetary and fiscal measures pursued to push economic recovery. If India continued on this path (easy credit or excess liquidity), it warned that this would lead to economic impairment and delay the recovery.

This report said macro-stress tests for "credit risks" showed that the Gross NPA ratio of scheduled commercial banks (SCBs) might increase from 7.5% in September 2020 to 13.5-14.8% by September 2021. This would translate to about Rs 15-16 lakh crore of stressed assets in SCBs. (For more read "Rebooting Economy 60: India in a financial mess of its own making ")

It further said if the current emphasis on easy credit continued for a longer period it could lead to (i) further "forbearance" of stressed assets  (ii) "liquidity traps" and (iii) capital buffers in individual banks might fall "below the regulatory minimum" even though SCBs had sufficient capital at the aggregate level.

This is not a new finding. The RBI's FSR of July 24, 2020, had said the same, warning that "credit risks" arising out of easy credit/liquidity might lead to SCB's Gross NPA ratio increasing from 8.5% in March 2020 to 12.5-14.7% by March 2021.

Also Read: Rebooting Economy 63: Budgeting FY22 with critical information gaps

RBI Governor Shaktikanta Das has been at pains to repeat how easy credit has led to stock market booms and how the "disconnect" between the real economy and stock market have "accentuated" recently and "pose risks to financial stability". Back in August 2020, he had explained the stock market boom by saying: "There is so much liquidity in the system, in the global economy, that's why the stock market is very buoyant, and it is definitely disconnected with the real economy. It will certainly witness correction in the future..."

Easy credit/liquidity fuels stock market bubbles that burst eventually, hurting the real economy (loss of business and jobs). This is a global phenomenon. (For more read "Rebooting Economy 38: What makes stock markets and billionaires immune to coronavirus pandemic?")

RBI proposes to tighten credit by raising CRR  

Why is the RBI continuing with low repo rate (at which it lends to banks) and CRR?

The RBI Governor explained this in his statement after the Monetary Policy Committee meeting concluded last week: "The MPC voted unanimously to leave the policy repo rate unchanged at 4 per cent. It also unanimously decided to continue with the accommodative stance of monetary policy as long as necessary - at least through the current financial year and into the next year - to revive growth on a durable basis and mitigate the impact of COVID-19, while ensuring that inflation remains within the target going forward."

Also Read: Rebooting Economy 62: Economic growth for whom and for what?

At the same time, he also said that he would roll-back the CRR from 3% to 4% in two steps by May 22, 2021, signalling curb on credit flow.

A higher CRR means banks would keep aside a larger amount as reserve, thereby curtailing the capital pool to lend. The apparent contradiction in keeping the repo rate low and raising the CRR is a balancing act the RBI is performing because most of the credit it has facilitated is going nowhere.  

Banks are depositing excess credit in the RBI's reverse repo account (which fetches 3.35% interest) daily as the following graph testifies. They are reluctant to lend due to the NPA fear and businesses have no appetite because demand is low and hence, capacity utilisation remains subdued.

Notice how the reverse repo deposits spiked in March-April 2020 when the RBI cut the repo rate from 4.4% to 4% (on May 22, 2020) and CRR from 4% to 3% (on March 28, 2020). Also notice how after a temporary dip the deposits are rising.

If this is not convincing enough, here is another graph that maps growth in bank credit to 'industry' and its component 'large industry'.

Easy credit has its downside

The suggestion of the RBI's IWG and Prof. Panagariya defies logic, not the least because if at 50% credit-to-GDP the Indian banking system is in acute distress what would happen when it goes up?

Also Read: Rebooting Economy 61: All that's wrong with guaranteed MSP outside APMC

The banking sector's distress is evident from the fact that since FY04, SCBs have written off Rs 10.9 lakh crore as NPAs - of which Rs 8.7 lakh crore was written off in the past six years between FY15 and FY20. Of this write-off, PSB's share is Rs 8.4 lakh crore (77%).

As past banking practices endure, the problem of stressed assets is also likely to endure.  

Here is how.

Firstly, the pandemic-induced lockdown led to a moratorium on loan repayment and suspension of classifying stressed assets as NPAs. Whoever availed of the moratorium holds the key to the outcomes.  

Here is a disclosure from the largest public sector bank SBI's research paper ("Financial Market Stability & Loan Moratorium: The Angel is in the Details" published on August 3, 2020). It said: (i) 70% of the total moratorium has been availed by corporates which are rated A and above - that is, those who have "comfortable debt-equity ratio" and so can easily pay - and these corporates are spread across pharma, FMCG, chemicals, healthcare, consumer durable, and auto sectors, etc. and (ii) consumer loans declined by Rs 53,023 crore in the current fiscal, but "consumer leverage in lieu of exposure to stock market" increased by Rs 469 crore that could be a potential source of financial instability".

It warned that a blanket extension of moratorium beyond August 31 would "do more harm than good".

Also Read: Rebooting Economy 59: Quantum jump in fiscal spending is what India needs immediately

What did the RBI do? It set up a committee (led by former banker KV Kamath) to look into the restructuring of loans - "ever-greening" of loans, the much-reviled UPA-era mechanism - and followed its recommendation to restructure loans in 26 sectors for the next two years.

Secondly, large industries - which are to run banks as per the recommendations of the RBI's IWG report and Prof. Panagariya - are the ones causing the high-level of stressed assets in banks. The evidence comes from the RBI's "Report on Trend and Progress of Banking in India 2019-20" published on December 29, 2020.

It said: "Large borrowal accounts (exposure of Rs 5 crore and above) constituted 79.8 per cent of NPAs and 53.7 per cent of total loans at end-September 2020."

Thirdly, the global financial services agency Credit Suisse has been repeatedly warning that India's large corporate houses are not only highly indebted, but their debt-stress levels have remained "elevated" for years (at least since FY17). Its "India Corporate Health Tracker" of August 2019 showed that barring a few, all the big private businesses houses figure in the list of "chronically stressed" corporates (interest cover ratio of less than 1 for a period of 1 to 12 quarters).  

Also Read: Rebooting Economy 58: The untold story of India's services sector

The debts of these chronically stressed companies had consistently been rising from Rs 8.9 lakh crore in FY17 to Rs 9.1 lakh crore in FY 18 and Rs 10.2 lakh crore in FY19. Further, these stressed debts are spread across sectors like infrastructure, manufacturing, telecom, power, metals, textiles etc. (For more read "Rebooting Economy XIII: Why Indian corporates are debt-ridden ")

What all this means is that the financial precariousness of India's large corporate houses poses a serious threat to the financial stability of the economy.  

How will they run banks and for what purpose?

India's consistent failure to resolve stressed assets  

What compromises the Indian economy further is India's repeated failure to resolve stressed assets over the past few decades.

India has tried several mechanisms, all of which failed: (i) Asset Reconstruction Companies (ARCs) in private sector registered under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act of 2002) (ii) Strategic Debt Restructuring (SDR) scheme of 2015 (iii) Sustainable Structuring of Stressed Assets (S4A) of 2016 and (iv) Insolvency and Bankruptcy Code (IBC) of 2016.  

There was yet another earlier mechanism, the Board for Industrial and Financial Reconstruction (BIFR), which gave way to the IBC of 2016 and dates back to 1980s. This mechanism was panned for a recovery rate of 25% of debts. The IBC's recovery rate is far lower at 21%. (For more read "Rebooting Economy 65: IBC has failed; will a bad bank succeed? ")

The IBC regulator, Insolvency and Bankruptcy Board of India (IBBI) says in its latest newsletter (July- September 2020) that 73.48% of the corporate insolvency resolution process (CIRP) ending in liquidation under the IBC were earlier under the BIFR.

Most of the debt claims under the IBC ended in liquidation - Rs 6.8 lakh crore or 59% of the total claims of Rs 10.5 lakh crore. In cases where the liquidation process is complete (Rs 18,916.9 crore), only Rs 280 crore was "realised" - that is, 98.5% or Rs 18,637 crore of bank credits were lost.

Also Read: Rebooting Economy 57: When and how will industry take India to next level of growth?

Liquidation leads to wiping out of the credit; it causes business loss and also wipes out employment that those firms provided.  

Now, this year's budget proposes a bad bank under the ARC (Asset Reconstruction Company) and AMC (Asset Management Company) model in which ARC will aggregate all stressed assets and transfer to AMC for resolution (similar to the ARCs in concept) to resolve stressed assets.

The details are yet to be worked out, but given the failures of private ARCs, political interference in the functioning of PSBs and poor banking governance, it would need a miracle for a bad bank to succeed.

Given the evidence and the state of the Indian economy, how valid are the claims and arguments of the RBI's IWG and Prof. Panagariya?

Also Read: Rebooting Economy 56: Why India should follow agricultural development-led industrialisation growth model

Also Read: Rebooting Economy 55: Farmer producer organisations best bet for small, marginal farmers

Rebooting Economy 65: IBC has failed; will a bad bank succeed?

 At 21% recovery, IBC has performed worse than UPA-era debt recovery mechanisms panned for inefficiencies. The idea of a bad bank is also likely to fail if political interference and poor bank governance continue

Prasanna Mohanty | February 7, 2021 | Updated 16:16 IST

Banking needs comprehensive structural changes to address stressed assets

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Faced with the prospect of dramatic rise in stressed assets of public sector banks (PSBs), about which the RBI warned in its recent report, the government is setting up yet another resolution mechanism. It proposes a bad bank under the ARC (Asset Reconstruction Company) and AMC (Asset Management Company) model in which ARC will aggregate all stressed assets and transfer them to AMC for resolution.  

Post-2014, the government has tried three debt resolution mechanisms: (i) Strategic Debt Restructuring (SDR) scheme of 2015 which allows creditors to take over firms unable to pay and sell them to new owners (ii) Sustainable Structuring of Stressed Assets (S4A) of 2016 which lets creditors take 50% haircut to restore the financial viability of firms and (iii) Insolvency and Bankruptcy Code (IBC) of 2016 which either revives (resolution) or closes (liquidation) indebted firms.

Also Read: Rebooting Economy 64: Budget numbers don't add up to 10% or more growth in FY22

The first two had failed by FY17, primarily because of governance failures as the Economic Survey of 2016-17 explained at some length. It was silent on the IBC since those were early days and strongly recommended a centralised (public sector) bad bank, which it called "Public Sector Asset Rehabilitation Agency" or "PARA" to "take charge of the largest, most difficult cases, and make politically tough decisions to reduce debt".

The government is now headed in this direction but to understand why one needs to look at the performance of IBC.  

At 21% debt recovery, IBC is worse than UPA-era's 25%   

The IBC has been stopped from initiating fresh corporate insolvency resolution process (CIRP) until March 24, 2021, by the government and apex court orders prompted by the pandemic-induced economic disruptions. The IBC regulator, Insolvency and Bankruptcy Board of India (IBBI), provides details of stressed asset resolution until September 2020 (Q2 of FY21).  

The IBBI's data shows that the total number of CIRP cases admitted for the IBC proceedings stood at 4,008 (from FY17 to Q2 of FY21). Most of these cases are from manufacturing (41%), real estate, renting, and business activities (20%).  

Of these 4,008 cases, 277 ended in resolution (firms continue as going concerns) and 1,025 in orders for liquidation.

Also Read: Rebooting Economy 63: Budgeting FY22 with critical information gaps

The following graph maps "admitted" claims of financial creditors (FCs) and "realisable" amounts from the resolution and liquidation processes.  

Click here to Enlarge

As is clear in the graph, the total claims were Rs 10.48 lakh crore (Rs 4.34 lakh crore plus Rs 6.14 lakh crore) and the "realisable" amount Rs 2.2 lakh crore" (Rs 1.89 lakh crore plus Rs 0.31 lakh crore). This means the total haircut is the rest Rs 8.3 lakh crore.

At this rate, the debt recovery works out to be 20.9% (79% of haircut).  

This debt recovery rate is far lower than the much-reviled UPA-era debt resolution processes when the recovery was 25% (and haircut 75%). The IBBI repeatedly reminded this in its reports to justify the IBC.  

There is yet another downside to it.

Most of the debt claims ended in liquidation - Rs 6.8 lakh crore or 59% of the total claims.  

Besides, out of Rs 18,916.9 crore of debt claims for which the liquidation process has been completed, only Rs 280 crore was actually "realised" - a recovery rate of 1.5% (haircut of 98.5%). The remaining Rs 5.95 lakh crore is under the liquidation process.

Liquidation is, thus, a triple whammy for the economy: Loss of credit/loan, loss of business and loss of jobs too.  

Diluting IBC and weakening RBI  

Why the IBC turned out to be worse than the notorious UPA-era of restructuring and ever-greening bad loans is for detailed investigation by forensic and insolvency experts.

Also Read: Rebooting Economy 62: Economic growth for whom and for what?

But enough evidence exists to suggest that the IBC is likely to go further downhill from here. There are three major reasons for this: (i) UPA-era like two-year loan restructuring the RBI allowed in August 2020 due to pandemic disruptions (ii) the Supreme Court's September 2020 interim order to banks not to classify loans as NPAs until further orders and (iii) dilution of the IBC and RBI's regulatory powers.

All three facts are known and need no elaboration, except for recalling some details about the third which highlights one of the key factors that may cause a bad bank to fail.

After resigning as the RBI Governor in December 2018, Urjit Patel disclosed in his book "Overdraft: Saving the Indian Saver" that the government had diluted the IBC and weakened the RBI's regulatory powers to resolve stressed assets after it issued a "revised framework" on February 12, 2018, asking banks to start resolution process after a day's default.  

The apex court struck it down on April 2, 2019, saying that "the RBI can only direct banking institutions to move under the Insolvency Code if two conditions precedents are specified, namely, (i) that there is a central government authorisation to do so, and (ii) that it should be in respect of specific defaults".  

Also Read: Rebooting Economy 61: All that's wrong with guaranteed MSP outside APMC

Instead of the RBI getting the authorisation, it issued a fresh circular diluting its earlier framework. Patel suggested that pressure from the government had led to this and that important functionaries of the government had started publicly undermining the IBC by seeking resolution of stressed assets outside the IBC. What Patel hasn't explained is: Why did the RBI acquiesce without protest? He hasn't yet revealed why he himself allowed demonetisation in 2016 that caused incalculable harm to the people and economy, especially since his predecessor Raghuram Rajan had opposed it.

Bad banks: Success is not guaranteed

Why will a bad bank succeed in resolving stressed assets when so many such mechanisms have failed?

The structure and functioning of the proposed bad bank is not yet known. After the announcement in the budget, Financial Services Secretary Debashish Panda has revealed that it would be a joint venture between the public and private sector banks without equity contribution from the government but with a sovereign guarantee to meet regulatory requirements.

The idea of a bad bank is not new to India though.  

Former RBI Governor Raghuram Rajan and his deputy Viral Acharya wrote in their September 2020 paper "Indian Banks: A Time to Reform?" that India's "primary experience" with bad bank was when the IDBI Bank transferred bad loans worth over Rs 9,000 crore in 2004 to a wholly-owned special purpose vehicle but neither did IDBI recover substantial amounts via its bad bank nor did IDBI Bank's lending record improve.

There are currently 28 ARCs in the private sector, RBI data shows. The central bank had promoted private ARCs much before the SDR and S4A came (ARCs are registered under the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act of 2002). The Economic Survey of 2016-17 said the RBI had hoped ARCs would buy bad loans of commercial banks but that didn't happen. In FY15 and FY16, ARCs bought up just 5% of the total NPAs and found it "difficult to recover much from the debtors".  

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It said, following this the RBI focused more on the SDR and S4A but these two had failed by FY17. Now the IBC has failed too.

Why will bad bank succeed?

Why India fails to resolve stressed assets?

Political interference poses the biggest challenge to resolving banking stressed assets. The IBC experience has highlighted it once more. What makes such interference easy is the RBI's easy acquiescence, like in the demonetisation of 2016 and dilution of its 2018 directive to banks for starting the resolution process after a day's default.

Problems with public sector banks (PSBs) are very old and well-known. From the appointment of executive heads and their boards to loan disbursals, decisions are directed and influenced by the government of the day.

Lack of independent and professional management leads to many governance failures, like poor risk management, reporting of bad loans, evaluation and monitoring of projects and firms bankrolled, etc. Proposals for an independent body for bank appointments and empowering boards have been long ignored.

The other is the economic policies that the RBI flagged in its Financial Stability Report of January 2021. It said the fiscal and monetary measures taken to revive the economy had "unintended consequences" of creating "macro-financial risks" to the economy. The Gross NPA ratio of Scheduled Commercial Banks (SCBs) was likely to rise from 7.5% in September 2020 to 13.5-14.8% in September 2021 - which would mean Rs 15-16.5 lakh crore of stressed assets in the SCBs.  

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It warned that if the current fiscal and monetary policies were prolonged, authorities would be locked in forbearance and liquidity traps, which the budget has ignored as it opted for a small increase in fiscal spending while giving large dollops of liquidity and tax concessions to businesses. Another policy that remains un-flagged yet is the routine write-off of loan defaults by big corporate entities and repeated recapitalisation of PSBs in compensation that further incentivises loan defaults. (For more read "Rebooting Economy 60: India in a financial mess of its own making")

The Economic Survey of 2016-17 highlighted some of the big challenges in preventing or resolving stressed assets, other than economic and business stress. It said stressed debts were "heavily concentrated in large companies" making it "inherently difficult to resolve". Taking over such large companies was difficult since they had many creditors, and it was "politically difficult as well".

The RBI's supervisory role too has come under scrutiny since 2018 when several banks and non-banking firms started collapsing or faced serious cases of financial frauds, like the PMC Bank, Punjab National Bank, ICICI Bank, Yes Bank, Lakshmi Vilas Bank, IL&FS, HDIL, DHFL, etc. Many corporate debtors under watch (for money laundering and other crimes) have fled the country, including Vijay Mallya, Nirav Modi, Mehul Choksi, Jatin Mehta, and Sandesara brothers.

Also Read: Rebooting Economy 57: When and how will industry take India to next level of growth?

Rajan and Acharya wrote in their paper that status quo in banking was simply not an option, yet they also warned: "At the same time, poorly structured reforms may not help. For instance, rapid re-privatisation of a public sector bank without firming up an independent governance structure for the privatised bank may exacerbate problems rather than solve them."  

Banking needs comprehensive structural changes to address stressed assets. As the past and contemporary experiences show, a trial-and-error method isn't necessarily the right way. For any mechanism to succeed, it would require two pre-conditions to be fulfilled: (a) addressing the conditions that lead to the creation of an unsustainable level of stressed assets and then (b) preparing the ground to pave the way for successful resolutions.

Short-cuts and impulsive actions haven't worked, have they?

Also Read: Rebooting Economy 56: Why India should follow agricultural development-led industrialisation growth model

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Rebooting Economy 64: Budget numbers don't add up to 10% or more growth in FY22

 Little attention to direct income support, health and education deprivations, and revival of small businesses will keep the demand and production of goods and services depressed in FY22

Prasanna Mohanty | February 6, 2021 | Updated 10:11 IST

Just ahead of the budget, the FY20 growth was reduced from 4.2% to 4%, which will lift the FY22 growth rate

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True to the trend, the budget for FY22 neither acknowledges nor seeks to address the biggest challenges that the pandemic-induced lockdown brought: massive loss of jobs and businesses, particularly smaller businesses; deepened poverty and hunger and worsened health and education inequalities. (For more read "Rebooting Economy 62: Economic growth for whom and for what? ")   

If one were to ignore the allocation of Rs 35,000 crore for vaccination, the budget gives no impression that India is going through an unprecedented human and economic crisis. The challenges are known, and so are their adverse impact on demand to revive growth (the GDP growth is estimated to be minus 7.7% in FY21) but the magnitude of these challenges is not known because the government made no attempt to do so, as feared. (For more read "Rebooting Economy 63: Budgeting FY22 with critical information gaps ")  

Rather, it is a budget for normal times with provisions for more of infrastructure spending, tax concessions for businesses, liquidity infusion, financial reforms and monetisation of assets to boost GDP growth. The underlying assumptions are the neoliberal economic thinking that the rising tide lifts all boats and growth trickles down. The stock market approved it with the BSE Sensex jumping by more than 3,000 points in the first two days (February 1 and 2).

Poverty reduces productivity also, hurting growth further

That loss of millions of jobs and shutdown of millions of small businesses are the biggest stumbling blocks to reviving demand or improving production of goods and services need no elaboration. Most global estimates say 40 million to 85 million of Indians would slip into 'extreme poverty' (per capita per day living expense of $1.9).  

A new study now says poverty reduces productivity of workers too. That would further hurt the economic recovery.

Also Read: Rebooting Economy 61: All that's wrong with guaranteed MSP outside APMC

Behavioural economists from top US institutions like the MIT, University of California and University of Chicago studied the impact of cash support to poor workers on their productivity and published their findings, "Do Financial Concerns Make Workers Less Productive?", in January 2021. It concludes: "Having more cash-on-hand... enables workers to work faster while making fewer errors, suggesting improved cognition".

Why so?

The study explained: "Concerns about money can create mental burdens such as worry, stress, or sadness. These in turn could interfere with the ability to work effectively." The productivity of workers given cash in hand went up by 6.2%, the effect was found to be "concentrated among relatively poorer workers" and mistakes (leading to poor quality product) declined.

Behavioural economists have known this, but this was, unlike others, a field experiment that confirmed the earlier (lab) findings. The workers in this experiment engaged in farming activities during sowing and harvesting seasons and did odd jobs in other times, in this case making leaf plates for local eateries. They were given Rs 1,400 in advance - corresponding to their one month's wage during lean seasons.

Does it seem the experiment is perfectly designed for India?

The experiment was actually carried out in Odisha.

Does this study say something about the new US administration's plans to give more cash in the hands of people who have lost jobs and also raise minimum wages? The US and other countries provided liberal cash assistance to people who lost jobs during the pandemic and the OECD countries reported to have saved 50 million jobs through their job retention schemes. (For more read "Rebooting Economy XXIII: What stops India from taking care of its crisis-hit workers? ")

India did neither. The budget doesn't either.

The government often cites fiscal constraints for its inability to do this, but this budget provides Rs 20,000 crore for re-monetising public sector banks (PSBs).

The PSBs write off loans of big private industries every year. In FY20, the total NPA write-off was Rs 1.8 lakh crore for the PSBs and Rs 2.4 lakh crore for the SCBs. The total NPA write-offs since FY04 are Rs 8.4 lakh crore and Rs 11 lakh crore for the PSBs and SCBs, respectively. Between FY15 and FY20, the government pumped Rs 3.16 lakh crore of public money into the PSBs and now has added Rs 20,000 crore more. (For more read "Rebooting Economy 60: India in a financial mess of its own making ")

Leaving job creation and revival of small businesses to chance  

The budget was expected to address the loss of jobs and businesses during the pandemic (incipiently pre-pandemic which started with the demonetisation and GST) but it didn't. It relies on higher spending on infrastructure and EPF subsidy (Atmanirbhar Bharat Rojgar Yojana). Sure, these will help but that is for normal times, for normal growth in employment, without addressing the unprecedented loss of jobs and businesses caused by the lockdown and the slowdown that preceded it.  

The allocation for rural job guarantee scheme MGNREGS has been reduced from Rs 1.1 lakh crore in FY21 (RE) to Rs 73,000 crore in FY22 (BE), as if the rural job crisis is over. As on February 3, 2021, the unmet demand for MGNREGS works stood at 17.5% for individuals and 13% for households in FY21. The average days of work provided to households was 45.8 days, against 48.4 days and 50.9 days in FY20 and FY19. Only 5% households got 100 days of work in FY21 (up to February 3, 2021) - far less than previous fiscals, not to mention the 150 days of work that the scheme mandates for calamities.

The Pradhan Mantri Garib Kalyan Rozgar Yojana (PM-GKRY) was launched last year to provide rural jobs to migrant workers who returned to villages. This has been discontinued (no allocation) to suggest that the reverse migration has reversed.

The MSME sector has been dismissed casually in the budget speech: "We have taken a number of steps to support the MSME sector. In this budget, I have provided Rs 15,700 crores to this sector, more than double of this year's BE," finance Minister Nirmala Sitharaman said while presenting Budget 2021-22 in the Parliament.

By December 2020, the finance ministry had disbursed Rs 1.58 lakh crore of collateral-free credit to the MSMEs (out of Rs 3 lakh crore earmarked) and said it expected 45 lakh units to resume business. At this rate, another Rs 15,700 crore for FY22 would mean 5 lakh more units to resume business. These are just 7.8% of the total MSME units (6.34 crore), 99.5% of which are micro units.

Also Read: Rebooting Economy 59: Quantum jump in fiscal spending is what India needs immediately

What about 92.2% or 5.84 crore MSME units left out?

1% growth in spending; 10% growth in GDP  

The finance minister said the government went on a spending spree to revive the economy and declared to spend more in the next fiscal year. Nothing can be further from the truth.  

The Controller General of Accounts (CGA) data shows that until December 31, 2020, the government had spent Rs 22.8 lakh crore out of the budgeted Rs 34.5 lakh crore. This is a 35% shortfall from FY21 (RE). This gap was much less, 25%, in FY20. Similarly, the gap in capital expenditure until December 2020 is 30%, far more than 24.4% in FY20.  

There is a bigger catch here.

These gaps exist despite an unusually high spending on subsidies. The government spent Rs 1.3 lakh crore on fertiliser subsidy, against the budgeted Rs 71,309 crore (1.9 times more) and Rs 4.2 lakh crore on food subsidy, against the budgeted Rs 1.2 lakh crore (3.5 times more) - as shown below.  

These additional subsidies are past expenditures hidden from the budgets through off-budget borrowings for years.

When it comes to spending for FY22, the total expenditure is just 1% more than FY21 (RE).  

The real GDP growth rate for FY21 is estimated at minus 7.7% (AE1) but for FY22 the budget projects plus 10% GDP growth (14.4% growth in nominal GDP minus 5.4% of inflation as assumed by the Economic Survey of 2020-21 while projecting 11% growth).  

The budgetary calculations of 1% rise in government expenditure for 10% GDP growth seems more than a mere optimism given that the two main engines of growth, private consumption demand and investment accounting for 90% of the GDP, are long depressed (both incipiently pre-pandemic too).

The capital expenditure is budgeted to go up by 26% in FY22 over FY21 (RE) and the revenue expenditure to fall by 2%. The capex still accounts for 16% of the total expenditure and revenue expenditure the rest 86%. How will this rise in capex impact growth?  

Also Read: Rebooting Economy 58: The untold story of India's services sector

It's is difficult to say because this rise in capex is small (Rs 1.2 lakh crore). Besides, the CGA data shows that the gap in capex by December 31, 2020 is 30% of the FY21 (RE) - much higher than 24.4% during the corresponding period for FY22.

Contra-intuitive spending priorities  

Here is the spending plan in key areas like health, education, agriculture and rural development, which are key to reviving growth, and also the past trends in these spending.

Low priority on health and nutrition needs  

The pandemic exposed India's healthcare and devastated socio-economic conditions of people with more than 10.8 million cases and more than 1.5 lakh deaths. The daily cases continue to be around 10,000 a day.  

Contrary to expectations, the allocation for health in FY22 falls by 9.5% over FY21 (RE) - from Rs 82,445 crore to Rs 74,602 crore - suggesting that the pandemic is over, there would be no more infections or deaths, and hence, calls for no higher health spending.

The budgetary allocation is higher by 10.5% over the last year's budget but there are plenty of anomalies in numbers. For example, the ministry-wise details reveal that the health ministry's allocation is Rs 71.269 crore, not Rs 74,602 crore that "Budget at a Glance" gives.

Interestingly, of this Rs 71,269 crore, Rs 3,480 crore is allocated to the Central Roads & Infrastructure Fund (CRIF). A government notification of 2019 lists "social and commercial infrastructure" development as one of the activities, but also says that the fund is run by the finance ministry, not the health ministry, which may have unforeseen implications.

The finance minister announced Rs 64,180 crore for a new scheme, PM Atmanirbhar Swasth Bharat Yojana, to develop capacities of primary, secondary, and tertiary care in 122 aspirational districts but this is over six years. Is the transfer to CRIF (Rs 3,480 crore) a part of it?

As for nutritional support, it is relevant to recall that the health ministry's health survey (NFHS-5) of 2019-20 (released in December 2020) had hit the headlines for all the wrong reasons: child malnutrition indicators had stagnated since 205-16 and in the majority of states the proportion of underweight children and child stunting had increased.

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The budget does not allocate more for nutritional programmes, but less.  

A new scheme, Saksham Anganwadi and POSHAM 2.0 has been launched, combining Anganwadi Services, Poshan Abhiyan, Scheme for Adolescent Girls, National Creche Scheme. It has been allocated Rs 20,105 crore.  

This is far less than Rs 28,557 crore allocated for the ICDS programmes (covering the schemes mentioned under the new scheme) in the last year's budget, and also less than Rs 20,538 crore allocated for the anganwadi services alone in the last budget.

Low priority on education spending

Similarly, the FY22 allocations for education may be higher than FY21 (RE) but is less than the last year's budget - Rs 93,224 crore in FY22 (BE) against Rs 99,312 crore in FY21 (BE). In addition, the government would be spending Rs 14,000 crore less in FY21 than what was budgeted as the FY21 (RE), spending on education is Rs 85,089 crore.

India's public education system has been neglected ever since the private sector was encouraged education (as in the case of healthcare too) in the post-reform era. The intent to strengthen and open new schools are good promises but what about the Oxfam International's finding that during the pandemic rural children were deprived of education since only 4% households have access to computers and less than 15% to internet connections?  

Low priority on rural development and agriculture

Rural distress has been high for years and the pandemic saw millions walking back to their villages. The rural economy needs higher assistance, but the budget lowers allocation for rural development by 10% over the FY21 (RE). This would mean the government thinks the rural distress is over.

The allocation for agriculture has increased by Rs 2,946 crore over FY21 (RE) but is lower by Rs 6,474 crore from the last year's budget. Tall claims about front-loading the PM-Kisan cash transfers (Rs 6,000 per year to all farmers) notwithstanding, the government intends to spend Rs 10,000 crore less in FY21 (RE) from Rs 75,000 crore budgeted last year. The allocation for FY22 has also been brought down to Rs 65,000 crore.

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Will India become the fastest growing economy in FY22?

Going by the growth numbers for FY22 that may be the case but that would be a temporary blip and then back to low growth, unless a miracle happens.

The growth projections by the IMF, Economic Survey of 2020-21 and the budget for FY22 are 11.5%, 11% and 10%, respectively (assuming 4.4% inflation as the Economic Survey of 2020-21 does.

This growth will be from minus 7.7% growth in FY21, and hence would mean a GDP growth of 2.4% over the absolute level of FY20. The Economic Survey recognises this very well.

There are other reasons to be skeptical of the FY22 growth number.

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Just ahead of the budget, the FY20 growth was reduced from 4.2% to 4%, which will lift the FY22 growth rate. There have been several such retrospective revisions in GDP numbers, creating doubts about their reliability in the first place. (IMF and World Bank rely on India's data for GDP)

Further, the FY21 growth projection is based on the quarterly GDP data of FY21 which relies on formal sector indicators for industry and services and partly on actual data for agriculture. Thus, this calculation can't be a reliable indication of the actual growth number. (For more read "Rebooting Economy XXVIII: Is India poised for agriculture-led economic turnaround? ")

Should one get carried away by the 11% growth figure and assume everything is alright? Or that the budget is good enough to revive growth? That would be unwise.