Digital Speculation & Economy

Let us understand the entire volume of money in transaction and try to ask a few questions? What is the Global GDP? How much is the world’s richest person’s share as compared to the total wealth?

A huge corpus of the money is floated around from person to person everyday – people buying at a price just to sell off to another person offering a higher price. A comparison with All Money in the bubble gives us an understanding how big a part – Digital Speculation of Financial Market is!

Ever wondered how stock price fluctuate? And what exactly is demand and supply affecting the market price to move up and down by the second?

It’s basically the bid and offer price. At any random given time, we have a number of buyers willing to buy a stock and a number of sellers willing to sell the stock at any given price. The exchange puts these ‘limit orders’ in a tabular form and decreasing order of “Buy Price” and increasing order of “Sell Price”. Bid price is the highest price (highest auction price) one is willing to pay to buy a stock. Offer Price is the least price (lowest sell price) one is willing to sell for this stock.

This is what we call the market depth. Generally, this bid price and offer price are very close to one another and offer price is slightly above bid price at any given time. This is called the Current Market Price (CMP): Offer Price for a buyer (because he will buy from the lowest seller) and Bid Price for the seller (because he will sell to the highest auction bidder).

How markets move? It’s generally BUY and SELL power. Huge buying will clear off all levels of Sell Price at the exchange and fresh bid will come thereby taking the CMP higher (higher demand). Sharp selloff can make the price come down as it will clear off Bid Price levels and fresh offers will come to settle.

Market Depth and how the Bid & Offer Prices move by the second

Now understand this. What if my intention of buying is just to sell off to the next buyer? Or in simple terms, my buying decision is simply based on the interest of the next buyer. Yes, this can happen when there’s a panic buying or selling – driven by emotions and this over a few trading sessions can end up to crazy valuations. In the stock market, some stocks to be intrinsically valued at 5rs sell at 50rs and some for 50rs sell at 5rs only.

Okay, at least for an asset class that produces something (like a farmland or a company share) – you have an entry point. A PE ratio – at what multiple of its present earnings you must pay to enter the business’ ownership! What about Gold or other metals? Or Cryptocurrency?

“BTC is an asset class that produces nothing” – Buffet

The concept of cryptocurrency is unique with hashing methodologies which can prevent time, infrastructure & cost of a conventional banking system. Though the idea has some challenges and markets do see the maximum future it can – should an idea be valued at $1 trillion with a single bitcoin trading at $57,000+?

The Power of Social Media Influence

Many of these price speculations are done not only by panic buying or insider trading – it can be as simple as a tweet or post. Provided the tweet comes a personality like Elon Musk. A stock price surging 1000% or BTC gaining a hundred billion dollars’ worth of valuation over a single tweet on a single day proves a ton on how emotions are linked with the current market price we see.

A single tweet increasing valuation of hundreds of billions of dollars is what the Power of Influence is

Will the Speculative Price Bubble Burst?

We all remember the US real estate bubble of 2007. Did AIG or Lehman Brothers see it coming 2 years in future? Super high rents on super expensive houses in New York City and thousands of defaulters and collateralized debt obligations (CDOs) finally resulted in the burst of bubble and bankruptcy of a some of the world’s biggest financial institutions in Wall Street.

Can this happen to BTC? Again, forget human emotions over a brilliant idea, tweets by richest people of the planet – isn’t it too highly valued over just an idea being speculated over each trading session?

Let’s understand what a crash is.

Consider February-March downfall in world markets over Covid pandemic. Investors of the world thought it to be a disaster and since markets see as much as they can see in the future – retail investors to corporate MFs started sharp selloffs. Somewhere along the line it feels “This is the End” and slowly it persuades others to escape. The prices slowly start to be driven by emotions than fundamentals and logical possible outcomes and thereby “Panic Selling” and huge decline happens!

Similarly a bubble burst (E.g. 2008 US Housing Bubble Burst, 2000 dot-com bubble burst) happens when there is a huge rally and overvaluation of an asset driven by emotions and speculations (“People buying betting on the excitement of the next buyer”). And then suddenly the balloon bursts due to the nature of the unhealthy growth beyond logical fundamentals.

Finance amalgamated in evolving modern technology is where the world is heading towards. Maybe cryptocurrency is the universally accepted alternative for the conventional banking across the world – and maybe from 2040 to look today in 2021 BTC is still very cheap in valuation!

AGRICULTURE SECTOR

The budget presented on 1st February 2021 was an important one for Indian agriculture. It was the 1st budget in the COVID era thus it had the ownership to bring back growth in a sector that employs 60% of India’s population. Also, in 2015, the government made a promise to double farmers’ income by 2022, thus it had the onus of one final push to fulfill this promise. In addition to that, this budget has been presented in the background of the ongoing Farm Law protests and could have been used to mollify the situation by increasing budgeted allocation for the agriculture sector.

This year, the government allocated Rs.1,23,018 crore to the Dept. of Agriculture, Cooperation and Farmers’ Welfare (DACFW) which is 8% less compared to Budgeted Expenditure (BE) in FY21. This department is responsible for the implementation of schemes such as Pradhan Mantri Fasal Bima Yojana, which provides interest subsidy for short-term credit to farmers and promotes up-gradation of skills to enhance the adoption of technology in this sector. Due to this decline in budget allocation towards DACFW, the PM- Kisan Scheme, which provided direct cash support to farmers of Rs. 6000, has seen a decline of Rs. 10,000 crores to Rs. 65,000 crores in FY22. This is a surprising move considering the current political and economic situation of the country as it was expected that agriculture and allied sectors will not see a decrease in budgetary allocation. Although, due to COVID-19, the government had introduced a revised budget in 2020, thus the current allocation is 5% more than the revised estimates of FY21.

In this budget, the government has ensured its commitment to the APMC system, a point of contention in the recent farm protests. Now, APMC’s will become eligible to utilize Rs. 1 lakh crore financing under the Agriculture Infrastructure Fund (AIF) which will lead to enhancement of infrastructures of the mandis. In addition to this, 1,000 APMCs will be connected to the e-National Agriculture Market (e-NAM). An additional source of funding for the agriculture sector has been made through the introduction of an Agriculture Infrastructure and Development Cess (AIDC). Through this cess, the government hopes to raise Rs. 30,000 crores to build infrastructure facilities for post-harvest produce in the mandis. According to a study conducted by NABARD, there have been infrastructural gaps ranging from 10% in case of cold storage (bulk & hub) to 99.6% in the case of packhouses. In India, food worth Rs. 92,651 crores are lost in post-harvest processes. [1]Insufficient private investment in such infrastructure and logistics is one of the principal reasons for such gaps. [2]Thus, creating a cess fund for this purpose is a move in the correct direction.

In addition to the existing 6,000 Farmer Producer Organisations (FPOs), the government has budgeted Rs. 700 crores to the development of 10,000 new FPOs. Almost 86% of Indian farmers have small and marginal land holding sizes i.e. 0.58 hectares of land only. These small land sizes make it impossible for them to achieve economies of scale which come from increasing production thus leading to low costs. However, when farmers join FPOs, they get shared access to markets, schemes, and credit. For example, Maharashtra based Rushiwat Farmer Producer Company Ltd. (RFPCL) with 1270 farmer shareholders, now owns a seed and turmeric processing plant and a warehouse where the product is sorted and graded. In 2019-20, the FPCL made Rs. 1.32 crore and received a premium for the turmeric they grew. [3]

Although the FY22 budget does not make provisions for any immediate relief to the agriculture community, it has made necessary allocations that will make this highly inefficient sector self-reliant and resourceful.

Author: Ambika Shevade
Editor, TJEF

[1] https://medium.com/@IamDineshN/post-harvest-losses-in-india-fa7e3e8981fe

[2] https://pib.gov.in/newsite/PrintRelease.aspx?relid=199102

[3] https://www.livemint.com/news/india/how-farmer-led-firms-are-hedging-inflation-11600094280389.html

BFSI and Disinvestment in Budget 2021

The banking and Financial Services Industry is an integral part of the spine of the finances of our country. With a contribution of Rs.107.83 lakh crore just by the public sector banks in FY20 itself the segment is moving at an accelerated growth rate of 3.57% compounded annually. There has been a major influx in newer technologies into banking services with the internet boom and the higher acceptance of digital payments across the channels ever since the demonetization move in 2016. Private players like WhatsApp bringing in UPI payments facility and the setup of NPCI (National Payments Corporation of India) have also promoted the growth of BFSI and its overall infrastructure over time. These facts alone are good enough to justify the importance of the sector in our economy. A small dent in the variables or a minor positive plush may turn things around. The annual budget of each year has a similar impact. The trial continued with the budget of FY-21 with the proposal of new policies and plans, the highlights of which we try to closely analyze and assess with a forward-looking approach for the overall economy.

Overview

A retrospective view of the past few years has brought the banking sector and PSUs into the mainstream to a higher degree than before. As per the budget of 2021, Finance Minister Nirmala Sitharaman unveiled the plans of divesting in all sectors barring four strategic areas. The government announced a budget of Rs. 1.75 lakh crore from the stake sale in public sector companies and financial institutions including 2 PSU (Public Sector Unit) banks and one insurance company in the next fiscal year. The move comes under the new PSE (Public Sector Enterprise) Policy unveiled in the current budget in the next fiscal year.  The policy would entail the strategic sale of IDBI Bank, BPCL, Shipping Corp, Container Corporation, Neelachal Ispat Nigam Ltd. being the inclusions up for sales by the end of the year beginning on April 1. The disinvestment target is lower than the last year’s target of 2.1 lakh crore.

Pros and Cons: A Brief View

The annual budget like any other aspect has its pros and cons. While there are moves that can be called for a positive catalyst for the economy, there are some areas that have still scope for the rework to be done.

The Pros

  • Constitution of ARC/AMC- Through the annual budget the government plans to work on the constitution of an Asset Reconstruction Company/ Asset Management Company. NPAs have been a burden on the economy, especially in the past few years. With a plan to subdue this burden to a different entity while the focus is kept on their reconstruction, the assets would be transferred and dealt with separately by a specially set up ARC/AMC done by an existing company in the business of ARC.
  • Deposit Linked Insurance Scheme- With an aim to restore the confidence of retail depositors in the banking industry an implementation framework would be in place whereby the depositors would be able to withdraw amounts up to 5 lakhs against their deposits. The success of this initiative would be directed by the seamlessness with which the deposit and withdrawal process continues.
  • Increase in FDI limits- With an increase in FDI limits, up to 74% in the insurance industry, the move is a welcome change as the control can rest between foreign JV partners with a dominance of specific safeguards such as the majority directors being Indian residents and 50% of the board comprising of Independent Directors.
  • Capital outlay for PSB revitalization- The budget entails an outlay of Rs.2000 crore to improve the financial health of the PSBs which would help in the further easy provision of capital during difficult times on the capital adequacy front. The privatization of banks would enable the other PSBs to gain an impetus for better performance and reflect a level of open-mindedness.
  • LIC (Life Insurance Company) IPO- The major move of the current budget is the disinvestment of the LIC and the decision of an IPO. The move would enable a significant cash inflow as well. The disinvestment being budgeted at Rs. 1,75,000 crores as per the budget. A discussion is also on the cards for the consolidation of the SEBI Act, 1992, the Depositories Act 1996, The Securities Contract (Regulations) Act, 1956, and Government Securities Act, 2007 into a rationalized single market code to streamline the multiple laws. The process would also lead to ease in implementation of the statute being easy from an administrative viewpoint.
  • Tax-related benefits-
    • Exemption of royalty income received from non-resident on account of the lease of aircraft paid by a unit in IFSC would be exempted from income tax in India
    • Investments in Unit Linked Insurance Plans (ULIP) would be taxable on maturity applicable on all policies taken on or after February 1, 2021. The move will create parity in terms of how mutual funds and ULIPs are taxed in the hands of the end consumer as an investment product.

The Cons

  • GST reduction on medical insurance premium- An area missed out in the budget would be not reducing the GST on the medical insurance premium, which was a major expectation of the industry. Given the fact that the budget gives maximum importance to Healthcare and wellbeing, a reduction of tax from 18% to 12% could have further benefited the insurance industry making the premiums more affordable
  • Rationalization in the tax rate for Indian branches of foreign branches- The foreign banks looked forward to a rationalization in the tax rates from the current levels. The taxes currently levied at 40%, if reduced to lower a level as applicable on the domestic banks in India could have been a major tax reform in the banking sector.

Editor’s Note- A verdict

A narrowed assessment of all the positives and negatives affecting the BFSI sector, and an aggregate analysis helps us understand some key points coming into the picture.

  • Catch up with the change- Privatization and disinvestments being some of the key components of the budgets indicate the need for the PSBs to accept the changes and also gain pace to function stronger than before. The decision will bring in more competition in the environment.
  • Insurance will be the key game changer- On being compared to other developed nations and the emerging economies like Thailand and the Philippines, India has lagged in the insurance industry. The penetration level and density of insurance are far lower when compared to other Asian countries. This will gain good momentum with a proposed increase in FDI limits at 74% and proposed IPO of for LIC. An additional focus on health and well-being may also drive more capital inflow into the sector.
  • Increased spending levels- The RBI has worked through the repo rates by reducing them and hence making a subtle nudge for the banks to increase the spending of the consumers. With a greater and more definitive role, the Banks will act in the direction of giving cheaper and more attractive loans than before hence acting as an incentive to spend more.
  • Close watch on the NPAs- With an agenda to strengthen the core of banks and their functionality, the budget aims to scrutinize closely the balance sheets through its move to implement a special body to watch the NPAs and work towards their reconstruction. This in turn would provide value to customers and shareholders of the banks

The budget can be an easy charter for the BFSI sector to the growth and development which can be a positive variable in the overall function of the growth of the economy.

Author: Mohd.Yusuf (Editor, TJEF)

Healthcare Sector

There are a lot of things that people wait for with baited breaths, but nothing in that list impacts their lives as much as the Union budget. There are generally always key focus areas that the budget presents every year and this year was no different, yet was historic. A sector that had never garnered enough focus was at the center-stage this year around- Healthcare has been at the center of all policy decisions due to the unprecedented medical crisis brought about by the ongoing pandemic. Dr. Prathap C Reddy, Chairman of the Apollo Hospitals Group, hailed this new outlook by the Government as “ground-breaking” and is optimistic that it will “fuel job creation and boost economic momentum”.

India has always been among countries that have the lowest healthcare budgets in the world. GDP percentages of Healthcare systems in India have consistently been below average and below recommended international guidelines by enormous margins. India’s healthcare sector only contributes to 1.3% of its GDP while the OECD countries have an average of 7.6% and even BRICS countries average of 3.6%. Even though the per capita government spending has almost doubled from Rs 1008 per person in FY15 to Rs.1944 in FY20 it’s a still low CAGR of 15%. Globally, Indians have the highest Out of Pocket Expenditure on healthcare.  

This year however there have been a shift in the outlook albeit triggered by the prolonged pandemic. There have been a few hits along with a few misses:

  • The Government has announced a total outlay of Rs.2,23,846 Cr for health and wellbeing which amounts to a 137% rise from the previous year. Budget conveyed that healthcare is a priority for the government.
  • Several schemes like the PM Atmanirbhar Swasth Bharath Yojana scheme has been announced, and they have an outlay of Rs 64180 crore that will be run along with the National Health Mission.
  • The PM Jan Arogya Yojana (AB-PMJAY) are also a part of the increased healthcare budget. Every year close to 5 crore families are pushed below the poverty line just to bear healthcare expenses. This Yojana aims at providing healthcare cover of up to 5 Lakhs per family per year.
  • A sum of 2.23 lakh crore is set to be spent on health care, of which 35000 crores is to be spent on COVID-19 vaccines alone.
  • The budget aims at boosting primary healthcare as well. The focus this time is not limited to rural development but it also looks at urban areas with plans of 17000 and 11000 health and wellness centers in the rural and urban areas respectively. Integrated public health laboratories and public health units are in plans of set up.

Amongst all the upsides and promises for a better tomorrow, there have been a few questions and expectations unanswered and unaddressed.

  • The primary need of the hour, the reason the pandemic caught us all off guard is the fact that R&D is not focused on enough. No schemes have been announced to increase R&D in government institutes, neither has R&D spending in private pharmaceuticals been incentivized in any way.
  • Advanced medicals devices are primarily imported into the country, no reduction in import duties have been announced.
  • The GST on Active Pharmaceutical Ingredient (API) is at the higher slab of 18%. This results in higher prices of the final product. Even though the reduction to 12% was anticipated and expected, the budget however did not reflect the same.

Nevertheless, despite all the shortcomings, the budget has been revolutionary in many ways. It reflects the changing mindset of the country where healthcare is steadily coming to the forefront. The COVID 19 provided the necessary impetus to focus on public health and the overall healthcare system. While it is evident that the steps are not enough to meet the colossal demand of healthcare and also meet the necessary OECD guidelines and other global standards, we still do have a long way to go.  This is year’s Budget comes as a welcome change in the right direction, in a country where healthcare has always taken the backseat. The pandemic seems to have caused a paradigm shift in  not only India but all over the globe.

Power and Renewable Energy Sector

We are doing our best every day, sitting on the same spot for hours, reading as much as we can, and gaining as much knowledge as possible to become valuable and be a solution provider to the world’s problems. Why are we doing this and what do we want to achieve by being valuable? Your answer can be anything from buying yourself a Tesla or a Bentley, or a sea-facing bungalow, or making the world tour dream come true or anything else. Now imagine a scenario where you do not have enough infrastructure to charge your Tesla or secure enough fuel for your Bentley, or enough power to light up your beautiful sea-facing bungalow. You might wish to work for the welfare of the poor and underdeveloped rural regions but that is impossible without securing enough electricity to light up their homes and empower their small businesses. I hope these few lines will be enough to make us understand the direct impact of power and energy sector on our lives. Also, the growth of the economy and its global competitiveness heavily depends on the availability of reliable and quality power at competitive rates to all consumers at all places.

In the previous year, the government focused its budget allocation towards reforming the distribution networks by introducing large scale smart metering and an expansion of the National gas grid. However, the allocation of INR 22,000 crore wasn’t just enough to quench this thirst and address the proposed reforms of the country. Also, as the pandemic hit the country, the need for power suffered a huge blow. There were not enough cashflows available with the distribution companies and therefore they were not able to fulfill their obligations to the power generation companies. Therefore, this year, the government had to focus a major expenditure of INR 1,20,000 crore on increasing the liquidity to support this supply chain and was forced to compromise on the structural reforms it wanted to introduce. 

The union budget of FY 2021-22 focused not only on bringing in structural reforms to step up on the ladder of development but also on providing aid to the distressed power sector. Therefore, the government allocated INR 3,06,000 crore to the distribution companies to support this important link of the entire power sector value chain. In addition to this, the Rural Electrification Corporation Ltd. will also raise about 69 % higher funds through the internal and extra-budgetary resources against what it raised previously. This is done to strengthen the sub-transmission and distribution networks in the rural areas, metering of distribution transformers/feeders/consumers in the rural area, and rural electrification.

Previously the government had discussed reducing aggregated technical and commercial losses which are currently at 26.31% (as per the Ministry of Power, Government of India) to below 15%. The present budget also has included this agenda to reduce technical losses with contemporary equipment for last-mile distribution. There is a proposal for pre-paid smart-metering which is a very expensive venture and still needs to be made clear with the kind of roll-out mechanism that will be put in place for its implementation.

As of now, we understand that in the previous year government could not contribute much to power generation companies, therefore this year a higher expenditure of INR 61,555 crore will be done, which is 22% higher than the revised estimates of the fiscal year 2021. This allocation will be made to increase the coal-based power generation capacity and build several hydroelectric power projects in Himachal Pradesh and Jammu and Kashmir. In addition to increasing power generation, this will improve the transmission and distribution infrastructure under the Integrated Power Development Scheme by the Ministry of Power. IPDS also aims at strengthening the sub-transmission network, and also be involved in metering, IT application, customer care Services, provisioning of solar panels, and the completion of the ongoing works of Restructured Accelerated Power Development and completion of the Reforms Programme (RAPDRP). The government is also determined to set up a separate central transmission utility for easing the planning and execution division of Power Grid Corporation of India Ltd.


Indian Renewable Energy Development Agency Ltd has been sanctioned INR 12,696 crore, approximately half of which is towards the development of renewable sources of energy and the rest half is towards the maintenance and expansion of the current resources. The government wants to establish a renewable energy capacity of 500 GW by 2030. It plans to install 175 GW of renewable capacity, including 100 GW of solar capacity by the year 2022. Presently we only have about 90GW of energy being produced by renewable sources and still require 85 GW to be installed to achieve this year’s target. The allocation to the solar energy corporation of India which will be funded by IEBR is set to boost the pace of the underdevelopment projects which will increase the power capacity by 32 GW using solar energy and 8 GW using wind energy.

Government expenditure in form of subsidies was seen under the KUSUM Scheme under the ministry of power and new & renewable energy. With the help of this scheme. the government is planning to update the irrigation system of India and as well as promoting solar power production by changing more than 3 crore diesel and petrol-driven pumps by solar-powered pumps. In addition to this scheme, the budget [DT1] also focused on increasing the subsidies for the development of grid-connected solar infrastructure under the solar rooftop program designed to expand access to solar savings for qualified residential customers who otherwise may not be able to use solar because of the high cost of installing panels. 

The government also put yet another strong step forward for an Atmanirbhar Bharat by increasing the import duty on solar modules/cells and inverters up to 20% for 2021 from 5%. This increase in taxes is supposed to push the local manufacturing capabilities in India which in turn will reap its benefits towards increasing the solar power capacities in near future. These measures come with a backdrop to reduce India’s import dependence on Chinese products, as almost 80% of the imports of solar cells, modules, and inverters were from China.

Energy is an important input for economic development and the power sector is an indispensable part of the infrastructure in [DT2] any economy. Providing adequate and affordable electric power is essential for economic development, human welfare, and a better standard of living. The demand for power in a developing country like India is enormous and is growing steadily. Thus it is very clear that the government wishes to achieve a growth-centric, investor-friendly, and environment-conscious energy sector for the country. It is evident that the government is ambitiously putting in efforts to push towards a gas-based economy, developing infrastructure to enable cleaner use of fossil fuels and reliance on renewable sources to meet COP21 commitments as it also believes in The nation that leads in renewable energy will be the nation that leads the world”.


 

INFRASTRUCTURE SECTOR

India spends over 4 per cent of GDP on infrastructure, according to Oxford economics, as opposed to China, which spends about 6 per cent of GDP. To achieve UN sustainable development targets, India needs to invest at least 1.5 trillion more annually. Disputes between the government and vendors over infrastructure contracts often result in delivery delays and cost escalations.

On 1st February 2021 the Union Budget of India for 2020-21 was presented. It was led by Indian FM Nirmala Sitaraman and is the first one to be paperless due to the Covid Pandemic situation!

Let us look at the government budget’s exclusive Infra reports:

  • The Government has extended its ₹ 111 lakh crore ($1.5 trillion) national infrastructure pipeline so that by 2025 it can cover more projects to shore up economic growth as the nation recovers from the pandemic caused recession.
  • The National Infrastructure Pipeline, with 6,835 projects initiated, has now grown to 7,400 projects. Under some main infrastructure ministries, approximately 217 projects worth Rs 1.10 lakh crore have been completed.
  • The programme would need an increase in both government and finance sector support, she added. The government is planning to take three concrete measures for this purpose:
    • Creating structural framework Great traction on asset monetization Rising the proportion of capital expenditures in central and state budgets
    • Large thrust on asset monetisation
    • Increase in federal and state budget allocation in capital spending
  • To draw investment and make India a $5 trillion economy, building new highways, rail links and other social and economic infrastructure is crucial. The NIP, collectively sponsored by the central government (39%), the state government (40%) and the private sector (21%), aims to invest in projects across sectors such as electricity, social and business infrastructure, connectivity, water and sanitation.
  • In addition, a new construction financing institution named the National Bank for Infrastructure and Growth Finance will be set up by the government. This will be set up on a Rs 20,000 crore capital base and in three years it will have a Rs 5 lakh crore lending target.
  • The FM said, ““Infrastructure needs long-term debt financing. A professionally managed development financial institution is necessary to act as provider, enabler and catalyst for infrastructure financing”

Some of the other key announcements that the government announced with regards to the Infra-Sector:

  • It will launch a nationwide monetisation pipeline of future brownfield infrastructure properties.
  • To track progress and to provide investors with visibility, an asset monetisation dashboard will be developed.
  • NHAI and PGCIL to build confidence in infrastructure investment to draw worldwide funds. Five operating roads are being moved to NHAI InvIT with an approximate enterprise value of Rs 5,000 crore.
  • Transmission reserves to be transferred to PGCIL InvIT to the amount of Rs 7,000 crore
  • Rs 5.54 lakh crore for 2021-22 – a sharp rise in capital spending, which is 34.5 percent higher than the 2020-21 budget forecast.
  • To have more than Rs 2 lakh crore for the capital spending of states and autonomous bodies.

    Gross budget funding for capital spending was substantially increased to Rs 5,54 lakh crore in 2021-22 BE (up 34% from 2020-21 BE and 26% from 2020-21 RE), with a higher allocation to the infrastructure market (roads, railways, etc).
Capital Outlay (₹ Crore)2020-21 BUDGET ESTIMATES2020-21 REVISED ESTIMATES2021-22 BUDGET ESTIMATESGrowth over BEGrowth over RE
Railways₹ 1,60,792₹ 2,40,840₹ 2,14,85834%-11%
Road Transport & Highways₹ 1,46,975₹ 1,57,053₹ 1,98,23035%26%
MRTS and Metrorail₹ 20,471₹ 9,437₹ 24,58220%160%
Ports, Shipping and Waterways₹ 3,715₹ 3,129₹ 4,91732%57%

The Union Budget has declared the creation of a new DFI with a capital of Rs.20,000 crore to increase the funding availability for the infrastructure sector. The goal of this organization is to finance and provide the infrastructure sector with debt more than Rs 5 lakh crore over the next three years, thus helping to bridge the infrastructure funding gap. The funding of infrastructure projects in India is primarily from the banking sector and a few NBFCs for infrastructure.

The Union Budget also provided the NIIF with Rs 5,000 crore, which would enable it to acquire infrastructure properties. Apart from this, the NIIF Infrastructure Debt Financing Mechanism was provided with another Rs 1,000 crore funding, which could be leveraged to provide the sector with substantial debt financing. The NIIF debt platform plans to develop a Rs 1 lakh crore debt portfolio by 2025 with the government’s funding of equity capital and the NIIF Strategic Opportunities Fund and future private sector equity involvement.

TDS on distributions were also removed from the budget by the InvIT, which would reduce the enforcement conditions of unit holders/investors. InvITs have a great ability to draw long-term capital to invest in secure assets for operating facilities and have a constant supply of longer-term cash flows.

FISCAL POSITION

Union Budget 2021, the first budget of the decade, also the first digital budget, presented in the backdrop of COVID-19 crisis, estimates total expenditure for 2021-22 at Rs 34.8 lakh crores. Expenditure in 2021-22 has increased at an annual rate of 14% over 2019-20. Revenue expenditure (expenditure for the normal running of government departments, interest charges on debt) is estimated to be Rs 29.3 lakh crores and capital expenditure (government spending that goes into the creation of assets like schools, hospitals, roads, etc.) is estimated to be Rs. 5.5 lakh crores.

Government Receipts (income of the government) are estimated at 19.7 lakh crores (an increase of 6% over 2019-20) leaving deficit of 15 lakh crores to be covered by borrowings (27% annual increase over 2019-20). Fiscal deficit (difference between the total income of the government and its total expenditure) is estimated to be 6.8% of GDP. Government borrowing from the market is planned around Rs 12 lakh crores. The rest is to be funded through multilateral borrowings, Small Saving funds and short-term borrowings. The nominal GDP is estimated to grow at a rate of 14.4% in 2021-22.

Last Year’s Fiscal Position

Budget 2020-21 estimated total expenditure at Rs 30.4 lakh crores, but the actual expenditure came out to be Rs 34.5 lakh crores. Revenue receipts which were estimated to give the government 20 lakh crores were revised to Rs 15.5 lakh crores. Fiscal deficit estimated at 3.5 % of the GDP was pegged at 9.5 % of the GDP.

Break Up of Government Receipts

SourceEstimates (in lakh crore)
A. Tax Receipts 
i) Indirect Taxes11.2 (6.3 from GST)
ii) Income Tax5.61
iii) Corporation Tax5.47
iv) Excise Duty3.35
B. Non-Tax receipts2.43
C. Disinvestments1.75

Non-tax revenue consists of interest receipts on loans given by the centre, dividends and profits, external grants and receipts from general, economic, and social services, among others.

Gross Tax revenue is estimated at Rs 22.1 lakh crores, of which the central government’s share is Rs 15.45 lakh crore. Devolution to states, estimated at 6.65 lakh crores, is marginally higher than last year’s devolution.

DIRECT TAX PROPOSALS

  • Exemption from filing tax returns for senior citizens over 75 years of age and having only pension and interest income
  • National Faceless Income Tax Appellate Tribunal Centre to be established
  • Eligibility for tax holiday claim for start-ups extended by one more year
  • Capital gains exemption for investment in start-ups extended till 31 March,2022

INDIRECT TAX PROPOSALS

  • Reduction in Custom Duty: On certain Iron and steel products, Textile products, Gold and Silver, Chemicals.
  • MSME- To incentivise exports of garments, leather and handicraft items, exemption on import of duty-free items rationalised.
  • Agriculture- Customs duty on cotton set at 10% and increase on duty on raw silk and silk yarn from 10% to 15%.

What’s cheaper, What’s costlier

Costlier

  • Cars
  • Electronic appliances
  • Leather Items
  • Shoes
  • Mobiles and Home Appliances

Cheaper

  • Gold, silver and other precious metals like platinum and palladium
  • Medical devices imported by international organisation and diplomatic missions
  • Nylon Clothes

BUDGET SERIES || CONSUMPTION

The solution to every problem can be found only if the problem is first decoded till the first principle. India’s economic slowdown should be treated and decoded the same way. The first thing that needs to be identified is whether the current slowdown in the economy is a cyclical slowdown or a structural slowdown. Cyclical slowdown is one that is characterized as a part of the business cycle, going through a trough which will eventually be followed by a recovery and peak. In gist, it is a short-term problem which can be solved through government’s fiscal and monetary policy. However, what the country is witnessing today is a structural slowdown and in order to garner a remedy for the situation, there needs to be a better understanding of the problem and there after damage control.

India’s growth story has always been driven by consumption. In terms of the components of GDP- government expenditure has been whooping for the economy, however government expenditure forms only around 10% of the GDP. Additionally, the fiscal deficit of the government raises concerns about what extent can the government afford to stretch the deficit to, especially with staggering tax collections. The current fiscal deficit stands at 7.5%, which is a notch higher than all the developing countries, barring Pakistan. Investments have been stalling, even after the corporate tax rate cuts. The reason is that if there is a weak consumption demand, why will the businesses invest even despite the incentives? The consumption demand, which is the most worrying concern, ironically forms around 60% or more of the GDP today. In such a situation, any policies, incentives or break throughs will not revive the economy until and unless there is a boost or rather revival of the consumption story of India. The current situation is worse than the 1991 fiasco, as during that time even though the government lacked the forex reserves, the consumption demand was strong. Today the government has ample forex reserves, but the main growth driver of the country has taken a backseat.

The demand can be broken down into urban demand and rural demand. FMCG sector of India, which is generally known for being the resilient and safe sector for the economy has been under trouble, which clearly highlights the gravity of the situation. There were times when the rural segment used to contribute 1.5times the urban segment for this sector. However, during the past few quarters the rural contribution has fallen to the level of urban contribution, and has dipped even more. Currently, the rural FMCG sales is growing by 5.2% and the urban sales is growing by 7.4%

One of the reasons for the above being, India is divided into an organized and unorganized sector. While the organized sector contributes two-third of the GDP, the unorganized sector contributes the rest, and certainly cannot be avoided. The informal sector is responsible for more than 80% of the job creation in the country, according to economists. The implementation of GST was done with the intent of formalizing the country. There has been interestingly a pattern observed, big firms in the industry that competed with a large portion of informal firms benefitted immediately after implementation of GST. The informal firms bore the compliance costs, many informal firms either shut down or witnessed a large drop in market share. The same firms which benefitted post GST, have now witnessed a decline in sales-reasons being slump in demand arising out of losses of job and high level of unemployment in the informal sector. For instance, biggies like Britannia, Marico first witnessed a plunge post demonetization. They again picked up post GST, due to the lessening of rivalry by their informal counterparts and now again a slowdown, due to their stressed counterparts.  

Additionally, there is an anomaly in the consumption behaviour of Indian consumers. According to the Consumption Expenditure Survey (CES), the expenditure compared between FY 12 and FY 19 indicates that the spending on durables, clothing, footwear, health, travel, entertainment and other miscellaneous good & services has actually increased. However, sectors like automobile and housing have witnessed a haunting slowdown. The anomaly is due to the lack of customer confidence. Customers do not want to spend on items requiring long term commitment in terms of maintenance and payments as they are not confident about their future income and revival of the economy. Hence, segments especially like travel and entertainment have seen robust growth figures as they are one-time expenditures for the customers. Additionally, events like big billion days witnessed e-tailors booking revenues worth $ 3 billion, plus 50% increase in terms of new customers for giants like Flipkart (mainly tier 2 and tier 3 cities). Major retail lending retail products, such as personal loans and credit cards continue to witness strong growth, though the pace may have decelerated. This brings us to the fact that slowdown does not necessarily showcase the lack of disposable income in the hands of urban middle class. These indicators highlight that there is sentiment issue, customers are still spending a robust amount of income in certain segments-segments which require one-time short-term low-ticket size expenditure, however not on those segments which are required to boost the economy.  RBI’s consumer confidence survey for November booked the lowest figure since its implementation back in 2010. The index stood at 85.7, which is even lower than the number observed in September 2013, where the country faced a BOP crisis. A reading below 100 denotes pessimism in the economy.

Budget 2020. The budget 2020 is imperative to bring the country out of a turmoil. There is a consensus view that the budget is likely to bring reforms which will stimulate demand and confidence of revival in the mind of Indian consumers:

With the corporate tax down to 25%, the next expected move of the government is a reduction in the income tax slab to leave more money in the hands of consumer. The current exemption of no tax for income up Rs. 2.5 lakh is expected to be increased to Rs. 5 lakhs. Slab of 5-10 lakh subject to a tax rate of 10% (20% currently), 10-20 lakh subject to a tax rate of 20% (30% currently) and above 20 lakhs subject to a tax rate of 30%. Next is increasing the deduction limit under section 80C from current Rs. 150000 to Rs. 250000. In order to revive investment and promote the housing sector, deduction for housing loan interest for self-occupied property is expected to increase from current Rs. 2,00,000 to Rs. 3,00,000. The rural economy needs to be given a priority; hence the budget should be focusing on bolstering the NREGA programme and funding rural road construction.

While all this may or may not work for the country, certain imperative deep-rooted measures need to be addressed to bring a long-term solution the country. One of the main forces believed to be positively linked to the consumption in an economy is the demographic dividend. India is believed to be the fastest growing country and unanimously agreed that it will reap the benefits of a “large working-class population” in the coming years. While there is no doubt of authenticity in the statement, what we fail to realize is that the above statement will materialize only when the current young population is provided with an environment of quality education and up scaling of skills. India is much behind this aim. Reforms in education and healthcare will pave the path for economic development in India. Successful Asian economies like China, Japan, South Korea, first focused on bringing reforms in the agriculture sector by promoting full-scale efficiency. Similarly, India should focus on reforms in agriculture in terms of access to seeds, technology, power and finance. They should look for ways to improve connectivity and facilitate easier leasing of land. Focus on such areas would not only solve the current problems but also cater to the problems the country has been facing for years but have been left unaddressed.

Balance of Payments Crisis 1991: An Eventful History

The Balance of Payment crisis in 1991 is undoubtedly, one of the most critical events to take place in the history of Indian economy and politics. The valiant effort in managing the crisis by the then incumbent government, steered India onto the path of economic liberalisation and prosperity. 

In hindsight, this watershed event can be viewed as a blessing in disguise for India. The confluence of bureaucracy, academia, institutions worked so well to pull India out of the crisis trench. Simplistically, one can understand that India went into the pitfall of the BoP crisis as it was unable to pay off its debts. But sometimes, it is fascinating to delve into the ‘why’ part of such an even happened. Why did India descend into such a situation? What were the warning signs? Did the policy was adequate enough to prevent the systemic risk, etc?

These were some pertinent questions that led me to delve deeper into the reasons and get a better understanding of it. Let us traverse through the series of the following activities that led to the creation of the crisis.

India had been significantly under pervasive administration control and its economy policy exhibited a strong inward orientation until early 1980s. The first half of 1980 saw a large increase in the central government’s deficit, primarily on account of high expenditure levels especially on agricultural subsidies, defence, and interest payments. On external account, higher imports dominated over exports. The Current Account Deficit (CAD) widened extensively due to higher import bill. The dependence on commercial financing increased significantly. The debt service ratio reached almost 30% (i.e. India had already used 30% of the total borrowed funds) in the late 1980s. The fiscal deficit as a percentage of GDP escalated to 9.4% in 1990-91 as against the average of 6.3% in the first half of 1980s. The increase in the money supply contributed to rise in the inflation and exerted pressure on the BoPs. The bulk of the outflow of funds amounted to nearly US$ 1 billion during April-June 1991. During 1988-1990, external commercial borrowings rose. The reliance on non-resident deposits continued with interest rates rising above the international levels. The perception towards external financing to be a stable source of funds resulted to be a whammy.  India faced large external and internal financial imbalances and was vulnerable to external shocks around 1990.

India’s tendency to extensive reliance on external financing and resorting to financing on commercial terms during 1980s resulted in relatively high debt at the end of the decade. The official reserves were drawn from 5 months of imports in the mid-1980s to a little over 2 months of imports at the end of 1989-90. Reserves declined by 71.2% from Aug 1990 to Jan 1991 (US$ 3 billion to US$ 896 million). The gross official reserves stood at US$ 5.8 billion (1.3 months of imports) by March 1991 despite purchase of US$ 1.8 billion from IMF in January 1991. Inflation rose to 12% while CAD widened to 3%. 

The situation exacerbated further due to sudden outbreak of the gulf war, annexation of Kuwait, higher oil prices, loss of workers’ remittances, policy slippage, domestic political unrest, postponement of the general elections followed by the resignation of the government in power in March 1991. The withdrawal of NRI deposits intensified during

1991-92. Exports stagnated largely due to slack in demand in key markets in Eastern Europe and the Middle East industrial nations. India’s sovereign credit rating was seriously downgraded. The burden fell mainly on monetary adjustments and direct import compression measures. 

By the mid-1991, the BoP crisis turned into a crisis of confidence and India’s default on its debt obligations seemed as a certain possibility in June 1991. India’s external liabilities stood at US$ 68.8 billion at end March 1992.

Management of the crisis and its resolve

The crisis presented the policymakers with the opportunity to pursue liberalization. The then Prime Minister P.V. Narasimha Rao roped in Dr Manmohan Singh as the Finance Minister to undertake economic reforms and embarked upon a historic economic transition of India along with their administration by abolishing License Raj and introducing liberalisation. 

Here are the key highlights of the reforms-

  • Industrial licensing was abolished (except for 18 industries). 80% of the industry was taken out of the clutches of the licensing framework.
  • Reforms in capital market, trade, infrastructure, and financial sector took place.
  • Automatic approval of FDI was done up to 51%. 
  • Public sector units were given more autonomy. Disinvestments in many PSU units were initiated.
  • Investment caps on large industrial houses were removed. MRTP act was revoked to foster capacity expansion and diversification.
  • Exporters were permitted to open Foreign Currency Accounts.
  • Access to foreign technology was liberalized.
  • Import licensing was abolished. 
  • Import duties were sharply reduced.

In October 1990, RBI imposed higher cash margins of 50% on imports, other than capital goods, for those against foreign sources of credit. In 1991, the cash margins increased further to 133% and 200% in March and April respectively. The government imposed surcharges of 25% on prices of petroleum products and also raised customs duties. RBI imposed 25% surcharge on interest on bank credit for imports. The measures undertaken resulted in significant import compression. Though it proved to be counterproductive as it affected exports. 

The Rupee (₹) was devalued by 18% in 2 phases- on July 1st and July 3rd ,1991. The dual exchange rate system was introduced in 1992 to contain the exchange rate volatility. The large outflow of funds was recouped to a large extent by subscription to India Development Bonds (IDBs) aggregating US$ 1.62 billion with bonds having elongated maturities. India received financing from World Bank, ADB and Japan aggregating US$ 1billion. Aid-India consortium committed aid during 1991-92 amounting to US$ 6.7 billion for India. The value of the gold holdings with RBI was at US$ 3.5 billion during 1991-92. The RBI in consultation with the government evaluated the value of the gold reserves to raise foreign exchange resources. The arrangement to utilise gold was done with the intention to be temporary as well as reversible.  As means of raising resources, RBI in 1991 pledged 47 tons of gold with Bank of Japan (BoJ) and Bank of England (BoE) to raise a loan of US$ 405.0 million. United bank of Switzerland (UBS) purchased approximately 20 tons of gold and paid a consideration of US$ 200 million to the government. Finally, the IMF approved credit tranche amounting to US$ 2.2 billion to be availed in instalments over 20 months under the 1991-93 stand by arrangement subject to the conditionality imposed by IMF. 

The successful management of the BoP crisis succinctly shows the vigour of the government under the leadership of P.V. Narasimha Rao that India was in no way to default on its debt obligations. The government was adamant to rebuild the sovereign rating of India and restore the market confidence on the Indian economy. The measures were taken prudently to weed out the crisis gradually. The co-ordinated financial aid received by India from global financial institutions was the result of strategic negotiations and collegial relationship nurtured between Indian administration and the institutions over the period of crisis. The incipient impact of the reforms undertaken was evident as the foreign exchange reserves had climbed to US$ 9.8 billion by the end of 1992-93 and economic growth had recovered to 4.0 percent. The fiscal deficit reduced from 8.4% in 1990-91 to 5% of GDP in 1993-94. In 2003, India successfully repaid its debt that it received from the IMF under the 1991-93 stand by arrangement. Through the end of the decade, India didn’t have to borrow. 

As the times have progressed, India has become a favourable destination for the FPIs, FDIs. The world is converging in India. It currently ranks 5th on the list of the world’s biggest economies. It has gained the precious tag of the” fastest growing economy” among the major economies in the world. So much for an economy that once faced the risk of defaulting on its debt commitment, gaining the title of the  fastest growing economy in 2018-19 is a feat unprecedented and a matter of pride for us fellow Indians.   

The Big Fat Economics of Indian Weddings

A popular Hindi movie titled “Band Baaja Baraat” based on the business of wedding planners has the protagonist speaking a dialogue “Recession ho ya inflation, shaadi toh honi hi hai” which translates to the conviction on how weddings are actually protected from any kind of economic roadblocks.

But what does actually the big fat Indian wedding entail for the entire economy? Starting with the provision of employment to a vast size of the population, to actually cause a movement of money in the circular flow of the economy ranging from gold purchases to durable goods being a part of gifts being passed on during the glittery affairs. The concept of gig-economy may have found its name during recent times but the wedding business thrives mostly on the temporary gigs that the various vendors may be a part of. Across the globe people find it to be an intriguing point of discussion, about Indians standing shoulder to shoulder as the country celebrates together. A true reflection of the colorful Indian culture actually involves the expenditure of 1/5th of an individual’s lifetime wealth. The idle money that might usually spend its major span of life in the lockers of banks may also see the light of day with these life-size events.

As per an estimation by the global media giant Conde Nast in 2013, the Indian wedding business stands at $38 billion per year which is equivalent to the GDP of a developing country. Weddings boost many industries related to wedding planners, decorators, Mehendi artists, bands and musicians, photographers, and caterers to name a few. Going by the exponential growth of the business, KPMG reports of having approximately 60.5 million weddings taking place in India from 2017-2021 which can be marginally affected since the outbreak of pandemic but if the revival rate is a model being followed and with a dropping number of active cases while the enthusiasm sores heights among individuals to turn their backs on the COVID-19 infection fears.

There has been a noticeable rising trend in the customizations of cards which has boosted the cards industry to value more than Rs. 5000 crore. The glitter is incomplete without the gleaming clothing. Designer clothing actually pushes the business to thousands of crores every year. The dreamy-eyed wedding of Indian cricket team captain Virat Kohli and actress Anushka Sharma made a lot of heads turn with the exclusively designed apparel by designer Sabyasachi. As the prominent personalities pull off these designer dresses, there is a hoard of local market players who would replicate a similar low-cost design that would be economically more reachable to a lower band of income levels as well. According to the celebrity designer Sabyasachi, the Red Benarasi saree donned by actress Anushka Sharma would flood the market with similar copies and hence pushing thousands of local weavers to enable a better living.

If the cards and clothing needed anything to complement, it is the makeup. Vivek Bharti, who heads the Bollywood-Hollywood International (BHI), a Mumbai-based make-up and hairstyling academy says that people at Indian weddings spend around Rs. 15,000-30,000 on bridal make-up compared to $150-200 in the US. While the makeup industry grows at a positive rate of 20% annually and awareness of make-up growing at a rate of 50%, newer categories of Jobs are also emerging as the professional make-up artists are being paid heavily.

There has also been a growth of startups focussed on wedding business-like ‘Wanted Umbrella’ which gives a platform for the differently-abled people to find a suitable match for themselves and ‘ForMyShaadi’ which lets the couple getting married to create a bucket list of all the gifts their family and friends. To finance the extraordinary expenses many banks and non-banking financial companies offer tailor-made personal marriage loans and financial products like wedding insurance being the new offering to cover for situations of cancellations caused due to various reasons.

The gold consumption and purchase is also a major factor during Indian weddings to make it a head-turner for economics enthusiast as Somadsundaram PR, MD of World Gold Council, India quotes “The country’s demand is largely in the form of jewelry in which 50-60% is bridal”. The clubbed effect on these variables can be collectively labelled as the “Weddonomic Effect”. With additions to the celebration and more and more enthusiasm over the ‘once in a lifetime event’ and the COVID-19 introducing a new normal to all our lives there is bound to be a bump in the usual growth of the wedding industry but the cycle shall keep running while the wheels continue to accelerate the economy at a micro level to create a macro impact.