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The post-election full budget for the FY 2024-25 presented by the finance minister on July 23 revealed the government’s economic agenda for the coming years, on the one hand, and the political compulsions of the ruling coalition that aspires to complete its five-year term, on the other. That said, the budget exhibits fiscal prudence, on the whole, and has not strayed from the trajectory of fiscal consolidation that was being followed in the post-Covid period.
Major PSU banks have digitalised their MSME products and processes ... based entirely on the digital footprints of the borrowers in the economy. Such methodologies are algorithm-based ... But the digital models/scorecards need to be tested and validated periodically ... Most PSU banks currently do not have the skill sets and support-systems needed to perform this in-house.
The provisional actuals of all the major deficit parameters viz. fiscal deficit, revenue deficit and primary deficit (as also their ratios to GDP at current price) for FY 2023-24 have come better than their respective original as well as revised estimates. The fiscal deficit/GDP estimate for 2024-25 at 4.9 per cent seems achievable under normal circumstances. The finance minister hopes to bring it down to 4.5 per cent in FY 2025-26. However, it will take some more years, even under the best of situations, to bring down the fiscal deficit/GDP back to the 3.4 per cent level that was achieved in FY 2018-19. Both the gross and net market borrowings for FY 2024-25 are estimated to be less than those in 2023-24, and that should be good news for the government securities market. The yield of 10-year G-Sec traded in a narrow range after the Budget. The equity market reacted somewhat negatively to the Budget, mainly on the announcement of higher taxes on F&O trades and long-term capital gains. These measures are in tune with the concerns expressed in the Economic Survey 2023-24 on the ballooning of retail participation in F&O trades and the current high valuation of the Indian equity market.
The budget exhibits fiscal prudence, on the whole, and has not strayed from the trajectory of fiscal consolidation that was being followed in the post-Covid period
India still resides in its villages
Failure of the BJP to gain absolute majority in the parliamentary elections, especially its dismal performance in Uttar Pradesh and Maharashtra has been attributed to lack of job opportunities and high inflation in rural areas arising out of structural problems associated with Indian agriculture like inadequate profitability, low productivity growth and underemployment/disguised unemployment. The pre-Budget Economic Survey 2023-24 called for meaningful reforms in India’s agricultural sector, including a reassessment of all the extant policies for providing subsidies and support measures for farmers. No wonder, productivity and resilience in agriculture and employment and skilling are the first two of the nine priorities listed in the Budget by the finance minister. While all the measures announced in the budget for agriculture and allied activities are relevant and useful, improvement in agricultural productivity on a durable basis and also to make agriculture resilient against adverse climate changes will need fresh investment for expansion/renewal of irrigation facilities and other rural infrastructure. However, almost the entire allocation made in the Budget for agriculture and farmers’ welfare is for various revenue expenditure. The Economic Survey 2023-24 mentions consolidation of land-holding as the key to boosting productivity in agriculture. The three farm laws that were repealed in November, 2021 would have been the best catalyst for this purpose. It is unlikely that any move either by the Centre or by the States will be made in this regard anytime soon.
The equity market reacted somewhat negatively to the Budget, mainly on the announcement of higher taxes on F&O trades and long-term capital gains. These measures are in tune with the concerns expressed in the Economic Survey 2023-24 on the ballooning of retail participation in F&O trades and the current high valuation of the Indian equity market.
India’s home-grown Mittlestand
For the first time in many years, the major issues raised in the pre-budget Economic Survey have been addressed in the Budget to varying degrees. The importance of SMEs for boosting growth, exports, employment and reducing large disparities in wealth-generation has long been recognised. The Economic Survey 2023-24 is of the view that deregulation and reduction in the burden of compliance are necessary to vitalise the SME sector. The Budget has announced a slew of measures to support the promotion of MSMEs, with special attention to MSMEs engaged in manufacturing, particularly labour-intensive manufacturing. All of these would be helpful.
While all the measures announced in the budget for agriculture and allied activities are relevant and useful, improvement in agricultural productivity on a durable basis and also to make agriculture resilient against adverse climate changes will need fresh investment for expansion/renewal of irrigation facilities and other rural infrastructure. However, almost the entire allocation made in the Budget for agriculture and farmers’ welfare is for various revenue expenditure.
One of the measures requires PSU banks to build their in-house capability to assess MSMEs for credit, instead of relying on external assessment. They are also expected to take a lead in developing or getting developed a new credit appraisal model, based on the scoring of digital footprints of MSMEs in the economy. This is expected to be a significant improvement over the traditional assessment of credit eligibility based only on asset or turnover criteria. This approach will also cover MSMEs without a formal accounting system.
Traditionally, PSU banks have been at the forefront of providing credit and other support to the MSME sector. Most of them now have good and well-experienced teams both at their branches and at their controlling offices for servicing the MSME sector. However, the loan recovery experience of PSU banks with the MSME sector has not been uniformly good at all times. Some of them are burdened with high MSME NPAs. The major PSU banks have already taken steps to digitalise their MSME loan products and processes, with the use of underwriting methodologies based entirely on the digital footprints of the borrowers in the economy. In most cases, such methodologies are algorithm-based with no human intervention in credit decisions. This approach has also been in use by some private sector banks in India. Surely, it has advantages over financial statements and projections-based credit appraisal. But the digital models/scorecards need to be tested and validated periodically using proper statistical techniques to gauge their risk differentiation capabilities. Most PSU banks currently do not have the skill sets and support-systems needed to perform this in-house. If PSU Banks appoint external agencies to do this job for them, knowledge and skill transfer within a pre-defined period should be a condition for such engagements.
Traditionally, PSU banks have been at the forefront of providing credit and other support to the MSME sector. However, the loan recovery experience of PSU banks with the MSME sector has not been uniformly good at all times. Some of them are burdened with high MSME NPAs.
The FM has listed nine strategic priorities that would guide budget-making in the coming years. It would have been ideal if there were broad consensus across the current political spectrum for a framework such as this. However, this is unlikely to happen. The Indian political culture has not yet evolved to a point of maturity where meeting of minds on strategic national issues is something within the realm of possibilities. Nevertheless, the Budget seems to promise continuity in economic policy-making by the NDA coalition now in power.