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A budget for Bharat

But there are concerns about its effect on the banking sector

Written by Krishnamurthy Subramanian |
Updated: March 1, 2016 12:30:26 am
union budget 2016, 2016 union budget, budget columns, columns on budget, india budget, this year budget, 2016 budget, indian express Union Finance Minister Arun Jaitley holds the bag containing the papers for the Union Budget as he comes to present the Budget at the Parliament on Monday. (Express Photo by Neeraj Priyadarshi)

Given the fact that the global economy is tottering, there is a definite need to foster domestic demand to accelerate economic growth. At the same time, it is politically and economically imperative that jobs are created in the formal sector to avoid the demographic dividend becoming a demographic liability. Given these twin objectives for the country, I find this year’s budget to be an admirable exercise. Overall, this is an excellent budget for rural India that I would give 9/10.

While the budget may not gladden the stock market, it is an excellent budget because it is a budget for Bharat. The emphasis on agriculture and farmer welfare, rural employment, social sector spending, in particular in the healthcare sector, and education, skills and job creation, would definitely foster demand in rural areas.

Nearly 65 per cent of small farmers in this country depend on rain-fed irrigation. More than 75 per cent of Indian farmers are not covered by crop insurance. Since shocks, such as bad weather or bad health, affect the poor significantly more than the average citizen in the country, allocations provided for irrigation, crop insurance and health insurance will significantly impact the rural population’s ability to withstand negative economic shocks. In particular, farm insurance, health insurance and cooking gas connections for BPL (below poverty line) families are superb initiatives that will focus government spending on those sections of the population that need the government’s attention the most — the poor and the downtrodden.

Another key measure in the budget relates to providing a legal framework for the Aadhaar platform, which will help to ensure that subsidies are directed to the needy. More than Rs 40,000 crore of subsidies are provided for fertilisers. Similarly, another

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Rs 40,000 crore of subsidies are provided in the electricity sector. Fertiliser and electricity subsidies together amount to 1.6 per cent of the GDP, much of which leaks abroad or
to non-agricultural uses, or goes to inefficient producers, or to firms given the exclusive privilege to import. But precisely for these reasons it has proved politically impossible to close the inefficient firms or eliminate the canalisation of imports. By providing a legal framework for the Aadhaar platform, the “JAM trinity” of Jan Dhan, Aadhaar and mobile would be strengthened considerably. This will help to rationalise the regime of subsidies and lead to better targeting. Again, better targeting of subsidies to deserving beneficiaries would help to foster domestic demand, particularly in the rural sector.

The worry for me in the current budget is about the banking sector. The Rs 25,000 crore provided for the capitalisation of public-sector banks in this financial year is woefully inadequate. In the next five years, PSBs will require several multiples of this amount to be able to meet the capital requirements of Basel III. Another key announcement that is worrisome in this context relates to the consolidation of PSBs. As we have witnessed with the merger of Indian Airlines and Air India, bunching up two large and struggling PSUs only serves to exacerbate problems for the merged entity. Consolidating PSBs without first empowering the boards of these banks would create more costs for the financial system than benefits.

PSB boards focus on tactical issues rather than discussing issues relating to strategy/ risk. Board deliberations are driven from the vantage point of compliance rather than business and economics. Monitoring of measurable disaggregated business goals in relation to targets is nominal. Scenario analysis through stress-testing is conspicuous by its absence, and specific plans for meeting worst-case scenarios find no mention. Little attention is devoted to the design of risk-mitigation mechanisms, including whether the risk function should be invested with greater autonomy, including in matters of credit risk. The lack of quality in board deliberations of PSBs stems from the quality of the bank boards themselves. Before fixing these issues pertaining to PSB boards, consolidation will only exacerbate matters. Existing boards have struggled to manage the banks well. These would now be forced to manage even bigger banks.


On the whole, while there are concerns regarding the budget’s ill effects on the banking sector, it is an excellent budget because it helps to foster rural demand and attempts to fix risks in the rural economy.

The writer, an associate professor of finance at the Indian School of Business, Hyderabad, and a board member at Bandhan Bank and NIBM, was a member of the P.J. Nayak Committee

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First published on: 01-03-2016 at 12:30:23 am
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