Budget 2019: Traders have a challenge spotting govt's hidden, growing debt

There's growing expectations that the government will do an accounting sleight of hand to keep its deficit in check: borrow via state-owned firms and issue special bonds.

Bond traders have one question as they head into India’s budget 2019 on Friday -- how big are the off-balance sheet borrowings?

There’s growing expectations that the government will do an accounting sleight of hand to keep its deficit in check: borrow via state-owned firms and issue special bonds. That’s a concern since total public sector borrowings have reached as much as 9% of gross domestic product by one estimate.

“Extra-budgetary resources are exerting pressure on corporate bond yields because the government is channelizing a lot of borrowings through state-run entities,” said Shailendra Jhingan, chief executive at ICICI Securities Primary Dealership Ltd. in Mumbai.

Prime Minister Narendra Modi may have few options left as a slowing economy crimps tax revenue, while investors are already smarting from his plans to borrow a record Rs 7.1 trillion ($103 billion) this fiscal year.

State-linked companies, including the Steel Authority of India Ltd., will probably raise Rs 1.8 trillion selling bonds and debentures for the 12 months ending March 2020, documents from February’s interim budget show.

Some state firms also issue a class of bonds serviced by the government where the coupon is accounted for in the budget only in the year when payments are made. When the debt is redeemed, it shows up as an expenditure in the budget.

Thanks to extra-budgetary borrowings, the spread between sovereign bonds and top-rated state company debt will remain wide at 80 to 90 basis points, said Gopikrishna Shenoy, who oversees $20 billion as chief investment officer at SBI Life Insurance Co.

Funding Subsidies

This is not the first time that an administration shifted debt from one hand to another to mask the actual deficit. Ruling parties have in the past regularly issued bonds for bank capitalization, and oil and fertilizer subsidies, which were listed as below-the-line items in federal accounts.

While Modi has an official fiscal deficit target of 3.4%, it’s probably in the 4% to 4.25% range once the off-balance sheet items are added, according to Anubhuti Sahay, head of South Asia economic research at Standard Chartered Plc.

The risk is that the additional borrowings dampen the impact of rate cuts by the Reserve Bank of India, she said.

Business Standard

Budget 2019: Time for govt to restore its credibility, get numbers right

Restoring the finance ministry's credibility requires more than ensuring that the fiscal deficit numbers are believable.

Budget 2019 : During election years such as this one, India’s outgoing finance minister offers up only an “interim budget,” under the assumption that the incoming government will have different policy priorities. Given that Prime Minister Narendra Modi’s government was reelected so easily, one might think the budget it’s scheduled to present on July 5 won’t look much different. It should.

Modi’s new finance minister, Nirmala Sitharaman, faces different conditions than her predecessor. In the months since the interim budget, India’s economy has taken a turn for the worse. In May, we learned that the economy had grown at only 5.8% in the three months between January and March, significantly lower than expected.

The monsoon -- crucial for growth in agriculture, which employs half or more of India’s workers -- has under-performed. Rain in June was a third less than expected; it was the fifth-driest June in a century.

That means consumer demand in India will be under further pressure and the government will be expected to step in to support spending and provide welfare.

Given those conditions, markets might forgive some deviation from the government’s fiscal glide path. The plan has long been to reduce the fiscal deficit to 3% of gross domestic product, but instead it seems to be stuck closer to 3.4% of GDP. Sitharaman will be tempted to further relax that target. Gross government debt as a proportion of GDP in India is fairly high, at close to 70%. Still, if combined with a credible plan to control expenditure, missing the deficit target slightly won’t be seen as a disaster.

What is far more important is to restore the government’s credibility. Frankly, the deficit figures in the interim budget didn’t stand up to sustained scrutiny.

A couple of years ago, India introduced a new indirect tax regime which, while still a good idea in theory, has in practice been so poorly designed that revenue collections have been lower than expected. In 2018-19, the actual collections from the goods and services tax were more than 10% less than budgeted the previous year.

Even so, the interim budget assumed that collection of the GST would grow by 18% in 2019-20. That claim found few takers. Now that even the government admits that the economy is slowing, it’s hard to see how the full-year budget could possibly repeat that assumption and still be taken seriously.

The Indian government is already short of credibility at the moment, buffeted as it is with questions about the accuracy of, among other things, its GDP estimates. Making sure that her sums add up and are seen to add up should be Sitharaman’s priority.

Hike in I-T exemption level, tax on income over Rs 10 cr in Budget: Survey

The pre-Budget survey 2019-20 conducted by KPMG (India) included responses from 226 respondents spanning across industries.

The upcoming Budget 2019 may hike the tax exemption limit for individuals from the current Rs 2.5 lakh and introduce a higher 40 per cent tax on those with income above Rs 10 crore, a KPMG survey said.

The pre-Budget survey 2019-20 conducted by KPMG (India) included responses from 226 respondents spanning across industries.

A whopping 74 per cent of the respondents felt that exemption threshold of personal income tax would be hiked from Rs 2.5 lakh, while 58 per cent said the government would consider a new 40 per cent tax slab for the 'super rich' -- those earning above Rs 10 crore.

While only 13 per cent of respondents feel that inheritance tax would be brought back, 10 per cent felt there are chances of re-introduction of wealth tax/estate duty, the survey said.

To boost housing demand, 65 per cent of respondents felt the Budget may increase the tax deduction limit for interest on housing loan for self-occupied properties from the present Rs 2 lakh.

Also, 51 per cent said the government could carve out deduction for repayment of housing loan principal from the existing overall deduction limit of Rs 1.5 lakh under Section 80C.

However, 53 per cent of the respondents do not expect Finance Minister Nirmala Sitharaman to make any major direct tax amendments in the Budget to be unveiled on July 5.

Also, 46 per cent of those surveyed felt corporate tax rate will not be cut to 25 per cent for all companies as was demanded by industry chambers in their pre-Budget meeting with Sitharaman.

Business Standard

50 yrs of moon landing: When the world paused to watch Armstrong's moonwalk

Officially more than 500 million people gathered around their sets to watch him leap from the ladder of Apollo 11's Eagle landing craft and onto the surface of the Sea of Tranquility.

Business Standard : When Neil Armstrong walked on the Moon, he became the biggest live television star in history.

Officially more than 500 million people gathered around their sets to watch him leap from the ladder of Apollo 11's Eagle landing craft and onto the surface of the Sea of Tranquility.

But, as AFP reported at the time, that figure was probably an underestimation.

Experts now believe the real number was closer to 700 million, a fifth of the planet's population at the time.

Next month will mark 50 years since Armstrong's famous phrase -- "That's one small step for man, one giant leap for mankind" -- was heard around the world.

The moment was the culmination of an unprecedented 31-hour live link-up between NASA and major US TV networks.

Armstrong's first steps onto the lunar landscape on July 21, 1969 were followed second-by-second by viewers across the globe, with the notable exception of China and the old Soviet bloc.

Normal life across the planet stopped for those special moments, AFP reported, with Japan's Emperor Hirohito interrupting a ritual walk with his empress to watch it.

The mission was covered in exhaustive detail over a marathon eight days of broadcasts from the last-minute preparations and the lift-off, to the moonwalk and return to Earth.

Some 3,500 journalists followed events at the Mission Control Center in Houston, Texas.

Joel Banow, who was a director for CBS News at the time, said the sheer scale of the event was mind-boggling.

"It was my job to make the programme as exciting as possible. We spent more than USD 1 million on the production, which was astronomical for a news programme in '69," he told Robert Stone in his documentary "Chasing the Moon".

"Some of the ideas I came up with were inspired by science fiction films I saw as a child," he admitted.

In fact, TV channels competed with each other to come up with the most "space age" sets, with some turning to star sci-fi authors such as Arthur C. Clarke, Isaac Asimov and Orson Welles, the director of the radio drama "The War of the Worlds".

Tax sops, funding access: What fintech, start-ups expect in Budget 2019

The government needs to attack on the front foot by easing liquidity conditions and bringing in needed regulatory changes to aid job creation, said Bhupinder Singh, CEO and founder, InCred.

Business Standard : Fintech firms and start-ups expect the government to usher in a new set of reforms in the upcoming full Budget for the current fiscal and hope for tax relief, funding access, and further push to digital economy.

It come at a time when the consumption demand is not growing fast enough, investment is tapering and exports are falling.

Finance Minister Nirmala Sitharaman will unveil the full budget 2019-20 on July 5.

The interim budget was presented on February 1, as the general elections were due in April and May to form the new government.

Loyalty programme firm PAYBACK Chief Executive Officer Gautam Kaushik said Prime Minister Narendra Modi's second term with an even bigger majority provides an opportunity to be decisive on the policy front.

"We expect a bolder approach to reforms and usher in reforms 2.0 for the economy that has been facing issues of domestic consumption not growing fast enough to offset a weakening global economic environment coupled with slow growth in investments and subdued exports," he said.

In 2018-19, India's economic growth had slipped to a five-year-low of 6.8 per cent, lower than 7.2 per cent in the preceding financial year.

"We expect Budget 2019 to continue with the tone set by the interim budget, which was built on the theme of offering exemptions to taxpayers, maintaining fiscal prudence, support to farmers and encouraging digitalisation," said Gaurav Gupta, co-founder and chief executive officer (CEO), Myloancare.in.

There continues to be an expectation of higher tax relief, and the fintech industry is looking forward to more clarity or direction on electronic-Know Your Customer (eKYC) using Aadhaar and a further push to digitalisation, he added.

Gaurav Chopra, founder CEO of online aggregator of financial products IndiaLends, said the government should push forward new reforms as part of Digital India 2.0.

"Although the government has strengthened its measures to curb cyber frauds, they should implement stricter laws and policies and conduct programmes to spread awareness about the cyber threats. We also hope that the coming budget will offer further tax sops as well as some special incentives offered to start-ups, and overall reduction in corporate tax," Chopra said.

PSU bank recap, growth revival, fiscal prudence: Expectations from Budget

The government, experts say, is likely to continue with the off-budget route for carrying out infra-related spending.

Given the slowdown in the economy and the possibility of oil prices moving north over the next few months on the back of likely supply cuts by Organization of the Petroleum Exporting Countries (OPEC), market experts expect the upcoming Union Budget 2019 to focus on reviving growth and yet maintain fiscal prudence.

That apart, re-capitalisation of banks is also a key monitorable. The government, they say, is likely to continue with the off-budget route for carrying out infra-related spending.

“We believe that the government will focus on maintaining continuity in policy and spending on schemes allocated per the interim budget. As such, we maintain our fiscal deficit estimate at 3.5 per cent of GDP (3.4 per cent of GDP as per the interim budget), since the government has introduced the farmer income support scheme and also recently increased its scope,” wrote analysts at Morgan Stanley in a recent co-authored report led by Ridham Desai, their India equity strategist.

For the January – March quarter, the gross domestic product (GDP) came in at a dismal 5.8 per cent, sharply down from 6.6 per cent in the previous quarter, well below forecasts and the slowest in over four years.

Growth expectations have also been trimmed. DBS, for instance, now pegs India's FY20 GDP at 6.8 per cent on weakening exports, down from 7 per cent projected earlier. Fitch, too, has cut its expectation to 6.6 per cent for the current fiscal (6.8 per cent earlier).

“Beyond the fiscal numbers, markets will also be looking for other details – the credibility of tax revenue and growth assumptions, off-budget expenditure, quality of spending and themes that are likely to be championed by the recently re-elected government. The implication for the fiscal and monetary policy mix is clear in our view. While there is some space for monetary easing, there is no space for a higher fiscal borrowing,” said Pranjul Bhandari, chief economist for India at HBSC.

Markets, however, have seen a good run over the past few months. In the first half of calendar year 2019 (H1CY19), the S&P BSE Sensex and the Nifty50 have gained around 9 per cent each. The S&P BSE Mid-cap and the S&P BSE Small-cap indices have underperformed and have slipped around 4 per cent and 3 per cent, respectively during this period.

The performance of consumption-related sectors has also been dismal. The auto and fast moving consumer goods (FMCG) indices on the National Stock Exchange (NSE) have underperformed and lost nearly 15 per cent and 3.5 per cent, respectively in H1CY19.

Need to reduce centrally sponsored schemes to improve spending: N K Singh

Revenue buoyancy continues to be weak in the area of indirect tax, said Singh.

Budget 2019 : Fifteenth Finance Commission Chairman N K Singh has said the number of centrally sponsored schemes currently exceeds 150 that needs to be reduced for better spending, as revenue buoyancy in indirect taxes remains weak.

"The central outgo is spread over 700 different outlay schemes. The number of centrally sponsored schemes exceeds 150. We need to thin this spread for better spending. Revenue buoyancy continues to be weak in the area of indirect tax," said Singh, at the SKOCH Summit on 'ModiNomics 2.0' held on Saturday.

He said the Goods and Services Tax (GST) needs to be watched carefully in the years to come. Compliance needs to be raised and leakages minimised.

"We cannot talk about macroeconomics leaving out important area of deep structural reforms which this economy needs. If the growth rate has been tenuous, we need macro stability but also in terms of reforms which can bring spending, saving and private investment," he said at the summit which also deliberated on budget wishes and the macroeconomic agenda of the new government.

Singh said the quality of compliance is as important as compliance itself. On expenditure, he said there is a long way to go.

Former Sebi chairman U K Sinha, who spoke on corporate governance, said Indian has moved from volatile, unpredictable, complex and arbitrary framework and the thinking has now shifted from short term to long term.

"People have realised that financial capital is not the only capital of a company. Influence, HR (human resource), and social capital are now being judged by the investors," Sinha said.

Sinha also added that India ranks higher than the US in terms of shareholder protection and is at par with the world in terms of corporate governance.

"We used to think that executive management of a company is responsible for everything. We now have series of examples where the NCLAT (National Company Law Appellate Tribunal) and the SC (Supreme Court) have passed orders against independent directors," he added.

India has covered a lot of ground but this is demand-led movement.

"We haven't covered the entire ground but my feeling is that shareholders and regulators have continued to be alert and vigilant," Sinha said.