State-Owned Banks Will Need More Capital From Government For NPA Clean-Up

The government’s budgeted amount for recapitalisation of public sector banks will have to be revised upwards after non-performing assets are moved out of banks’ balance sheets, the NITI Aayog said in a document on August

“The NPAs are much larger than at the time the Rs 70,000 crore figure had been fixed,” the government think-tank said in its three-year action plan. Under the Indradhanush plan, the government will infuse this amount in public sector banks over a period of period of four years till financial year 2018-19.

The document says that recent sharp decline in credit growth by public sector banks in indicative of the “detrimental effects” of these bad loans on the economy.

Shift Composition Of Spending To Priority Sectors

The document suggests shifting composition of government’s expenditure on high priority sectors. These important sectors include:

1. Health: Up spending to Rs 1 lakh crore by 2019-20 from Rs 30,000 crore in 2015-16. The increased allocation should be utilised towards public health, state-level grants, fiscal incentives and human resources for health to states to improve health outcomes.

2. Education: Up spending to Rs 1.12 lakh crore by 2019-20 from Rs 66,000 crore in 2015-16. The increased allocation should be used to improve government-run institutions.

3. Railways Capital Expenditure: Up spending to Rs 1.18 lakh crore by 2019-20 from Rs 40,000 crore in 2015-16. Higher allocation should be used to decongest the existing roads, thereby improving performance of both the sectors.

4. Roads Capital Expenditure: Up spending to Rs 86,000 crore by 2019-20 from Rs 31,000 in 2015-16. “There is an urgent need to develop the transportation infrastructure to assist in economic growth.”

5. Defence Capital Expenditure: Up spending to Rs 1.72 lakh crore by 2019-20 from Rs 95,000 crore in 2015-16. This would allow greater purchase of equipment for the armed forces, “keeping in mind the security considerations for the country.”

6. Agriculture and Rural Development: Up spending to Rs 2.16 lakh crore by 2019-20 from Rs 1.03 lakh crore in 2015-16 as the two are priority sectors for the government.

7. Food Subsidy: Up spending to 1.57 lakh crore by 2019-20 from Rs 1.24 lakh crore in 2015-16. Reduces subsidy as a proportion of GDP to 0.73 percent in 2019-20 from 0.9 percent in 2015-16 keeping under consideration the recent subsidy rationalisation measures undertaken by the government.

8. Fertiliser Subsidy: As the government has been able to contain the expenditures on fertiliser subsidies to Rs 70,000 crore in the last few years, better targeting and reforms of fertiliser subsidies is expected to keep subsidy outgo at the level in the next three years.

India To Witness Over 8% Growth In 2-3 Years

The country will witness growth trajectory to upwards of 8 percent in next two to three years if not sooner, the action plan says.

“Therefore, the chances of a massive cut in the poverty rate in the upcoming decade are excellent,” it says.

Despite the dip in growth rate to 5.6% in 2012-13 on account of several factors like global economic developments and domestic policy choices, quick corrective action in 2014, followed by sustained policy reforms, has helped the economy sustain over 7% growth during the three years ending March 31, 2017.

The document projects the fiscal deficit to be 3.2 percent of the GDP for the current financial year, and sees it falling to 3 percent by 2018-19 as per the Fiscal Responsibility and Budget Management framework.

Compensation To States For Loss Of GST To Rise 20% To 2018-19

The document projects the compensation given by the centre to states on account of any losses incurred post the implementation of Goods and Services Tax to increase 20 percent year on year to 45,000 crore in 2018-19.

The NITI Aayog action plan assumes the states will incur losses of Rs 37,500 crore in the first year of GST implementation.  The central government will compensate for these losses through the cess collected on demerit goods under the GST regime. These estimates were made by the government’s think tank before GST was implemented.

“Going forward, 2018-19 onwards, we expect the indirect tax buoyancy to increase as a result of GST implementation,” the document says.

The document projects an increase in indirect tax to GDP ratio by 10 basis points every year to 5.9 percent in 2019-20. The indirect tax to GDP ratio in 2016-17 is 5.6%.