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The Finance Minister, Ms. Nirmala Sitharaman, presented the Union Budget for the financial year 2019-20 in Parliament on July 5, 2019. In the 2019-20 budget, the government presented the estimates of its expenditure and receipts for the year 2019-20. The budget also gave an account of how much money the government raised or spent in 2017-18. In addition, the budget also presented the revised estimates made by the government for the year 2018-19 in comparison to the estimates it had given to Parliament in the previous year’s budget.
What are revised estimates?
Some of the estimates made by the government might change during the course of the year. For instance, once the year gets underway, some ministries may need more funds than what was actually allocated to them in the budget, or the receipts expected from certain sources might change. Such deviations from the budget estimates get reflected in the figures released by the government at later stages as part of the subsequent budgets. Once the year ends, the actual numbers are audited by the Comptroller and Auditor General of India (CAG), post which they are presented to Parliament with the upcoming budget, i.e. two years after the estimates are made.
For instance, estimates for the year 2018-19 were presented as part of the 2018-19 budget in February 2018. In the 2019-20 interim budget presented in February 2019 (10 months after the financial year 2018-19 got underway), the government revised these estimates based on the actual receipts and expenditure accounted so far during the year and incorporated estimates for the remaining two months.
The actual receipts and expenditure accounts of the central government are maintained by the Controller General of Accounts (CGA), Ministry of Finance on a monthly basis. In addition to the monthly accounts, the CGA also publishes the provisional unaudited figures for the financial year by the end of the month of May. Once these provisional figures are audited by the CAG, they are presented as actuals in next year’s budget. The CGA reported the figures for 2018-19 on May 31, 2019.[1] The Economic Survey 2018-19 presented on July 4, 2019 uses these figures.[2]
The budget presented on July 5 replicates the revised estimates reported as part of the interim budget (February 1, 2019). Thus, it did not take into account the updated figures for the year 2018-19 from the CGA.
Table 1 gives a comparison of the 2018-19 revised estimates presented by the central government in the budget with the provisional unaudited figures maintained by the CGA for the year 2018-19.[3]
Table 1: Budget at a Glance: Comparison of 2018-19 revised estimates with CGA figures (unaudited) (Rs crore)
Actuals |
Budgeted |
Revised |
Provisional |
Difference |
|
Revenue Expenditure |
18,78,833 |
21,41,772 |
21,40,612 |
20,08,463 |
-1,32,149 |
Capital Expenditure |
2,63,140 |
3,00,441 |
3,16,623 |
3,02,959 |
-13,664 |
Total Expenditure |
21,41,973 |
24,42,213 |
24,57,235 |
23,11,422 |
-1,45,813 |
Revenue Receipts |
14,35,233 |
17,25,738 |
17,29,682 |
15,63,170 |
-1,66,512 |
Capital Receipts |
1,15,678 |
92,199 |
93,155 |
1,02,885 |
9,730 |
of which: |
|
|
|
|
|
Recoveries of Loans |
15,633 |
12,199 |
13,155 |
17,840 |
4,685 |
Other receipts (including disinvestments) |
1,00,045 |
80,000 |
80,000 |
85,045 |
5,045 |
Total Receipts (without borrowings) |
15,50,911 |
18,17,937 |
18,22,837 |
16,66,055 |
-1,56,782 |
Revenue Deficit |
4,43,600 |
4,16,034 |
4,10,930 |
4,45,293 |
34,363 |
% of GDP |
2.6 |
2.2 |
2.2 |
2.4 |
|
Fiscal Deficit |
5,91,062 |
6,24,276 |
6,34,398 |
6,45,367 |
10,969 |
% of GDP |
3.5 |
3.3 |
3.4 |
3.4 |
|
Primary Deficit |
62,110 |
48,481 |
46,828 |
62,692 |
15,864 |
% of GDP |
0.4 |
0.3 |
0.2 |
0.3 |
|
Sources: Budget at a Glance, Union Budget 2019-20; Controller General of Accounts, Ministry of Finance; PRS.
The 2018-19 provisional figures for revenue receipts is Rs 15,63,170 crore, which is Rs 1,66,512 crore less than the revised estimates. This is largely due to Rs 1,67,455 crore shortfall in centre’s net tax revenue between the revised estimates and the provisional estimates (Table 2).
Major taxes which see a shortfall between the gross tax revenue presented in the revised estimates vis-à-vis the provisional figures are income tax (Rs 67,346 crore) and GST (Rs 59,930 crore). Non-tax revenue and disinvestment receipts as per the provisional figures are higher than the revised estimates.
Table 2: Break up of central government receipts: Comparison of 2018-19 RE with CGA figures (unaudited) (Rs crore)
|
Actuals |
Budgeted |
Revised |
Provisional |
Difference |
Gross Tax Revenue |
19,19,009 |
22,71,242 |
22,48,175 |
20,80,203 |
-1,67,972 |
of which: |
|
|
|
|
|
Corporation Tax |
5,71,202 |
6,21,000 |
6,71,000 |
6,63,572 |
-7,428 |
Taxes on Income |
4,30,772 |
5,29,000 |
5,29,000 |
4,61,654 |
-67,346 |
Goods and Services Tax |
4,42,562 |
7,43,900 |
6,43,900 |
5,83,970 |
-59,930 |
Customs |
1,29,030 |
1,12,500 |
1,30,038 |
1,17,930 |
-12,108 |
Union Excise Duties |
2,59,431 |
2,59,600 |
2,59,612 |
2,30,998 |
-28,614 |
A. Centre's Net Tax Revenue |
12,42,488 |
14,80,649 |
14,84,406 |
13,16,951 |
-1,67,455 |
B. Non Tax Revenue |
1,92,745 |
2,45,089 |
2,45,276 |
2,46,219 |
943 |
of which: |
|
|
|
|
|
Interest Receipts |
13,574 |
15,162 |
12,047 |
12,815 |
768 |
Dividend and Profits |
91,361 |
1,07,312 |
1,19,264 |
1,13,424 |
-5,840 |
Other Non-Tax Revenue |
87,810 |
1,22,615 |
1,13,965 |
1,19,980 |
6,015 |
C. Capital Receipts (without borrowings) |
1,15,678 |
92,199 |
93,155 |
1,02,885 |
9,730 |
of which: |
|
|
|
|
|
Disinvestment |
1,00,045 |
80,000 |
80,000 |
85,045 |
5,045 |
Receipts (without borrowings) (A+B+C) |
15,50,911 |
18,17,937 |
18,22,837 |
16,66,055 |
-1,56,782 |
Borrowings |
5,91,062 |
6,24,276 |
6,34,398 |
6,45,367 |
10,969 |
Total Receipts (including borrowings) |
21,41,973 |
24,42,213 |
24,57,235 |
23,11,422 |
-1,45,813 |
Note: Centre’s net tax revenue is gross tax revenue less share of states in central taxes. Figures for GST include receipts from the GST compensation cess. Note that GST was levied for a nine-month period during the year 2017-18, starting July 2017.
Sources: Receipts Budget, Union Budget 2019-20; Controller General of Accounts, Ministry of Finance; PRS.
While the provisional figures show a considerable decrease in receipts (Rs 1,56,782 crore) as compared to the revised estimates, fiscal deficit has not shown a comparable increase. Fiscal deficit is estimated to be Rs 10,969 crore higher than the revised estimates as per the provisional accounts.
On the expenditure side, the total expenditure as per the provisional figures show a decrease of Rs 1,45,813 crore as compared to the revised estimates. Certain Ministries and expenditure items have seen a decrease in expenditure as compared to the revised estimates made by the government. As per the provisional accounts, the expenditure of the Ministry of Agriculture and Farmers’ Welfare and the Ministry of Consumer Affairs, Food and Public Distribution are Rs 22,133 crore and Rs 70,712 crore lower than the revised estimates, respectively. The decrease in the Ministries’ expenditure as a percentage of the revised estimates are 29% and 39%, respectively. The food subsidy according to CGA was Rs 1,01,904 crore, which was Rs 69,394 crore lower than the revised estimates for the year 2018-19 given in the budget documents.
[1] “Accounts of the Union Government of India (Provisional/Unaudited) for the Financial Year 2018-19”, Press Information Bureau, Ministry of Finance, May 31, 2019.
[2] Fiscal Developments, Economic Survey 2018-19, https://www.indiabudget.gov.in/economicsurvey/doc/vol2chapter/echap02_vol2.pdf.
[3] Controller General of Accounts, Ministry of Finance, March 2018-19, http://www.cga.nic.in/MonthlyReport/Published/3/2018-2019.aspx.
The issue of Non-Performing Assets (NPAs) in the Indian banking sector has become the subject of much discussion and scrutiny. The Standing Committee on Finance recently released a report on the banking sector in India, where it observed that banks’ capacity to lend has been severely affected because of mounting NPAs. The Estimates Committee of Lok Sabha is also currently examining the performance of public sector banks with respect to their burgeoning problem of NPAs, and loan recovery mechanisms available.
Additionally, guidelines for banks released by the Reserve Bank of India (RBI) in February 2018 regarding timely resolution of stressed assets have come under scrutiny, with multiple cases being filed in courts against the same. In this context, we examine the recent rise of NPAs in the country, some of their underlying causes, and steps taken so far to address the issue.
What is the extent and effect of the NPA problem in India?
Banks give loans and advances to borrowers. Based on the performance of the loan, it may be categorized as: (i) a standard asset (a loan where the borrower is making regular repayments), or (ii) a non-performing asset. NPAs are loans and advances where the borrower has stopped making interest or principal repayments for over 90 days.
As of March 31, 2018, provisional estimates suggest that the total volume of gross NPAs in the economy stands at Rs 10.35 lakh crore. About 85% of these NPAs are from loans and advances of public sector banks. For instance, NPAs in the State Bank of India are worth Rs 2.23 lakh crore.
In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from 2.3% of total loans in 2008 to 9.3% in 2017 (Figure 1). This indicates that an increasing proportion of a bank’s assets have ceased to generate income for the bank, lowering the bank’s profitability and its ability to grant further credit.
Escalating NPAs require a bank to make higher provisions for losses in their books. The banks set aside more funds to pay for anticipated future losses; and this, along with several structural issues, leads to low profitability. Profitability of a bank is measured by its Return on Assets (RoA), which is the ratio of the bank’s net profits to its net assets. Banks have witnessed a decline in their profitability in the last few years (Figure 2), making them vulnerable to adverse economic shocks and consequently putting consumer deposits at risk.
What led to the rise in NPAs?
Some of the factors leading to the increased occurrence of NPAs are external, such as decreases in global commodity prices leading to slower exports. Some are more intrinsic to the Indian banking sector.
A lot of the loans currently classified as NPAs originated in the mid-2000s, at a time when the economy was booming and business outlook was very positive. Large corporations were granted loans for projects based on extrapolation of their recent growth and performance. With loans being available more easily than before, corporations grew highly leveraged, implying that most financing was through external borrowings rather than internal promoter equity. But as economic growth stagnated following the global financial crisis of 2008, the repayment capability of these corporations decreased. This contributed to what is now known as India’s Twin Balance Sheet problem, where both the banking sector (that gives loans) and the corporate sector (that takes and has to repay these loans) have come under financial stress.
When the project for which the loan was taken started underperforming, borrowers lost their capability of paying back the bank. The banks at this time took to the practice of ‘evergreening’, where fresh loans were given to some promoters to enable them to pay off their interest. This effectively pushed the recognition of these loans as non-performing to a later date, but did not address the root causes of their unprofitability.
Further, recently there have also been frauds of high magnitude that have contributed to rising NPAs. Although the size of frauds relative to the total volume of NPAs is relatively small, these frauds have been increasing, and there have been no instances of high profile fraudsters being penalised.
What is being done to address the problem of growing NPAs?
The measures taken to resolve and prevent NPAs can broadly be classified into two kinds – first, regulatory means of resolving NPAs per various laws (like the Insolvency and Bankruptcy Code), and second, remedial measures for banks prescribed and regulated by the RBI for internal restructuring of stressed assets.
The Insolvency and Bankruptcy Code (IBC) was enacted in May 2016 to provide a time-bound 180-day recovery process for insolvent accounts (where the borrowers are unable to pay their dues). Under the IBC, the creditors of these insolvent accounts, presided over by an insolvency professional, decide whether to restructure the loan, or to sell the defaulter’s assets to recover the outstanding amount. If a timely decision is not arrived at, the defaulter’s assets are liquidated. Proceedings under the IBC are adjudicated by the Debt Recovery Tribunal for personal insolvencies, and the National Company Law Tribunal (NCLT) for corporate insolvencies. 701 cases have been registered and 176 cases have been resolved as of March 2018 under the IBC.
What changed recently in the RBI’s guidelines to banks?
Over the years, the RBI has issued various guidelines aimed at the resolution of stressed assets of banks. These included introduction of certain schemes such as: (i) Strategic Debt Restructuring (which allowed banks to change the management of the defaulting company), and (ii) Joint Lenders’ Forum (where lenders evolved a resolution plan and voted on its implementation). In line with the enactment of the IBC, the RBI, through a circular in February 2018, substituted all the specific pre-existing guidelines with a simplified, generic, time-bound framework for the resolution of stressed assets.
In the revised framework which replaced the earlier schemes, the RBI put in place a strict deadline of 180 days during which a resolution plan must be implemented, failing which stressed assets must be referred to the NCLT under IBC within 15 days. The framework also introduced a provision for monitoring of one-day defaults, where incipient stress is identified and flagged immediately when repayments are overdue by a day.
Borrowers whose loans were tagged as NPAs before the release of the circular recently crossed the 180-day deadline for internal resolution by banks. Some of these borrowers, including various power producers and sugar mills, had appealed against the RBI guidelines in various High Courts. A two-judge bench of the Allahabad High Court had recently ruled in favour of the RBI’s powers to issue these guidelines, and refused to grant interim relief to power producers from being taken to the NCLT for bankruptcy. All lawsuits against the circular have currently been transferred to the Supreme Court, which has now issued an order to maintain status quo on the same. This means that these cases cannot be referred to the NCLT until the Supreme Court’s decision on the circular, although the RBI’s 180-day deadline has passed. This effectively provides interim relief to the errant borrowers who had moved to court till the next hearing of the apex court on this matter, which is scheduled for November 2018.