H I G H L I G H T S

•     Robust tax revenue boosts Govt finances in 1st half of 2021-22
•     Only worry on revenue front caused by poor disinvestment
•     Exports maintain robust growth in first half of 2021-22
•     Imports up at a higher pace, widening the trade deficit
•     Air India privatised, returns to the Tatas after 68 years
•     What Tatas paid out to acquire Air India
•     Govt sheds Air India, but carries a lot of its past debt
•     Growth outlook brightens, India set to grow faster than China
•     Business confidence up, but firms face margin pressure
•     Industrial output up in August, consumer demand still muted
•     Inflation softens, but worries in the medium term persist

Robust tax revenue boosts Govt finances in 1st half of 2021-22

The report card for the Union government's finances in the first half of 2021-22 could not have been more pleasing to the finance minister in a year when the Indian economy is yet to fully recover from the ravages of Covid-19. The Centre's fiscal deficit, a proxy for its overall borrowing requirement to meet the gap between its expenditure and revenue, is just about 35 per cent of the full year's deficit estimate of Rs 15.1 lakh crore. At a similar time last financial year, the deficit had ballooned to about 115 per cent of the annual fiscal deficit target for 2020-21. This reduction in the size of the Union government's fiscal deficit by the end of September 2021 has been possible because of two specific reasons. One, the government's tax revenue has shown robust growth. Net tax revenue (after refund and transfer to states) during April-September 2021 was estimated at Rs 9.2 lakh crore, almost 100 per cent more than Rs 4.6 lakh crore collected in the same period of 2020. Also helping the government revenue was the sharp rise in non-tax revenue from Rs 0.92 lakh crore to Rs 1.6 lakh crore in this period, largely because of the special RBI dividend income the Centre could book this year. On the expenditure side also, the government has kept its revenue spend under control, incurring only Rs 13.96 lakh crore, which was just about 48 per cent of the annual target of Rs 29.29 lakh crore. Subsidies expenditure too was kept under control with major subsidies showing a total expenditure of Rs 1.81 lakh crore, about 54 per cent of the annual target of Rs 3.36 lakh crore. This mild slippage was largely because of the expenditure on nutrient-based fertiliser subsidies already accounting for about 81 per cent of the annual target. Clearly, the government will have to provide more for fertiliser subsidies in the coming months. Even with respect to capital expenditure, the government was in control. Capital expenditure in the first half of the year at Rs 2.29 lakh crore was just about 41 per cent of the annual spending target.

Only worry on revenue front caused by poor disinvestment

If there was any worry on the revenue side, it was because of the poor disinvestment proceeds in the first half, estimated at only about Rs 9,100 crore, against an annual target of Rs 1.75 lakh crore. Can the planned sale of BPCL or the initial public offer of LIC be pulled off in the current year? That would decide if the government would be able to meet its disinvestment target this year. But this is one year when the government could afford a slippage in meeting its disinvestment receipt target as other revenues have maintained robust growth. Even the additional expenditure on account of food subsidy and fertiliser subsidy, necessitated by the need to address Covid-induced stress would not undermine the government's ability to meet the fiscal deficit target for the current year. Meeting the Budget target of keeping the fiscal deficit at 6.8 per cent of gross domestic product (GDP) in 2021-22 (compared to 9.5 per cent of GDP in 2020-21) should not pose any hurdle for the finance ministry.

Exports maintain robust growth in first half of 2021-22

For the first half of 2021-22, India's exports of merchandise goods have grown by a healthy rate of 57 per cent to $197 billion. During April-September 2020, exports were estimated at $126 billion, which, thanks to the Covid impact, marked a steep drop from $159 billion in the same period of 2019. Thus, even when compared with exports two years ago during the pre-pandemic period of April-September 2019, the exports performance of the first six months of the current financial year has shown a rise of about 24 per cent, which in itself is quite a decent rate. At this rate, India is all set to reach its annual target of $400 billion for the full year of 2021-22, breaking the decade-old shackle of annual exports remaining rangebound at a level of $300-330 billion. Merchandise goods exports in September 2021 at $33.44 billion recorded a growth rate of 21 per cent year on year, but even when compared with the same month of 2019, the growth was a respectable 28 per cent. India's exports rise is driven by engineering goods, gems and jewellery. Petroleum goods exports have also begun recovering.

Imports up at a higher pace, widening the trade deficit

Signifying the return of economic activity, imports also staged a smart recovery in the first half of the year. At $276 billion in April-September 2021, India's imports were 82 per cent higher than those in the same months of 2019. But, when compared with imports in April-September 2019, the imports rise in the first half of 2021-22 was only about 11 per cent. The rise in imports is largely due to the recent elevation in the price of crude oil, the import of which meets more than 80 per cent of India's total domestic requirement, coal and gold. Imports in September 2021 at $56 billion represented an increase of 85 per cent over September 2020 and 50 per cent over September 2019. The merchandise trade deficit, as a result is up at $79 billion in the first half of 2021-22, up considerably from $25 billion in the same period of 2020, but is still lower than $89 billion reached in April-September 2019.

Air India privatised, returns to the Tatas after 68 years

With the 100 per cent sale of the state-owned Air India to the Tatas, the month of October 2021 saw the Modi government completing its first privatisation deal. The Atal Bihari Vajpayee government had privatised about a dozen public sector entities between 1999 and 2004 and the Manmohan Singh government stayed away from privatisation for ten years between 2004 and 2014. In its first term, the Modi government too failed to privatise any state-owned enterprise, though it had begun the exercise in 2018 with Air India - an attempt that had failed. In its second term, the Modi government has moved quickly on completing the process of divesting its entire stake in Air India, in favour of the Tatas, from which quite ironically the Nehru government had acquired in 1953. Ratan Tata had thus tweeted "Welcome back, Air India", after the government announced the sale of Air India.

What Tatas paid out to acquire Air India

What the Tatas paid out for acquiring Air India was an amount of Rs 18,000 crore, of which about Rs 2,700 crore was paid by way of cash infusion and the remaining was by way of taking on the company's debt burden of about Rs 15,300 crore. The Tatas will thus have not only the debt-ridden and loss-making Air India, but also its low-cost subsidiary, Air India Express and a 50 per cent stake in Air India's ground handling company, AISATS. For the Tatas, the ownership of Air India came along with the liability of paying about Rs 9,185 crore every year on account of the capitalized lease obligations of 42 leased aircraft, mostly Boeing 787 Dreamliners and the responsibility of carrying the burden of 12,000-odd employees, whom it cannot shed for at least a year. At the same time, the new owners, who defeated a bid of Rs 15,100 crore by Ajay Singh of Spicejet, will have the benefit of eight Air India logos, which cannot be transferred for at least five years. By virtue of the acquisition, it would get 4,486 domestic and 2,738 international airport slots across Indian and major international cities. This would be a major gain. The Tatas would also become the second largest aviation group (including the capacity of its existing airlines - Vistara and Air Asia) in the country with a domestic market share of 25 per cent after Indigo's 55 per cent. On international routes, it would become the largest player.

Govt sheds Air India, but carries a lot of its past debt

For the government, the sale of Air India will mean an end to its worries over financing the state-owned airline's losses. Operating the airline was costing the government Rs 620 crore per month and the daily loss was about Rs 20 crore. The government had invested over Rs 54,500 crore into Air India since 2009-10 as cash support and another Rs 55,700 crore as guarantee for its loans. These loans have increased to Rs 61,560 crore after the pandemic. The government, however, will not be completely free of its financial burden on account of Air India. Even after the sale, the government would have to service Rs 46,262 crore of debt and Rs 15,834 crore of current liabilities like accumulated airport charges and vendor payments, all of which would be transferred to the newly created Air India Assets Holding Limited or AIAHL, a special purpose vehicle to handle Air India's past debts. After deducting the value of non-core assets worth about Rs 14,718 crore and Rs 2,700 crore of cash from the Tatas, the impact on the exchequer would be about Rs 44,680 crore. According to the government's Disinvestment Secretary, T.K. Pandey, AIAHL would raise money through government-guaranteed bonds and pay off the lenders. An alternative path would be that the government ask the lenders to replace the guarantee to AIAHL with a new contract, since most of these loans are not backed by assets. While for the government, there is no recurring financial burden on account of Air India, although the accumulated past debts would have to be managed, the Tatas face a big challenge ahead to make the airline a commercially viable proposition.

Growth outlook brightens, India set to grow faster than China

The outlook for India's growth has got better. The Reserve Bank of India continues to project a growth rate of 9.5 per cent for the Indian economy in 2021-22, but the International Monetary Fund has provided some extra cheer with its latest projections. It retains India's economic growth forecast for 2021-22 at 9.5 per cent, even though it scaled down the world economic growth projections by 10 basis points to 5.9 per cent, on account of supply disruptions and the Covid situation. The International Monetary Fund has also retained its growth projection for India in 2022-23 at a healthy 8.5 per cent, even as the world economy would grow at 4.9 per cent. For China, the IMF has projected a growth rate of 8 per cent for 2021 and 5.6 per cent for 2022. This means that India is likely to reclaim the tag of the fastest growing major economy in the world. The IMF's inflation projection shows that retail inflation in India is expected to be lower at 5.6 per cent in 2021-22, down from 6.2 per cent in 2020-21. For 2022-23, retail inflation is expected to decline further to 4.9 per cent. Remember that the Monetary Policy Committee of the Reserve Bank of India also has pegged the retail inflation rate at 5.3 per cent for the current financial year. On the external front, the current account balance will be in the deficit at -1 per cent in 2021-22, compared to a surplus of 0.9 per cent in 2020-21. The deficit would widen to 1.4 per cent in 2022-23, according to the IMF. There are, however, uncertainties about the Covid pandemic and whether the pace of vaccination maintains its current healthy pace. And the jury is still out on the sustainability of India's growth in the medium term, beyond 2022-23.

Business confidence up, but firms face margin pressure

Business sentiment has hit a two-year high, going by the latest survey by the National Council of Applied Economic Research or NCAER. The business confidence index, maintained by NCAER, rose to 117.4 in the second quarter of 2021-22, sharply up from 65 in the same quarter of 2020-21. In the pre-pandemic July-September quarter of 2019, the same index stood at 103.1. The improved business confidence reflects the weakening of the second wave of Covid-19, a rapid pace of vaccination and a resumption in most economic activities. Importantly, the confidence level showed improvement in all the key parameters, tracked by the NCAER index – economic conditions, financial conditions of firms, investment climate and capacity utilization. The same survey, however, draws attention to an area of concern: Rising raw material prices, which may increase the costs for firms. Already, the second quarter results of op companies shows that many of them are under margin pressure as a result of higher costs they have incurred on raw materials. The net profit growth for a sample of 450 companies rose by 18 per cent in the second quarter of 2021-22, compared to a much higher growth rate of 33 per cent in the same period of 2020-21. In contrast, their sales growth in the second quarter of 2021-22 was 26 per cent, compared to a contraction of 4 per cent in the year ago period. The margin pressure has already become quite severe.

Business confidence up, but firms face margin pressure

Business sentiment has hit a two-year high, going by the latest survey by the National Council of Applied Economic Research or NCAER. The business confidence index, maintained by NCAER, rose to 117.4 in the second quarter of 2021-22, sharply up from 65 in the same quarter of 2020-21. In the pre-pandemic July-September quarter of 2019, the same index stood at 103.1. The improved business confidence reflects the weakening of the second wave of Covid-19, a rapid pace of vaccination and a resumption in most economic activities. Importantly, the confidence level showed improvement in all the key parameters, tracked by the NCAER index – economic conditions, financial conditions of firms, investment climate and capacity utilization. The same survey, however, draws attention to an area of concern: Rising raw material prices, which may increase the costs for firms. Already, the second quarter results of op companies shows that many of them are under margin pressure as a result of higher costs they have incurred on raw materials. The net profit growth for a sample of 450 companies rose by 18 per cent in the second quarter of 2021-22, compared to a much higher growth rate of 33 per cent in the same period of 2020-21. In contrast, their sales growth in the second quarter of 2021-22 was 26 per cent, compared to a contraction of 4 per cent in the year ago period. The margin pressure has already become quite severe.

Industrial output up in August, consumer demand still muted

India's industrial output recovered in August 2021. The growth was 11.9 per cent, compared to a contraction of over 7 per cent during the pandemic-hit month of August in 2020. But the consolation was that compared to August 2019, industrial output in August 2021 had done better at 3.9 per cent. Manufacturing, a subset of the Index of Industrial Production or IIP and accounting for 77 per cent weight in it, grew by 9.7 per cent, compared to a contraction of 7.6 per cent in the same month of last year. Sequentially, manufacturing contracted marginally by half a per cent. Electricity generation did well at 16 per cent and so did mining at about 24 per cent. However, consumer durables growth was a little muted at 8 per cent and consumer non-durables did worse with a contraction of over 5 per cent. On the other hand, the encouraging sign was that the capital goods sector clocked a growth rate of about 20 per cent, compared to a contraction of 14 per cent in August 2020. The capital goods sector is an indicator of the likely pace of investment in the coming weeks and hence augurs well for investment prospects.

Inflation softens, but worries in the medium term persist

India's inflation worries seemed to have ebbed. Retail inflation fell to 4.35 per cent in September 2021, a five-month low figure. In August, retail inflation, based on the movement in Consumer Price Index, was 5.3 per cent. The big relief was that September also marked the third consecutive month when the retail inflation level stayed below the upper tolerance band of 6 per cent, mandated under the inflation-targeting regime introduced in 2016 by the Reserve Bank of India. In the year ago period of September 2020, retail inflation had risen to 7.27 per cent. The moderation in retail inflation was largely due to softening food prices, whose downward trajectory neutralised the upward pressure as a result of higher prices of crude oil and fuel. The wholesale inflation, based on the Wholesale Price Index, also softened to a six-month low of 10.66 per cent in September 2021. In August, wholesale inflation was 11.39 per cent. Here also, the fall in the wholesale inflation rate was caused by a fall in food prices, for the second month in a row. However, with crude oil prices maintaining a northward trend and other energy prices going up, inflation worries are still not over for the Indian economy. Wholesale inflation may still be in double digits in 2021-22 and retail inflation may just be below the upper tolerance band of 6 per cent.


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About the Author

A K Bhattacharya
Distinguished Fellow, Ananta Centre
Editorial Director, Business Standard

After a 10-year long stint with Financial Express from 1978-1988, in different capacities in the areas of news gathering and news management, A.K. Bhattacharya joined The Economic Times in 1988 and functioned as its Chief of Bureau from 1990 to 1993. In 1994, he became its Associate Editor. He joined The Pioneer as Executive Editor in September 1994, stabilised the newspaper before becoming its Editor in 1995. He joined Business Standard in 1996 as Editor, News Services. Was its Resident Editor in Mumbai from July 1996 to September 1997 and helped the newspaper launch its Mumbai edition. From October 1997 to May 1998, he functioned as National Editor leading the paper's news operations. As Managing Editor of Business Standard between June 1998 and April 2000 and as its Group Managing Editor between May 2000 and October 2011, he oversaw the newspaper's news operations and editorial administration. From November 2011 to July 2016, he was the Editor of Business Standard. Since August 2016, he has been the Editorial Director of Business Standard on a part-time basis. He has been writing a regular column - New Delhi Diary - commenting on government affairs, since 1990 - that appeared in The Economic Times, Pioneer and now in Business Standard. Since 1997, he has been writing another column - Raisina Hill - commenting on developments/issues concerning bureaucracy.