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The upcoming Budget should focus on creating jobs and bridging the widened inequality in the economy besides accelerating growth, former RBI Governor D Subbarao said on Thursday while observing that given the continuing need to raise spending on education, health and infrastructure, there is not much leeway for tax cuts.

Subbarao also opined that experience shows export promotion behind protectionist walls is seldom competitive, so there is a case for reducing the tariffs.

"Accelerating growth is the objective of every Budget as it should be of this one. But this Budget should pay special attention to bridging the widened inequality in the economy," he told PTI in an interview.

While noting that the COVID-19 pandemic has caused enormous distress to the low-income segments who operate in the informal economy, Subbarao said the upper income segments have not only been able to protect their incomes but have in fact been able to grow their savings and wealth.

Citing the latest World Inequality Report which had said that India is among the most unequal countries in the world, he said,” Such wide inequality is not only morally wrong and politically corrosive, but it will also dent our long-term growth prospects.”

Finance Minister Nirmala Sitharaman is scheduled to present the Union Budget 2022-23 in Parliament on February 1.

“We need job intensive growth. If there is a theme for this Budget, it should be jobs,” he said.

The former RBI Governor pointed out that jobs have been lost because of the growth slowdown and also because of the shift in activity from the labour-intensive informal sector to the capital-intensive formal sector.

“Growth is necessary to generate jobs, but not sufficient,” he said, adding that there is a need for stronger emphasis on improving the ease of doing business through governance reforms so that investment becomes a promising option for both domestic and foreign investors.

Subbarao pointed out that raising the level of exports is good not just for balance of payments reasons but also from a jobs perspective because export production is labour intensive.

“Experience shows that export production behind protectionist walls is seldom competitive. There is a case therefore for rolling down the tariffs,” he said.

Asked if there is any scope for reduction in taxes in the upcoming Budget as that will provide some relief to the poor, Subbarao said as per media reports, this year’s tax collections will be better than the budgeted target which, he said, will be largely offset by lower privatization proceeds and higher expenditure on food and fertilizer subsidies.

“So, the net positive impact on the fiscal deficit is likely to be marginal,” he said. Also, Subbarao noted that the tax buoyancy the country saw this year will dissipate next year as the informal sector revives.

“Besides, given the continuing need to raise spending on education, health and infrastructure, I don’t believe there is much leeway for tax cuts,” he argued.

Asked whether the government should continue with stimulus measures in order to stimulate growth, Subbarao said in the last Budget, the finance minister committed to a fiscal consolidation path of reducing the fiscal deficit to 4.5 per cent of GDP by 2025/26.

“I believe it’s important to operate within that space. Any deviation from the fiscal consolidation path will impair credibility, dent investor sentiment and hurt our growth prospects.” he said.

Asked how big a concern is inflation, Subbarao said inflation has remained in the upper reaches of the RBI’s target band for much of the last two years.

Going forward, he said there will be pressure on inflation because of an unfavourable base effect, rising commodity prices and output price hikes by firms.

“Controlling inflation can go a long way to redress the distress of the poor,” Subbarao observed.

On the risk of stagflation, he  said he thinks that’s being too alarmist.

“Yes, inflation has been persistent over the last two years but note that it is still within the RBI’s target band.  RBI should be able to bring it down to the mid-point of the target band by normalizing the policy,” Subbarao said.

Stagflation is defined as a situation with persistent high inflation combined with low growth.

Retail inflation in India rose to 5.59 per cent in December 2021, while the wholesale price-based inflation eased to 13.56 per cent last month.On economic growth, he said if Omicron remains mild, mobility restrictions are likely to be targeted and decentralized.

“In the base case scenario therefore, we should achieve 9.2 per cent growth for the full year. If in fact these assumptions about Omicron do not hold, there will be a downside risk to the 9.2 per cent growth estimate,” Subbarao said.

Some of these measures, which can be addressed in Budget 2022 are:

Rationalisation Of Duty Structure: The industry has faced duty structure anomalies arising from free trade agreements (FTAs) with several countries, leading to an inverted duty structure for several downstream and intermediate products. This had also resulted in insufficient capacity creation for these products which are used as feedstock for specialty/value-added products.

Further, high duties on key raw materials and building blocks, which are not available domestically, impacted the competitiveness of domestic manufacturers. While, in recent years some of the duty structure related issues have been addressed, such as reduction in basic customs duty on Naphtha from 4 percent to 2.5 percent in Budget 2021, and some of the anomalies under the FTAs have been rationalised.

However, further rationalisation in duty structure is needed, with reduction in duties for key raw materials and building blocks, and addressing the instances of an inverted duty structure by increasing duties on intermediates/downstream product to encourage domestic production of value-added products.

Incentives For Exports: Incentives for boosting exports in the chemical sector can be announced. Schemes such as Remission of Duties and Taxes on Exported Products (RODTEP) can be extended to the chemical sector as well.

Production Linked Incentives (PLI) Schemes: Extension of the PLI schemes for more chemical segments would support the domestic manufacturing sector, and encourage capacity additions. Currently the PLI scheme has been extended to the Active Pharmaceutical Ingredients (APIs) and key starting materials (KSMs).

Cluster-Based Development: Any fiscal incentives/budgetary allocation for cluster-based development under existing programmes such as PCPIR/plastic parks (Petroleum, Chemicals and Petrochemicals Investment Region) or other such programmes will also help in domestic capacity creation. Such cluster-based development will also be beneficial for environmental and social risk management, due to shared facilities enabling better compliance with tightening environmental norms.

Research and Development: In order to produce more value added products, it will be necessary for the domestic industry to increase its R&D spend. Any incentives/rebates for R&D-related capital expenditure by the industry will be favourable.

Schemes For MSME Sector: MSMEs account for significant share of domestic chemical manufacturing, and specific schemes targeting this segment to enable technology upgrade, and ESG compliance (domestic and exports) can help the MSME sector move up the chemical value chain, increase its product offerings, and improve competitiveness.

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Also, new-age firms that have listed in the last few months at high valuations have taken a beating, dampening investor sentiment. Rising COVID cases in India, which have remained above three lakh for some days now, are also causing concern.

Early trends this earnings season indicate that high input costs continue to be a bugbear, as also delayed kharif (monsoon) crop harvesting due to unseasonal rains, and the virus.

PTC India Financial Services (PFS) has been taking heat for lapses in corporate governance and compliance after three of its independent directors quit last week.

The Securities and Exchange Board of India (SEBI) has pulled up PFS, barring the non-banking financial company (NBFC) from holding a board meeting until it addresses the corporate governance issues and submits a report on action taken within four weeks.

Shares of PFS and parent PTC India have plummeted for three consecutive sessions. But what has caused all this?

The trigger

On January 19, Kamlesh Shivji Vikamsey, Thomas Mathew T and Santosh B Nayar resigned from the post of independent director of PFS on concerns over lapses in governance and compliance. They submitted similarly worded resignations and other supporting documents.

The three directors said that former bureaucrat Rakesh Kacker had also previously written to the management highlighting lapses in corporate governance before his tenure ended at PFS in end-December. Kacker was also on the board of the parent entity PTC; he resigned on January 21.

Why did the directors resign?

The independent directors have made six allegations--one pertains to the appointment of another director, while the other five pertain to operations and corporate governance issues.

1. • PFS’s managing director and chief executive officer Pawan Singh did not allow “Mr Ratnesh” to join and function as director finance and chief financial officer despite board approvals for the appointment. The independent directors said that the company was in violation of the Companies Act, 2013 as Singh took the decision “unilaterally” and did seek board approval, nor gave an explanation.
2. • The directors also alleged that the company did not disclose the forensic audit report (FAR) relating to a loan account of NSL Nagapatnam Power and Infratech for two years between November 2018 and December 2020. Due to ongoing stress in the project, insolvency proceedings were initiated in the project for which bridge loan was taken by NSL and the promoter company of NSL made a one-time settlement (OTS) offer to the company in March 2020. But when the FAR came to light, PFS’s audit committee recommended that the matter should be reported to Reserve Bank of India (RBI) as suspected fraud and the board wanted to defer the decision on OTS till RBI responded.
3. • The management took no action on corporate governance issues highlighted by former PTC head Deepak Amitabh in a board meeting held on August 5, 2021.
4. • The management made changes in conditions of loans, without prior approval of the board. The independent directors cited two examples—both pertaining to highway projects—and expressed concerns that there may be more such instances.
5. • The management blatantly ignored communications from the independent directors where they called for-- documentation pertaining to the appointment and joining of Ratnesh, request for professional help of legal counsel, meeting of nomination and remuneration committee to fill up the vacancy of a lady independent director, and action needed after the withdrawal of nomination of Renu Narang from the board of the company that rendered the nomination and remuneration committee dysfunctional.
6. • The management did not provide the independent directors with the information sought by them.

What has the management done in response?

The management has refuted the allegations, questioned the intent of the independent directors and formed an internal committee for investigation. They have sent a status report to the RBI, SEBI and the two stock exchanges.

The management has started the process of appointing new independent directors and has sought SEBI approval to hold a board meeting in their absence.

The management also said that while the former chairman Deepak Amitabh raised concerns over the corporate governance practices of the company in a board meeting on August 5, 2021, the board provided a clean corporate governance report on the same day for the financial year ending March 31, 2021. They also pointed out that on September 24, 2021 the ex-chairman addressed the shareholders of the company at the 15th Annual General Meeting, appreciating the firm and mentioning no concern related to corporate governance.

What regulatory action has been taken?

SEBI has barred PFS from holding a board meeting until the company submits an action report within four weeks. This effectively means that the company is unlikely to get an exemption for a board meeting for the next one month.

The RBI and even the ministry of corporate affairs are soon expected to ask the company for an explanation.

What next?

All eyes would be on the action report PFS has to submit to SEBI in the next four weeks.

As a listed NBFC, the company falls under the purview of both RBI and SEBI. Authorities could direct the company to conduct an independent audit of the corporate governance issues.

The management has been in talks with key investors to assuage their concerns. They may have to take some more action soon to allay their concerns as the selloff in the shares of PFS and parent PTC continues.

PTC, formerly known as Power Trading Corporation of India, holds a 65 percent stake in PFS. State run-power sector companies NTPC, Power Grid Corporation of India, Power Finance Corporation and NHPC together own a 16.2 percent stake in PTC.

Sequence of events

August 5, 2021: Former PTC Chairman Deepak Amitabh raises concerns over the corporate governance practices of PFS in a board meeting.

October 13, 2021: Amitabh resigns from the post of chairman and managing director with effect from November 5, citing personal reason. He joined the company in 2003 and held the top position since 2012.

November 6, 2021: Rajib Kumar Mishra, who was director of marketing at PTC, was given the additional charge of CMD’s position till a regular appointment was done.

January 14, 2022: PFS directors were sent a notice informing them of a board meeting to be held on January 22. The independent directors claimed that the board meeting was invalid as the notice was not served to all the directors of the board and the agenda did not include the corporate governance issues raised by them earlier.

January 19, 2022: Vikamsey, Mathew and Nayar resign from the board of PFS, citing lapses in corporate governance.

January 20, 2022: PTC and PFS refute allegations made by the independent directors who resigned.

January 21, 2022: PTC and PFS hold press meet to announce they have formed an internal committee for investigation. They question the intent of the independent directors.

January 22, 2022: PFS has to call off the board meeting after SEBI pulls them up, barring them from holding a press meet until they submit an action report in four weeks.

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The share price of Reliance Industries (RIL), which reported a healthy set of numbers for the December quarter, slipped into the red after opening higher in the morning session on January 24 following weak market conditions.

Billionaire Mukesh Ambani-led Reliance Industries reported a net profit of Rs 20,539 crore in the third quarter of 2021-22, up 37.9 percent year-on-year as all business verticals saw strong growth, the oil-to-chemical (O2C), telecom and retail conglomerate said on January 21.

The net profit of the company was boosted by a one-time gain of Rs 2,836 crore from the sale of its upstream shale gas assets in Eagleford in Texas, USA, with which the company exited from the shale gas play in North America.

The consolidated revenue for the country’s most valuable company by market capitalisation rose 52.2 percent YoY to Rs 209,823 crore in the quarter. The company said that it clocked record earnings before interest, tax, depreciation and amortization (EBIDTA) led by its O2C, oil and gas, retail and digital services.

Also read: Reliance Retail Q3 result | Net profit jumps 23% to Rs 2,259 crore backed by festive sales

It is that time of the year when markets await the Union Budget. From the time COVID-19 hit, the government has agreed to take a large GFD/GDP ratio (gross fiscal deficit/gross domestic product) in its stride, allowed for a sharp increase in its borrowing programme, leading to a significant increase in the public debt/GDP ratio. Expectedly, there are some calls for a fiscal consolidation, lest the debt becomes overly burdensome for future generations to pay or financial stability becomes an issue.

Can the government go for a fiscal consolidation immediately? The current economic landscape may not allow them to do so. The economy was anyways slowing over many quarters before COVID-19, implying structural impediments. With COVID-19, these impediments have probably only strengthened and thus the economy would need to be on policy crutches for full recovery to take shape.

Also Read:- As economies limp out of pandemic, here’s how CII wants policymakers to steer post-COVID recovery

A look at the data will make this clear. Advance GDP estimates (AE) published recently indicate that India is likely to grow at a real rate of 9.2 percent in FY22. The worry is weak private consumption demand and the still-frail consumer sentiment. The AE indicates that the private consumption expenditure will still be lower than the pre-COVID-19 level in FY22 by 2.9 percent. And, even more important is the fact that per capita GDP in FY22 at constant prices is at Rs 1,07,801 and this continues to be lower than the level of Rs 1,08,645 in FY20.

Petrol and diesel prices remain unchanged on January 21 - a notification issued by state-owned fuel retailers showed.

This comes after the Central government cut excise duty on November 4, 2021 to give relief from prices that had touched an all-time high.

The Central government cut the duty on petrol by Rs 5 per litre and that on diesel by Rs 10 a litre resulting in an equivalent reduction in retail pump rates. Following this, many states and Union Territories cut local sales tax or value-added tax (VAT) to give further relief to consumers.

In Delhi, fuel is relatively cheaper than the rest of the metros because the state government had earlier decided to reduce the VAT on petrol. Delhi reduced the VAT on petrol from 30 to 19.4 percent from December 1 midnight, bringing down the price by around Rs 8 to Rs 95.41 a litre. Diesel price also remains unchanged in the national capital at Rs 86.67 a litre.

In Mumbai, a November 4 cut reduced the price of petrol to Rs 109.98 a litre, which remains unchanged. Diesel is at Rs 94.14 a litre.

In Kolkata, petrol and diesel prices remained at Rs 104.67 and Rs 89.79. Petrol was at Rs 101.40 and diesel at Rs 91.43 in Chennai. In Hyderabad, petrol and diesel prices remained at Rs 108.20 per litre and Rs 94.62 per litre.

The states and union territories that had gone for VAT reduction after the excise duty cut by the Centre include Ladakh, Jammu and Kashmir, Himachal Pradesh, Delhi, Sikkim, Mizoram, Daman and Diu, Karnataka and Puducherry. Others include Dadra and Nagar Haveli, Chandigarh, Chhattisgarh, Assam, Madhya Pradesh, Tripura, Gujarat, Nagaland, Punjab, Goa, Meghalaya, Odisha, Rajasthan, Arunachal Pradesh, Manipur, Andaman and Nicobar, Bihar, Uttarakhand, Uttar Pradesh and Haryana.

States that have so far not lowered VAT include are largely opposition ruled states including Maharashtra, Jharkhand and Tamil Nadu. TMC-governed West Bengal, Left-ruled Kerala, TRS-led Telangana and YSR Congress-ruled Andhra Pradesh have also not cut VAT.

Congress-ruled Punjab, which is due for election by March, has seen the biggest drop in petrol prices after it slashed VAT the most. The union territory of Ladakh saw the biggest fall in diesel rates.

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