At a time when the economy is gathering momentum, the Budget will certainly be the most important opportunity to chart the future course for structural and institutional reforms. 2017 promises to be a year where we stand to reap the benefits of passage of key reforms such as GST and the Bankruptcy code, as well as bold and revolutionary decisions including the landmark demonetisation drive. For this momentum to get stronger and translate into meaningful growth, ensuring seamless implementation is vital. The advent of the JAM Trinity in the past two years has seeded a silent revolution. Now, as digital payments and gateways like the recently launched UPI platform gather momentum, we will see major opportunities for the banking and financial system.
Six key priority areas for the government for the FY18 Budget:
Direct tax incentives: Against the backdrop of the successful demonetisation, tax benefits will be critical for newly generated savings of the working youth and also to boost spending. I believe this will be instrumental in providing an immediate thrust to household incomes & financial savings. On the direct tax front, to begin with, the 80C limit can be increased to R3 lakh from current R1.5 lakh; this will also help deepen the mutual funds and capital markets, as there is a large pool of funds which can be incentivised, from the Pay Commission roll out.
As an additional step, the government can also look to encourage deposits by reducing lock in for tax rebates to one year (from five) and raise the threshold for mandatory TDS on interest income to R50,000 a year (from R10,000).
Promoting financial savings: Household savings in pension instruments in India is restricted to just 1.2% of GDP. It is important to address disparity in post-tax returns of existing schemes, like EPF, PPF, NPS, by moving towards a uniform tax. Reintroduction of inflation-indexed bonds to promote financial savings will also significantly lower reinvestment risks for pension, provident and gratuity funds.
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Further, it is essential to make financial savings attractive by increasing inflation-adjusted post-tax returns and introducing product innovation. Granting exemption from reserve requirements for the Gold Monetisation Scheme will reduce costs for banks by 50-100 bps and promote the adoption of e-Gold.
Incentivise cash-less transactions: As a step to further support India’s eventual transition to a cashless economy, and to increase efficiencies in terms of digital payments, it is important to provide a further fillip to the fintech sector.
A progressive, enabling regulatory and licensing framework will be essential for this vital, high growth sector, to safeguard all stakeholders and ensure cost and time-efficient transactions. Creation of a ‘regulatory sandbox’ for quicker turn around will further drive innovation.
Going forward, innovations like debit cards being equipped with smart chips for public transport payment (on lines of T-money in South Korea) will be key to help India truly leverage digital payments. This chip should be modified to fit credit/debit/SIM cards (allowing people to tap mobile phones to take the bus/metro).
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Progressively enable lower cost of funds to enable transformational growth: 2017 will surely witness gradual lowering of real interest rates in our economy, with growth trends hard-wiring to 7.5-8% GDP from April 2017 onwards. Institutional reforms like the GST will play a critical role in improving economic efficiency and lowering costs in the medium-term.
Against this backdrop, a vibrant corporate bond market is essential for infra growth—a new trading platform for corporate bonds (on lines of government bonds) can be institutionalised; further, banks should be allowed to hold 0.5-1.0% excess SLR in high quality corporate bonds (AAA/ AA+).
Further, calibration of sectoral risk weights for bank lending in select sectors such as Affordable Housing and Renewable Energy, will be a sure-shot step to drive credit appetite. The Government may also look at relaxing guidelines for end use of ECBs, with relevant risk mitigants, to reduce cost of funds.
Support for MSMEs: Given the nature of their business, many MSMEs are facing short term liquidity crunch due to demonetisation. To help this key sector tide over this transient issue, I believe a refinance window at RBI can be opened up (under SIDBI) at prevailing repo rate. Such a facility will also cushion the sector during the ongoing transition to a new ‘less cash’ norm.
Additionally, I believe there is a need for creation of a Centralised Portal and Repository for updated bank account details of all MSMEs. Close to 90% of India’s MSMEs are partnerships or proprietorships. Such a portal, with Udyog Adhaar linkage, will increase transparency of MSME financial data, enable automating financial assessment real time, thereby reducing decision making time and leading to further reduction in interest costs by ~1%.
Usher in FRBM version 2.0 to revamp fiscal responsibility guidelines: In line with the changing economic and financial order, the FY18 Budget can consider sticking to a point target for fiscal deficit (instead of a range target) to avoid policy ambiguity and uncertainty for financial markets.
The government may also look at framing detailed expenditure rules in favour of capital spending and set up a Fiscal Council to ensure adoption of rule-based fiscal policy.
The year gone by has laid the foundation for critical reforms in the country. Building on this, I believe India is at the beginning of a strong growth trajectory, with the banking sector playing the role of the principal change agent in this exciting journey.
The author is MD & CEO, YES BANK and Chairman, YES Institute