India’s macro economy has weathered several challenges successfully in 2015-16. Policy action combined the needs of short term economic management with focus on taming inflation and external account imbalances along with a medium to long term vision for transformation and development via investment facilitation and infrastructure creation. Currently on a cyclical upturn, growth revival remains remarkable against the backdrop of tentative global conditions and a below-par agriculture season.
At the next rung to enhance growth above potential, the FY17 Union Budget has emphatically focused on domestic financial sector as one of the 9 distinct pillars, adopting a stance that is bold, an approach that is futuristic and in spirit reformist.
The support from policy and regulatory environment will ensure superior financial delivery through markets, institutions, access, and incentivized behavior; in sync with the broader economic agenda.
The critical needs of the financial sector have been addressed though the following three broad themes:
Financial management of banks via capital infusion and stressed assets: Taking forward its Indradhanush framework, the Budget reaffirmed its commitment to infuse much needed capital in public sector banks (PSBs), by announcing recapitalisation funds of R25,000 crore for FY17. Given the low equity valuations and decline in asset quality, some capital infusion had to come from upfront from the Budget. The finance minister has however promised to raise additional capital if need be, urging the PSBs to be strong and competitive. I look forward to the road map for PSB consolidation, and commend the government for operationalising the Banks Board Bureau and for initiating the process of reducing its stake in IDBI Bank. In addition, the relaxed ownership norms of Asset Reconstruction Companies will go a long way to improve availability of capital for NPA resolution.
Boost to credit demand and supply: Against a weak credit growth of 11.5% in FYTD16, Budget has given adequate direct impetus to both demand and supply of credit via encouraging retail participation in G-secs, incentives to deepen corporate bond markets, R1,80,000 crore to be sanctioned under Mudra Yojana in FY17.
Further, the strong focus of the Budget on reviving investment, particularly infrastructure investments, and rural economy should also allow improvement in credit off take.
Game-changing new institutions: Perhaps, most important takeaway for the financial sector in the FY17 Budget comes in the form game changing reforms via new institutions of Bankruptcy Code and the Monetary Policy Committee. In the absence of a single bankruptcy code, FM in his last year’s budget speech had announced a comprehensive law aka US style Chapter 11, in order to reorganize stressed businesses without endless litigation. The clamour for the Code has only risen as banking sector continues to reel under severe asset quality pressures, which have worsened in Q3FY16 after RBI’s Asset Quality Review.
Against this backdrop, the commitment of the passing the Bankruptcy Code comes as a bout of sweet relief for the financial sector, setting the stage for a quicker economic turnaround. These efforts will also help India to improve its ranking from the current 136 of 189 countries in ‘Resolving Insolvencies’ according to World Bank Ease of Doing Business Survey.
The FY17 Union Budget has delivered on the utmost requirement of the banking and financial sector of that of a “strategic repositioning” for creating durable growth impulses. By building trust and improving predictability, the Budget measures will allow a financial fortification in a time-bound manner – a precursor for enhancing India’s long term growth trajectory.
The author is MD & CEO, YES Bank