Budget 2019: Financial sector reforms key to prop up economic growth for Modi 2.0

Published: July 5, 2019 10:23:07 AM

Budget 2019 India: In order to revive the economy, it is important that the government brings financial reforms as financial sector plays a crucial role in economic growth.

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By Jayant Manglik

Union Budget 2019 India: In order to revive the economy, it is important that the government brings financial reforms as financial sector plays a crucial role in economic growth. However, the sector has been hit due to non-performing assets and liquidity crunch. Thus, first and foremost, the government is expected to come out with a framework/policy for resolving bad debts and non-performing assets (NPA) issues in the NBFC sector on the lines of Insolvency & Bankruptcy Code (IBC). It is believed that speeding up of resolution of NPA will help ease the liquidity crunch and finally lead to revival in the private capex, which has been tepid in the last few years. The budget may also outline a plan for disinvestment (stake sale in some PSBs/ PSUs) to help meet its fiscal target.  Moreover, in order to discourage use of paper currency and to curb black money, the government may impose tax on cash withdrawals exceeding a certain limit (~ Rs 10 lakh) in a year.

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On the expenditure front, government will likely retain the allocations made in the interim budget to key sectors (e.g. Infrastructure, defence; etc.) in the final budget too. However, the final budget may contain a concrete plan for the deployment of the funds that should speed up project clearances which will also stimulate credit/loan growth in the financial sector. Also, measures to stimulate rural economy in terms of agricultural sops or favourable credit terms may also boost the economy.

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Investors (capital markets) are also expecting tax related reforms such as reduction in corporate tax rate, abolition of MAT and changes in the income tax slabs/ rebate (though any significant changes are unlikely). We believe, in case, there is a favourable change in income tax slabs/ increase in the tax-exemption limit , it will lead to more disposable income which in turn is likely to boost consumption and stimulate economic growth. On the other hand, as promised by former finance minister post interim budget 2019, there may be reduction in corporate tax rate from 30% to 25%. However the possibility of it looks unlikely due to muted tax collections this year.

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There are also reports suggesting of possible hike in long term capital gains (LTCG) tax rate in the upcoming budget. If the hike is implemented it would adversely impact the sentiments of the investor community.

To sum it up, the government is expected to bring out reforms which will help in putting the economic growth back on track. At the same time, it has a tough task of not overshooting the fiscal deficit estimate of 3.4% FY20 (raised in interim budget 2019-20 from earlier target of 3%). Thus, the budget needs to be a fine balance of measures to stimulate the economy without hurting the fiscal discipline.

The author is President – Retail Distribution, Religare Broking Ltd. The views expressed are the author’s own.

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