The year gone by will be best remembered for critical reforms – structural as well as institutional. I believe India is at the beginning of a strong growth trajectory, and the banking sector will play the role of the principal change agent.
With digital payments and gateways such as the recently launched UPI platform gathering momentum, we will see major opportunities for the banking and financial system.
I believe Finance Minister Arun Jaitley will focus on six key areas in the this year's Budget:
1) Direct taxes: Against the backdrop of demonetisation, I believe there is a need to provide an immediate thrust to household incomes and financial savings. Towards this, Jaitley may raise the 80C exemption limit to Rs 3 lakh, from the current Rs 1.5 lakh. Not only will the tax benefits boost savings and spending, it will also help deepen the mutual fund industry and capital markets, as there is a large pool of funds which needs to be incentivised from the Pay Commission roll-out.
Additionally, the finance minister can also look at encouraging bank deposits, by lowering lock in for tax rebates to 1 year from 5 years and raise the threshold for mandatory tax deducted at source (TDS) on interest income to Rs 50,000 a year, from Rs 10,000 currently.
2) Incentivise cash-less transactions: There is a need to create an enabling regulatory and licensing framework for the fintech sector, with the aim of safeguarding all stakeholders and ensuring cost and time-efficient transactions. The finance minister can also look at creating a ‘regulatory sand-box’ for quicker turnaround, which will further drive innovation in the sector.
3) Giving a fillip to MSMEs: To tide over the transient, short-term liquidity crunch that many MSMEs are facing due to demonetisation, I believe a refinance window at RBI can be opened up (under Sidbi). Such a facility will cushion the sector during the ongoing transition to a new ‘less cash’ norm. Further, I believe the finance minister can also look to create an Udyog Adhaar-linked Centralised Portal and Repository for updated bank account details of all MSMEs, thereby increasing transparency of financial data, reducing decision-making time and leading to further reduction in interest costs by 1 percent, and finally enabling automating financial assessment real time.
4) Lower cost of funds: An institutional reform like the GST will likely improve economic efficiency and lower economic costs in the medium term. Given such a scenario, there is a need for a vibrant corporate bond market for infrastructure growth. A new trading platform for corporate bonds, similar to government bonds, must be institutionalised. Also, I believe banks must be allowed to hold 0.5-1 percent excess SLR in high-quality corporate bonds (AAA/ AA+).
5) Promote financial savings: The finance minister may also look to address disparity in post-tax returns of existing schemes such as PPF, EPF, NPS by moving towards uniform tax treatment. It is also important to make financial savings attractive by increasing inflation adjusted post tax returns and introducing product innovation. Additionally, the government can also look to reintroduce inflation-indexed bonds to push financial savings. This will significantly reduce reinvestment risks for gratuity, pension and provident funds.
6) Introducing FRBM 2.0: Given the changing economic and financial order, the government can consider sticking to a point target for the fiscal deficit rather than a range target. This will help avoid uncertainty and policy ambiguity. The finance minister can also look to frame detailed expenditure rules in favour of capital spending and set up a fiscal council to ensure adoption of rule-based fiscal policy.
Going ahead, to maintain the reforms momentum, it is imperative to implement both the GST and the Bankruptcy code.
(The author is MD and CEO, YES Bank, and chairman, YES Institute)
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Updated Date: Jan 27, 2017 10:28 AM