Will Union Budget 2025 deliver on financial sector reforms?

All eyes are keenly on the upcoming first full budget of the new Indian government amid slowing GDP growth and intense geopolitical headwinds. The financial services industry is closely watching the government’s fiscal roadmap, which could foster growth, ensure stability and address long-standing industry challenges. A thriving financial sector is vital for sustaining economic momentum, spurring entrepreneurship and promoting financial inclusion.

Despite significant strides in improving the capital adequacy of Public Sector Banks (PSBs) in recent years, the Indian government will need to provide additional recapitalisation to catalyse growth in PSBs’ lending and bolster their ability to serve underbanked and underserved regions of India. There may be a case to evaluate the merger of smaller PSBs and privatise some of them to improve their competitiveness and efficiency and reduce the burden on public finances. These measures will need to be supplemented with (a) improvements in NPA resolution mechanisms and a more robust recovery framework (including the creation of a bad bank) and (b) appropriate incentives for mobilising public deposits, which PSBs as well as private banks, have been struggling with in recent times. Through appropriate fiscal incentives, the government should encourage the adoption of digital banking and innovations in fintech that foster financial inclusion. Additionally, the 2025 budget will likely focus on improving MSMEs’ credit flow and incentivising sustainable, green and ESG-compliant finance. The banking sector expects measures to make it easier for them to do business, including simplifying KYC norms and making the regulatory environment more conducive to innovation, especially for small banks and new financial institutions.

The insurance sector’s expectations are centred on making insurance products more accessible, affordable and attractive to consumers while fostering innovation. These could be achieved by providing additional tax incentives to encourage insurance adoption, relaxing GST on health insurance premia, providing policy and tax incentives for boosting digital infrastructure and adoption of new technologies and promoting micro-insurance products specifically to ensure penetration in rural and low-income groups. The government could also consider allowing up to 100 percent FDI (up from 74 percent currently) to ensure insurers have access to additional capital to fund the expansion of products and operations, increase customer outreach and build digital infrastructure other than supplementing insurers’ resilience against financial volatility.

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Considering increasing allocations to infrastructure development, the Indian government must consider extending the tax holiday provided to sovereign wealth funds and foreign pension funds for income from qualifying infrastructure investments; the tax holiday currently applies to investments made up to 31 March 2025, and one considers a three-year extension to be in good order. The Indian government could also consider policy initiatives to encourage savings and long-term investments by domestic investors, including incentives for SIPs, micro-investments and investments in pension funds (which, in turn, will drive long-term investment in mutual funds and other asset classes).

The Indian real estate sector also expects several key measures from the budget, particularly to enable affordable housing projects, drive the formalisation of the rental housing market, provide developers with access to affordable finance, increase focus on the development of urban infrastructure, especially in Tier-2 and Tier-3 cities, streamline and simplify approval processes, etc.

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Activities in the IFSC have been gaining momentum across sub-sectors in recent years. The government should continue to provide a fillip to the use of the IFSC, including implementing various announcements made in this respect in the last budget. To this end, the Indian government could consider identifying one or two sub-sectors every year to increase offtake, possibly starting with the asset management industry and developing the IFSC as a global trading hub. This would require the Indian government to extend the sunset date of the various fiscal incentives available for operating in the IFSC.

Industry stakeholders are anticipating further developments and specific action points regarding the policy initiatives and reforms announced in the last few union budgets. This includes the financial sector vision and strategy document, the introduction of variable capital companies, the further simplification of inbound and outbound investment regulations, and the completion of bilateral investment treaties. Budget 2023 identified the financial sector as one of the seven priority sectors in the Saptarishi framework, and subsequent budgets have duly focused on it. Policy reforms targeted at the financial services industry will continue to play a pivotal role in framing the 2025 budget.

Madhav Kanhere is Partner, Deloitte India. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.