Budget '17 to chart course of structural & institutional reforms

While the Indian economy is gathering momentum, it is imperative that key bills such as the GST and the Bankruptcy Bill be implemented in 2017. The upcoming Budget will give the government the chance to chart the future course for structural and institutional reforms. Further, with gateways such as the UPI and digital platforms gathering momentum this year, I see major opportunities for the banking and financial system.I believe the Hon’ble Finance Minister Arun Jaitley will focus on the below SIX key priority areas in the FY18 Budget: Direct Tax Incentives: I believe tax benefits will be critical for the newly generated savings of the working youth and also to boost spending, especially against the backdrop of the successful demonetization drive. This will be instrumental in providing an immediate thrust to household incomes and financial savings. On the Direct Taxes front, the finance minister may raise the 80C limit to INR 3 lakhs from the current INR 1.5 lakhs. This will help deepen the Mutual Fund industry and Capital Markets as there is a large pool of untapped funds which needs to be incentivized from the Pay Commission roll out. The Government can also encourage bank deposits by reducing the lock in for tax rebates to 1 year, from current 5 years and raise the threshold for mandatory TDS on interest income to INR 50,000 a year, from INR 10,000 currently.Promoting Financial Savings: I believe it is important to address the disparity in post-tax returns of existing schemes like EPF, PPF, NPS by moving towards an uniform tax treatment. The government may also look to reintroduce inflation indexed bonds to promote financial savings, which will significantly lower reinvestment risks for pension, provident and gratuity funds. Further, it is essential to make financial savings attractive by increasing inflation adjusted post tax returns and introduce product innovation. Incentivize cash-less transactions to aid Digital Payments push: The government may look to provide a further fillip to the FinTech sector to safeguard all stakeholders and ensure time-efficient transactions and costs, to eventually transition into a cashless economy. A progressive, enabling regulatory and licensing framework will be essential for this high growth sector. Additionally, creation of a ‘Regulatory Sand-box’ for quicker turn around will further drive innovation. To truly leverage digital payments in India, there is a need for innovations such as debit cards being equipped with smart chips for public transport payment (on lines of T-money in South Korea). This chip should be able to fit debit/ credit/ SIM cards (which will allow people to tap their mobile phones to take the metro/ bus).Progressively enable lower cost of funds to enable transformational growth: I believe 2017 will witness gradual lowering of real interest rates in our economy, with growth trends hardwiring to 7.5-8 percent GDP from April 2017 onwards. Institutional reforms like the GST will play a major role in improving economic efficiency and lowering economic costs in the medium term. Against this backdrop, it is imperative to have a vibrant Corporate Bond Market for infra growth - a new Trading Platform for Corporate Bonds (on lines of Government Bonds) can be institutionalized. Further, banks should also be allowed to hold 0.5-1.0 percent excess SLR in high quality corporate bonds (AAA/ AA+).Support for MSMEs: Many MSMEs are facing short-term liquidity crunch due to demonetization, given the nature of their business. To help MSMEs tide over this transient issue, a refinance window at RBI can be opened up (under SIDBI) at prevailing repo rate. Such a facility will cushion the sector during the ongoing transition to the new ‘less cash’ norm.I believe there is also a need for a Centralized Portal and Repository with updated bank account details of all MSMEs, with Udyog Adhaar linkage. Such a portal will increase transparency of MSME financial data, enable automating financial assessment real time, and also reduce decision making time and lead to further reduction in interest costs by ~1 percent.Usher in FRBM Version 2.0 to revamp fiscal responsibility guidelines: The FY18 Budget can also 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 to frame 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. I also believe India is at the cusp of a strong growth trajectory, and the banking sector will play the role of the principal change agent in this exciting journey.