The Economic Survey wanted India to follow China’s shining example of an export-led growth model. The Union Budget has taken another leaf from the Chinese growth playbook – a debt-fuelled increase in investment, and perhaps consumption.
In one sense, driving investments seemed to be the overarching theme of the Budget. Thus, many of the big measures can be viewed through the lens of unclogging the financial services sector and increasing the flow of credit to the economy, through both demand and supply-side measures.
The thrust to the affordable housing sector and the tax breaks on interest payments towards loans taken to buy affordable houses could boost the demand for housing credit. A similar tax break for electric vehicles could boost demand for car loans too, although it will be miniscule for now.
The move to make the Reserve Bank of India the regulator for housing finance companies and strengthening its powers to deal with non-bank finance companies (NBFCs) is important. The central bank can now supersede the boards of NBFCs and bar their auditors.
While the RBI’s own track record is far from perfect, this removes an anomaly in the financial services sector and could increase market confidence in NBFCs. The government has gone further and offered a one-time partial credit enhancement guarantee for public sector banks to buy NBFC assets. While this guarantee is for high-rated assets, which anyway had buyers, it is an important signal nonetheless. Moreover, NBFCs that want to raise fund from the public do not need to maintain a debt redemption reserve. All these steps ultimately pave the way for an increase in the flow of funds to NBFCs who can then on lend it further to customers and sectors where banks do not have the ability to reach or do not want to go.
Among all these, perhaps, the most important step the government has taken is to shift some of its borrowings away from the domestic market. Not only is the net market borrowing the same as that declared in the interim budget – Rs 4.73 lakh crore – the proposal to borrow in external currency will relieve the liquidity squeeze in the domestic markets. Domestic ten-year bond yields fell by as much as 19 basis points before closing the day 6 basis points up.
Of course, borrowing abroad comes with its own set of problems, but it is nothing that other nations in emerging Asia are not doing. Moreover, the decision to borrow abroad shows the government’s confidence in the economy and in itself, to maintain the discipline that will inevitably be demanded by foreign investors and rating agencies. Such a move means that the extent of the government crowding out private investment will also reduce and increase the flow of resources to the private sector.
With a smaller supply of government bonds, banks too will be encouraged to go out and lend to others. In this regard, the Rs 70,000 crore recapitalisation plan for banks will be of some help. As the insolvency and bankruptcy code starts to work more efficiently, lenders stand to free up capital in locked assets. There was also a mention of measures to deepen the corporate bond market, though that has been an omnipresent topic in financial market discussions for decades now.
What’s the caveat?
The fiscal deficit number is based on optimistic projections for revenues. Moreover, the true extent of the government borrowing in India is close to 8 percent of the GDP taking into account the borrowing of the states and the public sector. And, as Abheek Barua, chief economist of HDFC bank points out, nothing additional has been budgeted for the overseas borrowing account in the current financial year.
This push to increase credit offtake may take some time to bear fruit.
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