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Budget 2017: A Roadmap For A Paperless Financial System With Higher Credit Penetration

30/01/2017 11:53 AM IST | Updated 30/01/2017 11:53 AM IST
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Budget 2017 will be one of the most highly anticipated budgets of recent times. The bold demonetisation move by the government last year has led to high expectations from customers and industries alike. While the common citizen is looking forward to higher tax slabs and other dole-outs, the corporate sector is expecting a strong stimulus to revive consumer demand and investment cycle. The fintech industry also has its share of budget expectations, especially when the government is strongly focusing on its financial inclusion and "less-cash society" objectives.

Here goes my wish list for Budget 2017.

Improve credit penetration

Despite the government's thrust on improving financial inclusion, credit penetration still remains abysmally low. According to a 2013 study conducted by CRISIL, only one out of seven Indians had access to formal credit. One of the major reasons of such low credit penetration is the tendency of banks to reject loan applications instead of working harder to price the loans according to the risk profile.

The Finance Minister should introduce some tax sops and other budgetary incentives for lenders meeting pre-set loan acceptance targets, particularly for the under-banked and under-privileged sections.

However, with increasing use of digital payments, a lot of customers belonging to less privileged sections of society will leave behind their digital footprints. Banks and NBFCs can use this data to provide risk-adjusted loans. Finance Minister Arun Jaitley should introduce some tax sops and other budgetary incentives for lenders meeting pre-set loan acceptance targets, particularly for the under-banked and under-privileged sections. This can go a long way in deepening our country's credit penetration rate.

Promote digital transactions

One of the major aims of the demonetisation drive was to transform India into a less-cash economy. Other than helping in corruption and tax evasion, cash transactions incur a huge cost to our economy. According to a report prepared by Visa, cash transactions cost about 1.7% of our GDP.

Post-demonetisation, the government has made several announcements to incentivise card payments. These sops should be extended to digital wallet payments too. Additionally, this budget should permanently do away with fuel surcharges and other convenience fees charged on card transactions.

Incentivise a paperless financial processes

Most financial institutions, especially PSU banks and NBFCs, follow paper-heavy documentation processes. Apart from slowing down credit approvals or account opening, they also increase their operation costs. These costs are finally borne by the consumers in the form of processing or other service charges. The government can incentivise financial institutions to go paperless by waiving service tax, stamp duties or other levies on paperless processes.

Increase retail investor participation in capital markets

ELSS (Equity Linked Savings Scheme) is steadily emerging as the most popular instrument for saving tax under Section 80C. For many retail investors, ELSS is their first window to capital markets. However, ELSS has to share Section 80C with various other instruments such as EPF, PPF, life insurance premium and repayment of home loan principal. Introducing a separate section for ELSS investments will encourage retail investors to invest more in ELSS. This will also bring in long-term investments to our capital markets and deepen the equity culture in our country.

Increase basic tax-exemption limits to increase disposable income

According to a Deloitte survey, 58% of its respondents want the government to increase the basic IT exemption from ₹2.5 lakh to ₹5 lakh. Although the government may not institute such a drastic increase in the limit, any upward revision will increase the disposable income of the lower middle classes. This will boost both their savings and spending, thereby giving a much-required impetus to revive subdued consumer demand.

Incentivise long-term retirement savings

In the absence of a universal social security scheme, the government should incentivise people to invest more in pension products like NPS. Although NPS has been available to all Indian citizens since 1 May 2009, the scheme has failed to gain mass acceptance due to its poor tax treatment. Currently, only 40% of the NPS maturity proceeds are tax free while its competitor instruments like PPF and EPF are entirely tax-free with much more favourable liquidity features.

Increasing the basic tax exemption limit may help boost domestic consumption while continuing with Section 80EE will incentivise low-cost housing.

Another much-needed reform in NPS is the removal of upper limits on its equity fund option. At present, one can only invest up to 50% of one's contribution in the said option. However, NPS is a long-term investment product—and equity beats all others asset classes in terms of returns over the long term. Therefore, this year's budget should allow the NPS subscribers with higher risk appetite to invest up to as high as 100% of their contribution in the equity fund option. This will help them to create a larger corpus for their post-retirement life and increase long-term investment in the equity market.

Continue the deduction available under Section 80EE

Section 88EE provides an additional deduction of ₹50,000 on interest payments over and above the deduction for home loan interest payment under Section 24. The government reintroduced Section 80EE in the last budget for the current financial year. The deduction can only be availed by first-time home buyers availing loan amount of up to ₹35 lakh and property value of up to ₹50 lakh. The aim was to provide tax relief to low-cost-home buyers and encourage affordable housing projects. Budget 2017 should extend this deduction to the next financial year too. This will help the government in realising its goal of "housing for all."

To sum it up, Budget 2017 should aim at creating an efficient financial system by incentivising paperless processes and increasing the common citizen's access to institutional credit. Meanwhile, increasing the basic tax exemption limit may help boost domestic consumption while continuing with Section 80EE will incentivise low-cost housing. The government should also introduce pension reforms and enhanced deductions for ELSS investments to promote retirement savings and long-term investment, respectively. These steps will also increase the participation of retail investors in our equity markets.

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