India is witnessing a silent revolution that will transform the country in the coming years, especially with the advent of the JAM (Jan Dhan, Aadhaar, Mobile) Trinity over the past two years, and the thrust on curbing black money, among others.
In the years to come, 2016 will be remembered as the year of structural and institutional reforms—from taking the bold and revolutionary decision to conduct the landmark demonetisation drive, to the passage of key reforms such as the GST Bill and the Bankruptcy Code. To carry the reforms bandwagon forward, it is imperative to implement both the GST Bill and the Bankruptcy Code in 2017.
With digital payments and gateways gathering moment, we will see major opportunities for the banking and financial system...
Now, with digital payments and gateways such as the recently launched UPI platform gathering moment, we will see major opportunities for the banking and financial system.
I believe Finance Minister Arun Jaitley will focus on five key areas in the coming budget—provide direct tax incentives, support for MSMEs (Micro Small & Medium Enterprises), progressively enable lower cost of funds to enable transformational growth, promote financial savings, and incentivise cashless transactions to augment the digital payments push.
Direct tax incentives
I believe the Finance Minister may raise the 80C limit to ₹ 3 lakh, from the current ₹1.5 lakh. This will also aid in deepening the mutual fund industry and the capital markets, as there is a large pool of funds that can be and needs to be incentivised, from the Pay Commission roll out. Additionally, the government may also look to give bank deposits a fillip by reducing the lock-in period for tax rebates to one year, from the current five years, and raise the threshold for mandatory TDS (tax deducted at source) on interest income to ₹50,000 a year from the current ₹10,000.
These tax benefits will be critical for the newly generated savings of the youth, and will also boost spending. Especially, against the backdrop of demonetisation, such a move will provide an immediate thrust to household incomes and financial savings.
To mitigate any short-term liquidity crunch that many MSMEs may be facing due to demonetisation, I believe a refinance window at RBI can be opened up (under SIDBI). This will also help cushion the sector during the ongoing transition to a "less cash" economy.
Additionally, I believe the government can also look at creating a centralized portal and repository for bank account details of all MSMEs. Given that almost 90% of India's MSMEs are partnerships or proprietorships, a portal linked to Udyog Aadhaar will increase transparency of MSME financial data and reduce decision-making time that will in turn lead to further reduction in interest costs (by ~1%), and automate financial assessment real time.
Incentivise cashless transactions
I believe there is a need to incentivise cashless transactions to augment the digital payments push. In a bid to safeguard all stakeholders and ensure time-efficient transactions and cost, the government may look at a progressive, enabling regulatory and licensing framework for the high-growth FinTech sector. Also, to further drive innovation in the sector, a "regulatory sandbox" may be created for quicker turnaround.
Reduce cost of funds
Fourthly, with the implementation of institutional reforms like the GST Bill, I expect economic costs to come down in the medium term, along with improvement in economic efficiency. Coupled with that, there is a need for a vibrant corporate bond market for infra growth—a new trading platform for corporate bonds, similar to government bonds. This needs to be institutionalised. Further, banks must also be allowed to hold 0.5-1.0% excess SLR in high quality corporate bonds (AAA/ AA+).
To promote financial savings, there is a need to move towards a uniform tax structure when it comes to existing schemes like EPF, PPF and NPS.
I believe the government may even look to relax guidelines for end use of ECBs, with pertinent risk mitigants, to reduce cost of funds.
The government may also look to relax guidelines for end use of ECBs (external commercial borrowings), with relevant risk mitigants, to reduce cost of funds. Further, calibration of sectoral risk weights for bank lending in select sectors such as Renewable Energy and Affordable Housing, will definitely drive credit appetite. These measures will progressively enable lower cost of funds, which will further aid transformational growth.
Promote financial savings
Lastly, to promote financial savings, there is a need to move towards a uniform tax structure when it comes to existing schemes like EPF, PPF and NPS. The government may also look to reintroduce inflation indexed bonds to promote financial savings, which in turn will also significantly lower reinvestment risks for gratuity, provident and pension funds.
I believe there is also a need to make financial savings attractive by increasing inflation-adjusted post tax returns and introduce product innovation. Additionally, the government may also look at granting exemption from reserve requirements for the Gold Monetisation Scheme, thereby reducing costs for banks by 50-100 basis points and promoting the adoption of e-gold.
Going forward, building on the reforms platform, I believe the banking sector will play the role of being the principal change agent in the exciting journey of strengthening the growth trajectory of India.