The fiscal plans of many governments helped their citizens tide over this difficult time. India is no exception to this and in fact, the country has had a good balance of fiscal policy and monetary policy reforms, with reforms aggregating close to 10% of the GDP. Key objective of the governments was to keep their people afloat while the storm blows over and a vaccine comes in.
The vaccine has been approved and the results are expected to be positive. The future looks bright, but subject to the government managing the pandemic baggage. Re-building business confidence and consumer confidence is going to be extremely critical as a part of the revival process.
Key reforms that can be considered in Union Budget 2021
- Create a bad bank: Cleaning up the challenges existing in the banking balance sheets is key given that India is still a bank credit led economy. Creation of a bad bank under the National Investment and Infrastructure Fund (NIIF) umbrella may be something that the finance ministry should evaluate . The Reserve Bank of India (RBI) would need finance ministry’s support in this matter and creating a bad bank could be a great initiative. This will also help release a lot of capital within the banks.
- Subsidy and refinance: Reviving the housing, infrastructure and the MSME segment, will help deliver the maximum economic growth, given the inherent growth elasticity they demonstrate to economic impetus. A right mix of subsidy and refinance programmes within the budget could help deliver the much-needed growth to these sectors.
- Boost start-ups: Focus should be on initiatives around ease of doing business so the start-up ecosystem can continue to thrive and mature into big technology firms. Rationalising the number of statutory and regulatory requirements necessary to start a business could go a long way in making India the preferred investment destination.
- Reforms for financial market: Initiatives around deepening of the corporate bond market, deepening a credit derivative market especially around products such as Credit Default Swaps could go a long way in developing a robust risk management system for managing corporate debt defaults. Further, promoting the growth of financial market infrastructure companies would help bring about a lot of innovation within the financial services ecosystem. Some of the initiatives that they have already brought are innovations including UPI and centralised KYC to name a few. Incentivising them with the right tax breaks could help invigorate the innovation ecosystem further.
- Liquidity window for NBFCs: The non-banking finance company (NBFC) sector has been mired with controversy and fraught with governance and fraud related issues. However, the contribution made by the sector towards financial inclusion cannot be ignored. Liquidity has always been one of the key challenges of the sector, given the nature of their business model and hence providing a special liquidity window during times of stress, should be considered. While the RBI has addressed the liquidity challenge at a systemic level for the entire financial services ecosystem, the finance ministry could consider the need for a special liquidity window like the ones available for scheduled commercial banks.
- Digitisation is the need of the hour: The budget for the first time will not be printed. There can be no greater proof of digital focus than this. Digitisation is the need for financial inclusion and investments in public infrastructure especially around digitisation - such as internet connectivity, offline payments market infrastructure and land records digitisation to name a few – would go a long way to improve economic growth.
- Focus on divestments: It is a focus and conversation in every year’s budget and this year should not be any different. While the targets of divestment are not always achieved due to market conditions, the focus to use this theme effectively should be a repeated effort.
- Build strong bilateral ties: Given the geo-political changes on account of the China conflict, BREXIT, the middle eastern oil crisis, it is extremely important right now for India to develop stronger bilateral ties with different regions and have trade co-operation built in. Investments in infrastructure to provide a more robust trade ecosystem would help monetise the flow of money from these country corridors more effectively.
Balancing the budget is not the easiest exercise and we do understand that not everything would be possible given the constraints. However, the ideas are only to provide a directional input into the larger thought process that we are sure, is already at play.
Vivek Ramji Iyer is Partner with Grant Thornton Bharat