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Budget 2019: A Financial Sector Perspective

Budget 2019 Financial Sector

One of the many mandates of the financial sector is to bolster growth in economy. The Union Budget 2019 cognizant of the significance of the sector addressed existing infirmities and drew out announcements that will be influential in not only bolstering growth of the sector, but also help other sectors buttress their fiscal foundation.

Decisive announcements that will augment growth of the financial sector and subsequently complement performance of other sectors include:

a). Investment-Driven Growth

Measures were announced to meet the annual INR 20 lakh crore investment requirement. These include:

  1. Credit Guarantee Enhancement Corporation to be set up in 2019-2020
  2. Deepen the bond-market for long-term bonds with special attention on infrastructure sector
  3. Investments in debt securities by Infrastructure Debt Fund – Non-Bank Finance
  4. Investments by FIIs/FPIs in debt-securities issued by Debt Fund – NBFCs can be transferred or sold to any domestic investor within specific lock-in period
  5. Regulators to explore the possibility of permitting stock exchanges to consider AA rated bonds as collaterals.

 

b). Recapitalization of Public Sector Banks

As an inevitable consequence of bad-loan pressure, banks restructured their balance sheets. This resulted in reduced liquidity and therefore lower credit growth. Considering credit is essential for businesses to incur capital investment and expand capacity, INR 70,000 crore will be infused in public sector banks. This will infuse liquidity which can be leveraged by NBFCs as well as recipient banks to give the much-needed push to increase lending capacity of banks.

c). Foreign Investments

  1. FDI was increased from 49 to 100 percent in the insurance intermediaries. This will attract more companies to operate in India which will eventually ensure the sector is aligned to global best practices in the near future. Insurance penetration in India is currently at a low of 69 percent and deeper distribution chains will help the sector penetrate further. Moreover, the net-owned fund requirement for re-insurers to join IFSC has been reduced by 80 percent, from 5,000 crore to 10,000 crore, another initiative that will increase the scale of operations in the country.
  2. Steps to increase FDI in aviation, media and insurance are also being examined.
  3. Norms that apply on local sourcing will be streamlined for FDI in Single Brand Retail sector.
  4. Limit for FPI investment in a company has been revised from 24 percent to the FDI limit in the corresponding sector.
  5. To increase ease of compliance for Foreign Portfolio Investors, investor-friendly Know Your Customer (KYC) norms are proposed.

 

d). Social Stock Exchange

Proposal to set up a social stock exchange, an electronic fund-raising platform under the ambit of Securities and Exchange Board of India (SEBI) for social enterprises and voluntary organizations is a positive step towards providing equal opportunity to social enterprises. This will also encourage social entrepreneurs to work towards their goal, free of any pressure from donors.

e). With merger of the NRI-Portfolio Investment with the Foreign Portfolio Investment route, NRI’s will have greater and easier access to investment opportunities in the Indian capital market

f). In order to unlock the commercial potential of the research and development carried out by ISRO, New Space India Limited (NSIL) a public-sector enterprise is proposed that will undertake mandates including production of launch vehicles, transfer to technology.

g). To invite retail participation in treasury bills and securities issued by the Government it is essential that RBI and SEBI depositories are interoperable. To ensure this, adequate steps in consultation with RBI and SEBI are proposed. Moreover, minimum public shareholding in listed companies will also be increased from 25% to 35%.

h). To address the conflict of interest that arises in the existing framework of National Housing Bank (NHB) which currently is mandated with lending, refinancing and regulating the housing sector, Union Budget 2019 proposes to return the regulation authority to RBI.

Union Budget 2019’s focus on infrastructure, increase participation of retail investors, and measures to deepen long-term bond markets will be decisive in steering the economy towards a high growth trajectory in the medium-term. With sharp policy solutions in the making, financial sector will be able to facilitate growth of other sectors and therefore enable the economy to clinch its espoused target of USD 5 trillion in the next 5 years.

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