The expansion of the informal sector was the main emphasis of this year's Union Budget, which included initiatives to improve income for rural areas, credit flow to MSMEs, and skill development for young people. What the budget offered the financial industry was as follows.
On Tuesday, July 23, 2024, in New Delhi, India, Nirmala Sitharaman enters with budget materials in hand to deliver the federal budget to the Parliament.
Significant gains for the Indian financial industry were highlighted in the Union Budget statements, with a comparatively higher percentage of benefits going to the underprivileged. The budget recommendations, which included several initiatives to improve youth skill levels, loan flow to micro, small, and medium-sized firms (MSMEs), and income enhancement measures for the rural sector, were centered on the expansion of the informal sector of the economy.
The proposed budget would raise both the per capita income and the level of financial inclusion. The plans to provide interest subsidy for domestic higher education and incentives for the creation of new formal sector employment may also contribute to the expansion of the formal economy's sectors. In the medium run, all of these statements should increase the population's bankability and the flow of credit via the official channels in the economy.
Encouragement of the MSME Sector
Numerous announcements were made to enhance the credit flow to the MSME sector, given the large employment provided by the sector and with an emphasis on relieving its stress. The three most important ones were the increase in MUDRA loan ceilings, the assurance by the Government of India (GoI) of credit assistance to past-due MSME borrowers, and the decrease in the turnover limit for MSMEs' goods purchasers in order to facilitate their required onboarding into the receivable discounting platform. Other significant announcements that will strengthen the credit flow and strengthen the asset quality of the lenders include the introduction of a new credit guarantee scheme for MSMEs in the manufacturing sector to purchase machinery and the acceptance of updated loan underwriting models by public sector banks to lend to MSMEs.
The announcements of the youth skilling program in partnership with industry, together with other financial incentives to provide formal employment to the young, are also encouraging, as they strengthen the formal positions in the economy and meet the industry's rising need for trained workers.
The housing industry has a multiplier effect on the economy, and the government's persistent push for the PM Awas Yojna (PMAY) with its substantial allocation increase is more evidence of this. The statements aimed at persuading governments to lower stamp duty on home purchases will also lower the cost of home ownership. Furthermore, the announcements of land-related changes in both urban and rural regions, such as the digitization of urban ordinances and rural land records, would help lenders with mortgage underwriting. After a one-year break, the CLSS plan is back, which will help end-borrowers become more affordable. This is good news for affordable housing finance providers since it means that demand will likely only increase.
Tax slab revision
Encouraged by the growing acceptance of the new individual tax system, the tax slabs have been updated, offering income taxpayers further relief. The total gross and net borrowings for FY2025 have been further reduced to Rs. 14.01 trillion and 11.63 trillion, respectively, with the help of increased revenues. Even if the decrease is less than we had anticipated, the announcements are positive for the economy's overall interest rate environment and do not seem to be impeding private sector fund raising. As anticipated, the budget deficit has been reduced to 4.9% of GDP for FY2025 and is expected to remain below 4.5% of GDP for FY2026. Nonetheless, rather than a definite decline in the fiscal deficit/GDP ratio, the new medium-term fiscal consolidation route connected to a decrease in debt/GDP ratio will continue to be monitored.
PSU Banks Disregarded
There were no announcements about capital injection into public sector banks or other government-owned financial institutions, which was completely expected given their stellar performance. It was unexpected, therefore, that the three public sector general insurance companies—which are still woefully undercapitalized—were disregarded once again for capital injection. It is imperative that these organizations improve their financial health significantly in order to meet their aggressive medium-term insurance penetration ambitions.
In order to fortify lenders even more, the announcements regarding the necessary modifications to be made to the 2016 Insolvency and Bankruptcy Code, as well as the actions to be taken for tribunal reform and strengthening, debt recovery tribunals, and appellate tribunals, in addition to the creation of additional tribunals, will encourage recoveries and be advantageous for the lenders' asset quality and profitability.
It is hardly surprising that the securities transaction tax on futures and options has increased given the growing worries about excessive activity in derivatives trading. We may anticipate some slowdown in the overall levels of capital market activity, especially in light of the imminent rise in capital gains tax rates.
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