The Union Budget 2016-17, and the Financial Sector Reforms

Partha Ray Download Article

Partha Ray, Ph.D., is Professor, Economics, Indian Institute of Management Calcutta. Prior to joining Indian Institute of Management Calcutta, Prof. Ray, a career central banker, was the adviser to Executive Director, International Monetary Fund, Washington D.C. during 2007-2011.

The hype and hoopla about any Union Budget in India is phenomenal and almost unheard of anywhere else in this lonely planet.  In consonance with the disproportionate media attention to the annual income expenditure statement of the Central Government, the Union Budget in India is often used as an annual policy announcements of the Government that goes beyond the normal perimeter of fiscal policy and book keeping of the Exchequer.  The Union Budget of 2016-17 was no exception. While in terms of sublime, it was viewed as a a budget primarily with an agricultural or rural thrust, financial sector is an area where this year’s Budget spent some space and tried to give some directions about the shape of things to come in Indian financial sector.

Specific Proposals

In terms of specifics, insofar as Indian financial sector is concerned number of policy prouncements have been done. Illustratively, in the realm of specific legal reforms, the Budget talked of three specific proposals:

  1. introduction of a comprehensive Code on Resolution of Financial Firms;
  2. amendments in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act), 2002 so as to “enable the sponsor of an ARC (Asset Reconstruction Company) to hold up to 100% stake in the ARC and permit non institutional investors to invest in Securitization Receipts”; and
  3. comprehensive Central Legislation to deal with the menace of illicit deposit taking schemes.

The Budget announcement of permiting 100 per cent FDI and Sponsor ownership on ARCs is likely to boost the effectiveness of ARCs in resolution of distressed assets. The finance minister also indicated that the Bankruptcy code will be introduced during the year.

Statutory basis for a Monetary Policy framework

The necessity of a monetary policy framework has been emphasized by the RBI for quite some time.  In fact, the government last year had proposed to set up a Monetary Policy Committee (MPC) consisting of representatives from the Finance Ministry and RBI, to decide on interest rate. Last year witnessed some controversy about the composition of the MPC. It was interesting to see that the Finance Ministered has announced to set up a Monetary Policy Committee through the Finance Bill 2016. RBI has already welcomed the move and Governor Rajan in his first Ramnath Memorial Lecture delivered on March 12, 2016 in New Delhi went on to say:

“The RBI’s inflation-focused monetary framework will be strengthened by the constitution of the monetary policy committee mooted in the Finance Bill. While the RBI Governor will no longer be able to set monetary policy unilaterally, I believe shifting the decision to a committee is in the economy’s interest. Not only will a committee aggregate multiple views better than an individual can, it will offer more continuity, and be less subject to undue pressure. I believe the monetary reforms of this Government will stand out as one of its signal achievements”.

 

Financial Data Management Centre

The idea of a Financial Data Management Centre is not new. It has been mooted by the Financial Sector Legislative Reforms Commission (FSLRC) in 2013. Subsequently a committee was formed by the Ministry of Finance, Government of India for  looking into the creation of a repository of all financial regulatory data  in September 2014.  It is in this backdrop that this year’s Budget proposed to set up a financial data management centre to facilitate integrated data aggregation and analysis in the financial sector. Here again while the idea is indeed welcome, one needs to see action on the ground to evaluate its efficacy.

Other Measures

 Among the other measures, this year’s Budget made the following announcement which have important bearing on India’ s financial sector. First,  the Budget has noted that new derivative products will be developed by SEBI in the Commodity Derivatives market. Second,  RBI will facilitate retail participation in Government securities.  Third, number of members and benches of the Securities Appellate Tribunal will be increased. Fourth, General Insurance Companies owned by the Government are to be listed in the stock exchanges. Fifth, target of amount sanctioned under Pradhan Mantri Mudra Yojana has been increased to Rs. 1,80,000 crore, whrein Micro Units Development and Refinance Agency (MUDRA) would provide funding to the non corporate small business sector for development and refinancing activities.

Bank Recapitalization

Indian public sector banks have been occupying newspaper headlines in recent times for the wrong reasons. Apart from specific corporate’s irresponsible behaviour this is reflected in banking sector’s bad loans. As per official data the gross non-performing assets (NPAs) of the Indian public sector banks have registered a huge increase – from Rs 53,917 crore in September 2008 to Rs 3,41,641 crore in September 2015. As a percentage of the total loans, NPAs has grown from 2.11 per cent to 5.08 percent.  This called for huge need of recapitalizing Indian banking sector.  It is in this context that the Budget announced Government’s intention to allocate Rs.  25,000 crore towards recapitalisation of Public Sector Banks. This has boosted the public sector banks’ stocks in the capital market.  However, allocation of Rs 25,000 crore for recapitalisation of banks is only a patch with the total requirement identified at 1,80,000 crores  by the Economic Survey.

How far are these announcements going to solve the problems of the present ailing financial sector of India? It may be too early to pronounce any judgement on these policy announcements as the devil may lie in implemental and outcome details. Thus, while all these proposals are extremely important, given that the track records of the present Government in terms of implementing legal reforms is not exactly very encouraging, these proposed reforms could suffer from a syndrome of inability to finish the last mile. Hence, apart of treating these as well-intentioned and lofty proposals, there is not enough evidence to evaluate these proposals at this juncture.

*****