India / Nirmala’s maiden Budget is all about incremental measures

Finance Minister Nirmala Sitharaman, in her maiden Budget on Friday, sought to tackle several pain points in the economy through incremental steps rather than opting for the spectacular announcement route.

One of the biggest announcements she made was of a Rs 70,000 crore capital infusion in public sector banks to be used as growth capital, now that the legacy issues plaguing the sector have been addressed.

She also announced a slew of measures to ease the liquidity and regulatory problems affecting the Non-Banking Financial Company (NBFC) sector, a key pain point in India’s economy at the moment.

The budget incorporated a number of positive tax reforms such as lowering the corporate tax rate for companies with an annual turnover of less than ₹400 crore and increasing the surcharge to be paid by high net-worth individuals earning more than Rs 2 crore a year. It also finally provided relief for startups from the undue pain of the ‘angel tax’.

In a move that spooked bond markets, Ms. Sitharaman announced that the government would be increasing its external borrowing programme since India’s external debt to the GDP was below 5% and among the lowest globally.

Liquidity arrangements

“Non-Banking Financial Companies (NBFCs) are playing an extremely important role in sustaining consumption demand as well as capital formation in small and medium industrial segment,” Ms. Sitharaman said. “NBFCs that are fundamentally sound should continue to get funding from banks and mutual funds without being unduly risk-averse.”

Keeping this in mind, Ms. Sitharaman announced that the government would provide a one-time partial credit guarantee to public sector banks for their first loss of up to 10% when they purchased the pooled assets of financially sound NBFCs.

She noted that the Reserve Bank of India has only limited regulatory authority over NBFCs, adding that steps will now be taken to strengthen the RBI in this regard. Housing finance companies will henceforth be regulated by the RBI. Apart from this, the Budget featured smaller steps that would help the NBFC sector such as doing away with the Debenture Redemption Reserve for public issues. Another provision in the Finance Bill says that if the RBI is satisfied that in the public interest or to prevent the affairs of an NBFC being conducted in a manner detrimental to the interest of depositors or creditors, it can supersede the board for up to five years.