The upcoming Budget will certainly be the most important opportunity for the Government to chart the future course for structural and institutional reforms. The year 2017 promises to be one where we stand to reap the benefits of key reforms such as GST and the bankruptcy code, as well as bold and revolutionary decisions, including the landmark demonetisation drive.

To make the most of this momentum, ensuring seamless implementation of both GST and the Bankruptcy Code is vital. The advent of the JAM Trinity over the past two years has seeded a silent revolution that will transform India in the coming years. Now, as digital payments and gateways such as the recently launched UPI platform gather momentum this year, we will see major opportunities for the banking and financial system.

Here are the six key priority areas for the FY18 Budget:

1) direct tax incentives: Against the backdrop of the successful demonetisation drive, tax benefits will be critical for newly generated savings of the working youth and also to boost spending. I believe this will be instrumental in providing an immediate thrust to household incomes & financial savings. On the direct taxes front, to begin with, the 80C limit can be increased to ₹3 lakh from current ₹1.5 lakh; this will also help deepen the mutual funds industry and capital markets, as there is a large pool of funds which needs to be can be incentivised, from the Pay Commission roll out.

As an additional step, the Government can also look to encourage bank deposits by reducing the lock-in for tax rebates to one year (from five years) and raise the threshold for mandatory TDS on interest income to ₹50,000 a year (from ₹10,000 currently).

2) Promoting financial savings: As household savings in pension instruments in India is restricted to just 1.2 per cent of GDP, it is also important to address disparity in post-tax returns of existing schemes like EPF, PPF, NPS by moving towards uniform tax treatment. Reintroduction of inflation indexed bonds to promote financial savings will also significantly lower reinvestment risks for pension, provident and gratuity funds.

Further, it is essential to make financial savings attractive by increasing inflation adjusted post tax returns and introducing product innovation. Granting exemption from reserve requirements for the Gold Monetisation Scheme will reduce costs for banks by 50-100 bps and promote the adoption of E-Gold.

3) Incentivise cash-less transactions to augment digital payments push: As steps to further support India’s eventual transition to a cashless economy, and to increase efficiencies in terms of digital payments, it is important to provide a further fillip to the fintech sector.

A progressive, enabling regulatory and licensing framework will be essential for this vital, high growth sector, in order to safeguard all stakeholders and ensure cost and time-efficient transactions. Creation of a ‘regulatory sand-box’ for quicker turn around will further drive innovation in the sector.

Going forward, innovations like debit cards being equipped with smart chips for public transport payment (on lines of T-money in South Korea) will be key to help India truly leverage digital payments. This chip should be modified to fit credit/debit/SIM cards (which will allow people to tap their mobile phones to take the bus/metro).

4) Progressively enable lower cost of funds to enable transformational growth: 2017 will surely witness gradual lowering of real interest rates in our economy, with growth trends hardwiring to 7.5-8 per cent GDP from April 2017 onwards. Institutional reforms such as the GST to play a critical role in improving economic efficiency and lowering economic costs in the medium term.

Against this backdrop, a vibrant corporate bond market is essential for infra growth — a new trading platform for corporate bonds (on lines of government bonds) can be institutionalised; further, banks should be allowed to hold 0.5-1.0 per cent excess SLR in high quality corporate bonds (AAA/ AA+).

Further, calibration of sectoral risk weights for bank lending in select sectors such as affordable housing and renewable energy, will be a sure-shot step to drive credit appetite. The Government may also look at relaxing guidelines for end use of ECBs, with relevant risk mitigants, to reduce cost of funds.

5) Support for MSMEs: Given the nature of their business, many MSMEs are facing a short term liquidity crunch due to demonetisation. To help this key sector tide over this transient issue, a refinance window at RBI can be opened up (under SIDBI) at the prevailing repo rate. Such a facility will also cushion the sector during the ongoing transition to a new ‘less cash’ norm.

There is a need for creation of a centralised portal and repository for updated bank account details of all MSMEs. Close to 90 per cent of India’s MSMEs are partnerships or proprietorships. Such a portal, with Udyog Aadhaar linkage, will increase transparency of MSME financial data, enable automating financial assessment real time, thereby reducing decision making time and leading to further reduction in interest costs by about1 per cent.

6) Usher in FRBM Version 2.0 to revamp fiscal responsibility guidelines: In line with the changing economic and financial order, the FY18 Budget can consider sticking to a point target for fiscal deficit (instead of a range target) to avoid policy ambiguity and uncertainty for financial markets. The Government may also look at framing detailed expenditure rules in favour of capital spending and set up a Fiscal Council to ensure adoption of rule-based fiscal policy.

The year gone by has laid the foundation for critical reforms in the country. Building on this, India is at the beginning of a strong growth trajectory, with the banking sector playing the role of the principal change agent in this exciting journey.

The writer is the MD & CEO, YES Bank and chairman of YES Institute

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