The Budget has the potential to reverse the declining investment cycle and spur demand growth, eventually building up to 7 per cent-plus GDP growth in 2017/18
The financial sector is the prime mover of development. Efficaciously functioning financial markets optimise utilisation of other factors of production - land and labour - too. India's reform story began with the financial sector, albeit in primary and less controversial areas like the abolition of the Controller of Capital Issues and opening up of stock markets to foreign participation. A vibrant financial market is characterised by the wholesome presence of investors, entrepreneurs and intermediaries, and a bouquet of products where efficacy - including the behaviour of participants and enforcement of the contract - is ensured by the micro-market structure and the ground rules. Viewed in that perspective, the Budget 2017 proposals presented by Finance Minister Arun Jaitley have the makings of a transformational Budget - the way the business will be transacted and the way the financial markets will shape up. Transparency in election funding, all government payments and receipts beyond an amount to be in digital form, legislation to eradicate illegal deposit schemes and heightened focus on digitisation could be a big cleanup act in the transition of the Indian economy from largely informal to formal. The cleanup will bring about greater financialisation of savings, leading to a higher multiplier of investments, greater capital formation and increased total factor productivity. Incidentally, the clean up should help in the reduction of corruption as well. Last year's Budget had pursued left over reforms in financial markets. This year's Budget outlines most of the remaining reforms, commencing with the abolition of the foreign investment promotion board, integration of commodities' spot and derivatives market, resolution (bankruptcy) of financial firms, re-engineering of the dispute resolution mechanism, listing of PSUs hitherto sacrosanct and another PSU exchange traded funds. Setting up of the Payments Regulatory Board, listing of securitisation receipts, higher allocation for the MUDRA (Micro Units Development and Refinance Agency) Yojna and harsher legislative measures to deal with dishonoured cheques are the other reforms proposed. These should all help in greater participation of savers and a larger number of transactions in the financial market, taking the growth and development of the markets to a new level. The finance minister has wiped away the anxieties of the capital market - there has been no change in capital gains tax on securities market transactions, which many had feared. Lower withholding tax, including on masala bonds, etc, is being continued. Fiscal prudence has been reaffirmed as the mantra for micro-economic stability. The fiscal deficit has been contained at 3.2 per cent, borrowings are even lower than last year's, lower inflation expectations and narrower current account deficit should inter alia lift the 'confidence index' of business and help to keep the rupee stable. Reduced borrowings will help to reduce interest rates and thereby the cost of capital. However, the building of a vibrant debt market, the essential ingredient for the flow of debt capital for infrastructure funding, seems to have slipped below the radar. Summing up, financial sector reforms, greater and broader investor participation, larger disinvestment, newer products and micro-economic stability should derisk the outflow of foreign monies and instead make India one of the most preferred investment destinations. On the whole, this is a transformational Budget, which has the potential to reverse the declining investment cycle and spur demand growth eventually building up to seven per cent plus GDP growth in 2017/18, notwithstanding continued global headwinds and geo-political, social and economic uncertainties.
The author is Former Chairman, SEBI & LIC