India’s domestic macroeconomic situation has improved significantly over the past two years, but the banking sector has continued to face challenges due to the lack of any meaningful recovery in asset quality, capital constraints and sluggish profitability. However, I firmly believe that, with support from the policy and regulatory environment, 2016 will be the inflexion year for the banking and finance sector, especially as corporate sector balance sheets improve.
Revitalising public sector banks (PSBs) has been a key focus area for policymakers. The Reserve Bank of India (RBI) and the Central government have put in place key enabling measures in the Indradhanush scheme, and are working in unison for the expeditious resolution of distressed assets, improving the overall operational efficiency and ensuring that banks have adequate capital (within the budget constraints) for growth and expansion.
India’s transition from a state saddled with a crisis of confidence in 2013 to being the bright spot in 2015 is not by chance but by design. Going forward, the upcoming budget session of Parliament will be very important for creating short- and medium-term wins.
There is a need to boost savings in the economy in order to enhance the inherent economic strength of the financial sector. It will be worthwhile to adopt the Gear (growth, efficiency, attractiveness, reach) approach to augment the savings rate.
First, enhance growth to increase per capita incomes. It will be important to increase disposable incomes by raising the personal income tax exemption slab to Rs 5 lakh. This could be a one-time correction and the slab could thereafter be linked to inflation and reviewed every three years.
Two, focus on improving the efficiency in financial transactions. The use of plastic currency and e-transactions (via the internet and mobile phone) will not only improve the ease of transactions but also enhance the saving propensity among citizens. Every 1 per cent reduction in the currency in circulation is likely to add 0.4 per cent to the savings rate. This could also help in curbing the flow of black money.
Three, make financial savings attractive by providing tax incentives. For instance, the tax exemption limits under Section 80C could be doubled to Rs 3 lakh. This will deepen the mutual fund and equity markets. Similarly, there’s a need to increase inflation-adjusted post-tax returns for bank deposits by reducing the lock-in period eligible for tax rebate to one year from five years. Other me-asures could be to enhance the threshold for mandatory tax deduction at source (TDS) on interest income to Rs 50,000 a year from the current level of Rs 10,000. It will also be useful to roll back TDS on recurring deposits to encourage wider adoption, as this is a product that promotes the habit of regular saving. Further, just like the other pension products like the EPF and PPF, even the National Pension Scheme should enjoy “EEE” (exempt, exempt, exempt) tax status.
Four, expand the financial reach. The government could consider converting India Post into the postal bank of India, a full-fledged payments and savings bank, to leverage its rural penetration for greater financial inclusion.
Apart from boosting savings, India’s top priorities this year should include the passage of the GST bill, further rationalising direct taxes, tax sops for start-ups and the introduction of key structural reforms in terms of real estate, labour, and micro, small and medium enterprises. The farm sector, too, needs significant focus on irrigation and technological support. The bankruptcy bill will also turn out to be a gamechanger for spurring economic activity and confidence. The advent of the JAM (Jan Dhan, Aadhar, Mobile numbers) trinity is a silent revolution that will transform India in the coming years. While the Jan Dhan Yojana will further
the objective of financial inclusion, the Aadhaar platform will furnish the much-needed basic digital intelligence and mobile phones will leverage this through innovative payment systems, such as Immediate Payment Service or IMPS.
Micro measures will help, but the banking and finance sector also needs the next generation of reforms to enable it to finance India’s aspiration of 9-10 per cent GDP growth on a sustainable basis. I am hopeful that economic clairvoyance will triumph over political myopia in 2016.