Fiscal consolidation: Yes. Banking reforms: Wait

This is Union Finance Minister Nirmala Sitharaman’s seventh successive Budget, the highest by any finance minister, surpassing Morarji Desai’s six. Also, this is Sitharaman’s shortest Budget speech (leaving out the Interim Budget of February). She took just one hour and 21 minutes to read it.
 

The big takeaway from the Budget is the government’s commitment to stick to the fiscal-consolidation path. The estimated fiscal deficit for FY25 has been reduced from 5.1 per cent, presented in the Interim Budget, to 4.9 per cent. This has been done without compromising the budgeted capex outlined in the Interim Budget -- Rs 11.1 trillion.
 

Indeed, this is on expected lines because of the higher dividend payment by the Reserve Bank of India as well as public-sector undertakings, and tax buoyancy. Nonetheless, the sharp drop in the projected fiscal deficit from 5.6 per cent in FY24 to 4.9 per cent is the best part of this Budget. Next year it is expected to go down to 4.5 per cent.
 

As a result of this, the gross and net market borrowing of the government in FY25 is estimated at Rs 14.01 trillion and Rs 11.63 trillion, respectively -- against Rs 14.13 trillion and Rs 11.75 trillion projected in the Interim Budget and much lower than the previous year’s Rs 15.43 trillion and Rs 12.29 trillion.
 

The debt market didn’t cheer because the borrowing programme is just marginally down while the equity market yo-yoed reacting to the rise in short-term capital gains from 15 per cent to 20 per cent and long-term capital gains from 10 per cent to 12.5 per cent as well as higher securities transaction tax for futures and options, from 0.01 per cent to 0.02 per cent. The new slabs for such taxes take immediate effect. Is this the government’s way of cooling the markets?
 

Down 1,200 points after the rise in capital gains tax announcement, the Sensex ended the day at 80,429.04, just 73.04 points short of Monday’s closing level. The 10-year government bond yield ended at 6.97 per cent, unchanged from Tuesday’s close, and the rupee closed at 83.69 a dollar, after hitting 83.7175 -- both new lows.

 

What’s there for the banking sector?
 

To speed up the recovery of bad loans, the Budget has promised appropriate changes in the insolvency law and strengthening debt-recovery tribunals and appellate tribunals. More such tribunals will be set up to clear bad-loan cases. Let’s hope the government walks the talk soon because the issues are not new.
 

The banks, particularly those majority-owned by the government, will have to look at micro, small, and medium enterprises (MSMEs) through a different prism. Their way of financing MSMEs will change.

A credit-guarantee scheme is being introduced to facilitate term loans to MSMEs for buying machinery and equipment without collateral or third-party guarantees. The scheme will operate on pooling the credit risks of such MSMEs. A self-financing guarantee fund will provide each applicant guarantee cover up to Rs 100 crore, while the loan amount may be larger.
 

The task in hand for state-run banks is to build their in-house capability to assess MSMEs for credit, instead of relying on external assessments. The new credit-assessment model will be based on the scoring of digital footprints of the MSMEs in the economy.
 

A new mechanism for ensuring bank credit to MSMEs during the stress period is also being worked out. This will be supported by a guarantee from a government-promoted fund. Besides, MSMEs will be able to unlock their working capital by converting their trade receivables into cash. The government wants to reduce the turnover threshold of buyers for compulsorily boarding the TReDS (trade receivables electronic discounting system) platform from Rs 500 crore to Rs 250 crore.
 

TReDs is an online electronic platform for factoring of trade receivables of the MSME sellers. It enables discounting of invoices through an auction mechanism to ensure prompt realisation of trade receivables.
 

Following the plan of halving the turnover, 7,000 more companies could join the platform.
 

Finally, the upper limit of Mudra loans is being raised to Rs 20 lakh from Rs 10 lakh. The record of Mudra borrowers is not good but bankers won’t worry because the raise is meant for those entrepreneurs who are not defaulters.
 

What’s there for financial-sector reforms? Privatising state-run banks? This Budget was presented on July 23 -- the date on which Manmohan Singh had presented the landmark Budget in 1991, unveiling economic liberalisation. Those who were expecting an encore of 1991 are disappointed.
 

Next-generation reforms are at the bottom of the list of nine priorities of this Budget. There is no action but a promise for a vision and strategy document to prepare the sector in terms of size, capacity, and skill, set the agenda for the next five years, and guide the government, regulators, financial institutions and market participants. The wait gets longer.