Budget 2021: Elevated fiscal deficit a concern

Indian Union Budget 2021-22: The finance minister has presented a progressive and growth-oriented budget that has also given serious consideration to some of the persistent problems of the banking and financial services sector.

A bold announcement was the creation of a permanent institutional framework to invest in investment-grade securities to instil confidence in the Corporate Bond Market and improve secondary market liquidity. It will enhance the stability of the corporate bond market and, should it succeed in its objectives, it may well become the benchmark for developing the retail debt market in less developed economies. For India’s NBFC sector, it is crucial that our bond markets are strengthened so that they can rise up to become a viable alternative to bank finance. One of the lessons we have learnt from recent episodes of crises in the financial sector is that bank funding can dry up very quickly.

Setting up of an ARC/AMC for cleaning the books of public sector banks is another step in the right direction. However, the institutional framework must ensure that it does not become another bank, laden with bad debt. Likewise, the setting up of a Development Financial Institution with capital of Rs 27,000 crore capital will take some of the burden of lending to infrastructure and long-gestation projects off the shoulders of banks.

We are pleased that the FM has reduced the eligible loan amount for recovery under the SARFAESI Act for NBFCs. It will help in strengthening the NBFC sector by improving credit discipline among borrowers. It would have been desirable to make the limit at par with the banks, especially now that the RBI is looking to regulate large NBFCs under bank-like norms.

The announcement about setting up a gold commodity exchange is laudable as it would bring much-needed transparency to the domestic gold market. The lowering of customs duty on gold from 12.5% to an effective rate of 10% reduces the incentive for smuggling. However, a sharper cut was warranted given that smuggling of gold continued to be an issue earlier, even when the duty was at 10%.We also feel some additional steps should have been taken towards monetising the 1.5 trillion dollars of gold lying idle with Indian households. Monetisation of this gold through the gold loan route would have helped provide much-needed capital without any burden on the government.

If there is one concern about the budget, it has to do with the elevated fiscal deficit and its potential inflationary impact. Going forward, the onus will be on the government to ensure that the deficit levels are progressively brought down. In that sense, a final word on this budget may have to wait for a couple of years more, when we can be sure that the deficit is indeed coming down according to the glide path. It is important that the inflation monster is not allowed to raise its head. Our experience is that once inflation takes hold, interest rates rise, and growth inevitably tapers off, with all attendant ills.

Too much should not be read into it beyond that it reflects the Government’s directional thinking in its focus areas of expenditure and its plans for revenue generation.

The author is MD & CEO, Manappuram Finance