Infra spend must be time-bound to deliver the goods

By Ausang Shukla

The past 12 months have been momentous for the financial services sector in India. The combination of a push by the government to a less-cash economy, along with favourable markets and low interest rates, has heralded rising inflows in financial savings, including mutual funds and insurance, and a sharp pick-up in digital payments.

The government has helped create an environment for a virtuous cycle where savings flow to productive asset classes, which in turn channelise capital to development requirements and entrepreneurial initiatives. In that context, we expect that through the Budget, the government will continue to aid the virtuous cycle in areas such as:


1. Sops for digital payments: The positive environment and ecosystem has helped Indian digital payments register strong growth rates over the past 18 months. Banks and payment services companies have taken the cue from the government to aggressively roll out POS machines and innovative payment mechanisms. The next phase of growth will come from the vast majority of small merchants adopting digital payments, which in conjunction with the GST implementation can be transformational for increasing the tax base in India. However, the thin margins in small retail has been a big pushback for the adoption of digital payment mechanisms, with respect to merchant discount rates. Tax concessions on low value transactions carried out through digital mechanisms could help address this concern.

2. Infrastructure spending and boost for bank lending: Last two years have been a dismal time for the overall banking sector with overall growth in assets dipping to single digits compared to long-term average growth rates of c.18%. The concerted efforts of the government and the regulators that have made the banks take the bitter pill to clean up historical NPAs are laudable. But along with the bitter pill, the government has also provided a strong recapitalisation programme and supported initiatives of banks for raising equity from capital markets. A comprehensive and time-bound infrastructure spend by the government which in turn spurs greater private sector capital expenditure as well as generates employment leading to higher consumer spending is the big expectation from the Budget. New projects and the kick-start of the capex programme will lead to greater demand for banking credit.

3. Long term clarity on tax rates: A stable tax regime provides greater clarity and comfort for businesses and retail investors. Two areas in the financial savings segments where this would be welcome is the life insurance and long term capital gains on listed equities.

The role of life insurance in channelising truly long term funds is unparalleled. In a highly price sensitive market like India, pricing is critical for broadening the penetration in the market. Historically, insurance companies have enjoyed a preferential tax rate of 12.5 per cent under Section 115JB of the Income Tax Act, which has been reflected in their product structures and pricing. The expectation of implementation the direct tax code, which may otherwise help in bringing in an overall simplified tax structure and rates, has created an uncertainty in the market on the potential impact on insurance companies, and whether they would be subject to normal corporate tax rates in future.

One other area that needs similar clarity is long-term capital gains on listed equities. A positive investor sentiment for the capital markets in turn helps channelise more savings to equity which facilitates bringing in domestic capital for the private sector as well as disinvestments by the government.

4. Continued divestments through capital markets: The government has been using the strong capital markets to strategically achieve the disinvestment targets through a steady stream of offer for sales (OFS) in public sector entities. Analysis of global markets has shown that an increase of supply in capital markets through sell down in government-owned entities aids in bringing in more savings to the capital markets, given the level of trust that these entities enjoy. A structural increase in the share of capital markets in the financial savings, apart from being a positive for the financial services sector, is a big positive for the overall economy as savings tend to move away from passive and inflationary instruments like real estate and gold. Continued OFS / follow-on offering
and IPOs as a mechanism for steady sell-down by the government, besides helping in reaching disinvestment targets, will aid the ongoing theme of financialisation of household savings.

(The writer is Managing Director at Ambit Corporate Finance. Views expressed are personal.)