~ Shrishti Sharma
Throughout the four episodes of the ETBFSI Union Budget 2024 series, panellists have consistently emphasized the importance of capital expenditure (Capex). As we delve into the critical aspects of budget allocations, a key focus emerges – the ambitious Fiscal Deficit target of 4.5% by FY 2025-26. The looming question remains: Can this goal be realistically achieved?
Abheek Barua, Chief Economist at HDFC Bank says, “I expect the government’s continued expenditure emphasis to shift to capital expenditure rather than revenue expenditure. Fiscal consolidation, the quality of expenditure and targeted welfare are what will be the pillars of Sitharaman’s budget. ”
“Infrastructure spending alone cannot achieve the 4.5 percent target; we need resources to stimulate private capital spending.” adds Manish Shah, MD & CEO, Godrej Capital.
Shah underlines the significance of capacity utilization, stating that when production capacity exceeds 80%, it typically signals economic growth. However, he raises concerns about the lack of private investment in new projects, which could hinder overall economic progress. The move by the Reserve Bank of India to lower risk measures reflects fears of overheating in consumer lending.
“Public and private sector balance sheets are both cleaned up, and our credit growth has outpaced deposits. This indicates a stronger financial position and a robust lending environment.” pointed out Krishnan Sankarasubramaniam, MD & CEO, Tamilnad Mercantile Bank.
A nuanced approach to economic planning, where there is recognition of the importance of capital expenditure, coupled with an emphasis on fiscal responsibility, efficient resource allocation, and the need to catalyze private sector investments for holistic and sustainable economic growth.
How important is creating fiscal space?
In the last three years, uncertainties have had a significant impact, with the background of a global pandemic, the Ukraine-Russia war, and widespread monetary tension. These events underscore the profound impact that uncertainties can have on the global landscape.
HDFC Bank’s Abheek Barua asks, “Can this always be addressed through monetary policy? We need fiscal space and buffers to tackle the challenges head-on.”
Sale of government assets and disinvestment of PSUs may also be the proposed solutions.
In the BFSI sector, formalization is underway through the GST and EPFO networks, accompanied by an improvement in living standards, making individuals more creditable. The credit market is expanding, attributed to the formalization of small businesses and increased disposable income for consumers. Recognizing this improvement in creditworthiness, there is a need to integrate this dynamic into the broader budget policy for sustained economic growth.
How do Risk Weights and Premiums shape Priority Sector lending?
“I believe that if we lower the risk weights of MSME loans, we can provide more support, take calculated risks and ensure a continuous flow of credit,” noted Godrej Capital’s Manish Shah.
In the realm of priority sector lending, Manish Shah sheds light on the critical dynamics of risk weights and risk premiums. Risk weights, indicating the capital bank reserve based on perceived loan risk, pose challenges for MSME lending, requiring higher capital allocation. Shah points out that reducing risk weights would enable banks to extend more loans, overcoming capital constraints.
Lenders struggle with complicated credit terms, hampering their lending potential despite the aspiration to increase reach. Shah acknowledges SIDBI and CGTSMEI initiatives to mitigate risks in MSME lending but emphasizes persistent challenges, especially in sectors affected by export downturns.
To keep credit flowing, Shah recommends paying higher risk premiums, additional compensation for risk, especially crucial in sectors facing export challenges. Urging government intervention, he calls for an examination of risk weights for priority sector loans, emphasizing regulatory adjustments to encourage banks to sectors pivotal to economic growth, especially the MSMEs. This integrated strategy aims to foster targeted and sustainable lending, driving economic expansion in priority sectors.
The need for diversified pension products
“Long-term investments of this nature require some help from the government, the economies doing well in the segment do have tax benefits, the government still supports.” mentions Tarun Chugh, MD & CEO, Bajaj Allianz Life Insurance
Amid potential change in India’s tax regime, there is a growing need for significant government support to promote long-term investments in the financial landscape. Calls for diversifying pension savings beyond the National Pension Scheme (NPS) echo, emphasizing the exploration of various pension schemes.
Chugh also raised concerns regarding annuities, with insufficient attention given to the risks of longer life spans and challenges related to double taxation. Moreover, the 18% GST burden on insurance products is highlighted as too high, posing obstacles to financial product accessibility.