Budget 2017: Six things the Budget should prioritise

The Budget should set the stage for redefining policy priorities as it offers the opportunity to emphatically shift gears towards a robust and sustainable growth environment. It presents a clear opportunity for the government to chart the future course for structural and institutional reforms.

In order to bring about meaningful economic and industrial growth, ensuring seamless implementation of both GST and the Bankruptcy Code is vital. The advent of the JAM Trinity (Jan Dhan, Aadhaar, Mobile) over the past two years has seeded a silent revolution that will transform India in the coming years. Against the backdrop of demonetization, the Budget could also look at providing relief to the aam aadmi by increasing their disposable income.

I believe the following should be the six priority areas for the government:

Direct tax incentives: Against the backdrop of the successful demonetization drive, tax benefits will be critical for newly-generated savings of the working youth and for boosting spending. I believe this will be instrumental in providing an immediate thrust to household incomes and financial savings. On the direct taxes front, to begin with, the 80C limit can be increased to Rs 3 lakh from current Rs 1.5 lakh; this will also help deepen the mutual fund industry & capital markets as there is a large pool of funds which can be incentivised from the Pay Commission roll out.

As an additional step, the government can also look to encourage bank deposits by reducing lock-in for tax rebates to 1 year (from 5 years) and raise the threshold for mandatory TDS on interest income to Rs 50,000 a year (from Rs 10,000 currently).

Promoting financial savings: As household savings in pension instruments in India is restricted to just 1.2% of GDP, it is also important to address the disparity in post-tax returns of existing schemes like EPF, PPF, NPS by moving towards uniform tax treatment. Reintroduction of inflation-indexed bonds to promote financial savings will also significantly lower reinvestment risks for pension, provident and gratuity funds.

Further, it is essential to make financial savings attractive by increasing inflation-adjusted post-tax returns and introducing product innovation. Granting exemption from reserve requirements for the gold monetisation scheme will reduce costs for banks by 50-100 bps and promote the adoption of e-gold.

Incentivise cashless transactions: As steps to further support India's eventual transition to a cashless economy and to increase efficiencies in terms of digital payments, it is important to provide a further fillip to the FinTech sector.

A progressive, enabling regulatory and licensing framework will be essential for this vital, high-growth sector in order to safeguard all stakeholders and ensure cost and time-efficient transactions.

Creation of a 'regulatory sandbox' for a quicker turnaround will further drive innovation.

Going forward, innovations like debit cards being equipped with smart chips for public transport payment (on lines of T-money in South Korea) will be key to help India truly leverage digital payments. This chip should be modified to fit credit/debit/SIM cards, which will allow people to tap their mobile phones to take the bus/metro).

Progressively enable lower cost of funds to enable transformational growth: 2017 will surely witness gradual lowering of real interest rates, with growth trends at 7.5-8% GDP from April 2017 onwards. I expect institutional reforms like the GST to play a critical role in improving economic efficiency and lowering economic costs in the medium term.

Against this backdrop, a vibrant corporate bond market is essential for infra growth - a new trading platform for corporate bonds (on lines of government bonds) can be institutionalised; further, banks should be allowed to hold 0.5-1.0% excess SLR in high-quality corporate bonds (AAA/ AA+).

Further, calibration of sectoral risk weights for bank lending in select sectors such as affordable housing and renewable energy will be a sure-shot step to drive credit appetite. The government may also look at relaxing guidelines for the end use of ECBs, with relevant risk mitigants, to reduce the cost of funds.

Support for MSMEs: Given the nature of their business, many MSMEs (micro, small and medium enterprises) are facing short-term liquidity crunch due to demonetization. To help them tide over this transient issue, I believe a refinance window at RBI can be opened up (under Sidbi) at prevailing repo rate. Such a facility will also cushion the sector during the ongoing transition to a new 'less-cash' norm.

Additionally, I believe there is a need for creation of a centralised portal and repository for updated bank account details of all MSMEs. Close to 90% of India's MSMEs are partnerships or proprietorships. Such a portal, with Udyog Adhaar linkage, will increase transparency of MSME financial data, enable automating financial assessment real time, thereby, reducing decision making time and leading to further reduction in interest costs by estimated 1%.

Usher in FRBM Version 2.0 to revamp fiscal responsibility guidelines: In line with the changing economic and financial order, the Budget can consider sticking to a point target for the fiscal deficit (instead of a range target) to avoid policy ambiguity and uncertainty for financial markets. The government may also look at framing detailed expenditure rules in favour of capital spending and set up a fiscal council to ensure adoption of rule-based fiscal policy.

The year gone by has laid the foundation for critical reforms in the country. Building on this, I believe India is at the beginning of a strong growth trajectory, with the banking sector playing the role of the principal change agent in this exciting journey.

The writer is MD & CEO, YES Bank and chairman, YES Institute