Union Budget 2013 – From a cynic’s perspective.
The union budget is an annual exercise and strictly speaking the union finance budget is just a statement of receipts and payments of the Central Government. If viewed from this angle it need not attract any hype or euphoria currently attached to it. But in India the union budget is more than just a statement of receipts and payments. It often is viewed as a policy document which spells out the various policies and priorities of the Central Government. The various policy measures announced in the budget, the fund allocation to various projects and the various amendments to direct and indirect tax rates mentioned in the budgets makes it a statement that affects the life of all Indians. I always look at the budget very keenly from two perspective – as an individual and as a banker. From an individual perspective I don’t have any reasons to cheer in the Union Budget 2013 -14 as no additional tax benefits have been granted. I take solace in thinking that reducing the fiscal deficit of the country is more important to the Finance Minister than helping me manage my family budget. Personally I am aggrieved that tax rates have not been adjusted for inflation, but the patriot in me pacifies the family man in me. So my interest as I read through the budget fine print was more as a banker and how it be affecting banks and banking facilities that are available to the public.
TheFinance Minister has recognized the role of agricultural credit in driving agricultural production . With the intention of providing agricultural credit at affordable rates the interest subvention scheme for short-term crop loans has been continued. As per the scheme a farmer who repays the loan on time will be able to get credit at 4 percent per annum. The scheme which was till now been made available only to loans extended by public sector banks, RRBs and cooperative banks has now been made applicable to loans extended by private sector scheduled commercial banks also. This would definitely make agricultural credit at affordable rate more accessible to the farmers and also help private scheduled banks meeting their agricultural sector lending targets. By rewarding prompt repayments rather than providing relief by debt waivers, Finance Minister has tried to enforce better borrowing and repayment discipline. Cheers to the Finance Minister.
Private Scheduled Banks have been raising this demand for quite some time. Better delayed than never. No doubt. The finance ministry had been in the past pressurizing the banking regulator in the country , the Reserve Bank of India to issue guidelines for granting of new banking licenses. Accordingly RBI has provided guidelines for issue of new banking licenses. It is learned from the reports appearing in the media that various industrial houses also .have applied for banking license. These new banks also would be required to meet the priority sector target of 18% of advances to agriculture sector. It is thus the timing of the announcement that awakes the “cynic” in me.
For reducing the role of middle men in farm product marketing and strengthening the functioning ofFarmer Producer Organizations (FPO), an equity grant upto Rs 10 lakh has been proposed for registered FPOs. This together with the creation of the Credit Guarantee Fund with an initial corpus of Rs 100 crore will definitely enable FPOs to leverage working capital from financial institutions. The credit risk for banks lending to FPOs gets reduced which would ultimately lead to more funding for FPOs. Let us hope in the days to come we would be able to purchase more fresh vegetables and fruits directly from the farmers through the FPOs.
The Finance Minister has expressed firm resolve to ensure that the Direct Benefit Transfer ( DBT ) scheme will be rolled out throughout the country during the term of the UPA Government. Lot of basic work like issuing Aadhaar card to all beneficiaries, opening of bank account linked to Aadhaar card for all beneficiaries etc has to be completed before the DBT is rolled out all over the country. In such case banks would see more savings accounts being opened in the days to come. It would definitely help the banks in meeting their financial inclusion targets and the poor and needy in having “Aapka paisa aapke haath”. Kudos to the Finance Minister for the firm resolve.
To attract new investment and to quicken the implementation of projects, the Union Budget 2013 has propose to introduce an investment allowance for new high value investments. Accordingly any company investing Rs 100 crore or more in plant and machinery during the period 1.4.2013 to 31.3.2015 will be entitled to deduct an investment allowance of 15 percent of the investment. This investment allowance is in addition to the current rates of depreciation. So invest Rs 100 crore and claim additional tax benefit of Rs 15 crore. Great. As a banker I can expect higher demand for term loans for purchase of plant and machinery and better turnover and profits for my plant and machinery manufacturing units. But I fail to understand why this benefit should be restricted only if the investment is more than Rs 100 crore? The Finance Minister himself in the budget speech has mentioned that “higher growth leading to inclusive and sustainable development” is the mool mantra. If that is the case should we not provide the benefit of investment allowance to small and medium scale industrial units also, which would be more labour oriented and thus create more jobs ? Point to ponder. The “cynic” in me is getting stronger.
Currently interest up to Rs 1.50 lakh paid on a loan taken for the purchase of a house for residential purpose is exempted from tax. The union budget 2013 proposes to introduce section 80EE , whereby, a person taking a loan for his first home from a bank or a housing finance corporation up to Rs 25,00,000 during the period 1.4.2013 to 31.3.2014 will be entitled to an additional deduction of interest of up to Rs 100,000. Finance minister is confident that such a measure will promote home ownership and give a fillip to a number of industries like steel, cement, brick, wood, glass etc. besides jobs to thousands of construction workers. But are all these required only for one year? If we are looking at inclusive sustainable development for the long term, the benefit should be more of a permanent one. It is such short term, ad hoc kneejerk measures by the government what makes the union Budget an announcement that is eagerly looked upon by all. Thank you Finance Minister for continuing the practice!!!!!!!
Given the fact that the benefit is provided only for one year, I feel that instead of giving a fillip to various industries like steel, cement, brick, wood, glass etc. the measure would only be helping real estate developers and builders to clear off their existing stock of constructed flats and villas and thereby unlock value for them. And as the incentive is only for one year to me it sounds similar to a teaser loan scheme. ( A teaser loan scheme is scheme where low interest rate is offered for the first year and then once the loan has been taken the interest rates are hiked from the second year onwards) Definitely home loan department of banks and housing finance companied would see enhanced activity during 2013-14. Real estate developers and builders also will see more hectic activity. Share prices of real estate companies like DLF might also improve. “ Cynic” is becoming more stronger.
Iinflation definitely has been a cause of worry. People have been looking at safe financial investment products that can provide return above the inflation rate. The absence of such products have seen savings flowing to investment in gold , thereby increasing its import and adversely affecting our current account deficit. The proposal for introduction of Inflation Indexed Bonds is definitely a welcome measure. I wish the structure and tenor of the instruments are finalized and bonds made available to the public at the earliest. Will the inflation indexed bonds compete with bank term deposits and adversely affect the banks capacity to raise funds, is a matter to be seen.
Capital infusion of Rs 14,000 crore for public sector banks would help them in meeting the Basel III regulations and expanding business without constrains of capital. Initiatives proposed like bringing all banks, including some cooperative banks, on CBS and e-payment systems by 31.12.2013, ensuring all branches of public sector banks have an ATM in place by 31.3.2014 etc will provide the public with the convenience of any where any time banking. Finance minister has set apart Rs 1,000 crore for setting up India’s first Women’s Bank. The bank will lend mostly to women and women-run businesses, supports women SHGs and women’s livelihood, employs predominantly women, and addresses gender related aspects of empowerment and financial inclusion. If starting a Women’s Bank is a panacea for all the gender related aspects of empowerment and financial inclusion I wonder why other Finance Ministers did not have this sort of creativity and innovation. As a banker I am happy that the Finance Minister has started a new bank , instead of putting additional targets and pressures on existing banks. I wish and pray the bank starts functioning soon and attain its goals at the earliest.
Banks have been permitted to act as insurance brokers so that the entire network of bank branches will be utilised to increase penetration. But even now all banks are acting as corporate agents of an insurance company. As per current IRDA regulations banks can act as corporate agent of only one insurance company. Due to this regulation the new insurance companies that have come up were finding it difficult to enter into tie up with banks. There had been a lot of pressure, since long on IRDA for bringing out the open architecture, thereby permitting banks for multiple tie ups. But as no final decision was taken till date by IRDA Finance Minister had to make the announcement in the budget so as to use branch network to increase insurance penetration. But why increasing penetration should be a much more serious concern to the Finance Minister, than even to the regulator of insurance business, is what I cannot digest. There would definitely be some macro economic consideration, which lesser mortals like me are unable to think off. Even if the proposal might not in the long run help in increasing insurance penetration, it will definitely help new insurance companies to enter into tie up with banks and thus increase their net work.
Having regard to the various measures like extending interest subvention scheme to private sector banks also, Pan India roll out of DBT, .investment allowance for fresh investment of Rs 100 crore or more in plant and machinery, additional deduction of interest up to Rs 1 lakh on housing loans for a period of 1 year etc, on a plain reading of the budget, I would rate it as extremely positive for banks and positively touching the life of customers. But reading between the lines, with an element of cynicism I find the intentions of the budget moving from the positive territory to the negative territory. But then I awake the “patriot” in me and put the “cynic” in me to sleep, so that I stop reading the budget , stop writing this article and go back to my routine schedules of family life.
Jiz P. Kottukappally. The author is working as Asst General Manager, Catholic Syrian Bank and the views expressed are the personal opinion of the author. Author can be reached at jizpauls@gmail.com
