What Budget holds out for financial services

deficit. In the context of spiralling fiscal deficits run by governments in mature economies and mounting levels of government debt as a proportion of GDP in those economies, India had to seize the moment as well as the economic momentum that it is experiencing to rein in deficits and present a differentiated level of financial discipline that would sustain the confidence of investors and lenders to continue funding India’s growth. The Budget addresses this concern satisfactorily. At Rs 3,80,000 crore, the government’s borrowing programme for next year is pegged at levels below that for the current year. This should allay concerns of investments being crowded out by government borrowings along with adverse inflationary and interest rate expectations. And, by committing to progressively contain deficit levels and bring government debt down to 68% of GDP over the next few years consistent with the recommendations of the Thirteenth Finance Commission (TFC), and to bring out a paper on how this will be done in six months, the government sets out an agenda for fiscal reform that at least says all the right things. At Rs 40,000 crore, the government’s target for raising funds from disinvestments represents about 80% of funds raised from capital markets during 2009. This will permit investment banks to bolster their credentials, if not their bottom lines, and, if successful, ensure that the capital markets will see a substantial supply of equity paper. The India Infrastructure Finance Co (IIFCL) is expected to increase its funding of the infrastructure sector. Importantly, from a banking sector perspective, the FM expects IIFCL to develop a framework under which it will ‘take out’ financing extended by commercial banks to infrastructure projects; a working arrangement, if devised, would permit commercial banks to lend to infrastructure projects without creating material asset-liability mismatches. The continuing challenge, of course, is to ensure a sufficient supply of bankable infrastructure projects, something that is beyond the remit of the Budget. Tier-I capital of public sector banks is sought to be shored up to 8% by the end of next year, with the government injecting Rs 16,500 crore of additional equity. Working on an average government ownership in public sector banks at 60%, this would imply that the markets will see follow-on public offers for Rs 11,000 crore from this segment of the banking sector. While details are limited, the FM indicated that banking licences will be issued to private sector organisations, including NBFCs. Yes Bank was the last private bank to be granted a licence, and that was over five years ago. Given the conservative stance of the RBI on bank licensing, the number of private banks in the country is unlikely to swell materially in a hurry