Union Budget 2019: What’s In For The Fintech Space

On the backdrop of strong political mandate and continuing agrarian stress, this was going to be the one of the toughest budgets for the government. Everyone was tight-lipped and reserved on what to expect from union budget. Political pundits, industry stalwarts or economists, everyone was careful in setting up pre-budget expectations and more generic problems were quoted such as lack of employment generation, NBFC liquidity crisis and need to boost consumption. But everyone knew that there was no easy fix.

We all have seen tough decisions made in the first tenure of government like  demonetization, introduction of GST that has impacted Indian economy in a big way. How would the current situation be addressed was much awaited. 

Modi 2.0 is no different from his earlier tenure on tough decisions. It was easy to slip on the path of fiscal consolidation amidst the unleashing animal spirit in the economy (consumption), but targeting 3.3% fiscal deficit for FY ’20 is a very clear signal to the global audience that policy making will remain consistent and they can place long term bet on the Indian economy.

The household sector contribution to Gross Value Addition is still high, around 43%, and this has been dropping down due to severe slowdown in the real estate sector (property ownership is biggest capex for household). In recent past, capital formation in household sector had come down to 10.9% and this has been addressed very appropriately by providing additional income tax deduction of Rs 1.5 lakhs for properties up to Rs. 45 Lacs. Bringing in HFCs directly under RBI will lead to reduced arbitrage between bank and HFCs. It will eventually lead to better stability of HFCs. 

Having addressed one of the biggest employment (non-skilled) generator,  government moved on to the next two employers - MSME and Infrastructure.

India’s SME and MSME sector will benefit immensely from NBFCs temporary credit guarantee and interest subsidy. This segment has significant contribution to the Indian economy and also in direct employment generation. In recent years, they have faced tough times on account of liquidity (demonetisation and NBFC squeeze) and compliance requirements (GST), with GST being rationalised and simplified. Making cash available for growing businesses was essential.

Further, the government has also intervened directly to improve the health of NBFCs through 10% credit enhancement.  But at the same time, it has stayed away from partial or blanket bailout, leaving the role of identifying efficient and well managed NBFCs to market participants.  Also, they have put banks in centre-stage. Now it is very clear that the banks will be the key source of funding for NBFCs, and government has worked backward to ensure that there is no dearth of liquidity. Be it through capital infusion of Rs 70,000 crore or through Facility to avail Liquidity Coverage Ratio (FALLCR)

This positive sentiment from government is going to give high boost to the economy. Now, there will be enough room for NBFCs to recover who were struggling to source funds, despite being compliant and having good ratings. Going forward, the entire eco-system will become market driven.  

Government has also attracted higher investments in the sector by proposing to exclude income tax scrutiny in Alternative Investment Funds (AIF-II)  as well. In addition, doubling tax holiday to IFSC operating in Gujarat International Finance Tec-City (Gift City), Ahmedabad is another positive signal for developing the industry. However, we are yet to see how many such IFSC centres are to be opened in India.

Angel tax relief and preparedness of DIPP for allowing tax holiday is definitely in line with the spirit of legislation.

Measures taken by government have also been to relieve middle class or low income earner and tax the super riches. If petrol prices have gone up to budget international crude oil fluctuations, government has made Electric Vehicles a tax saving purchase. This opens up space for other infrastructure and support system to act upon. 

Overall, it is all a pull strategy laid out on table. Not very bullish, but a disruptive move which is just what India needed at this time

The author is the Co-Founder & CEO, LoanTap