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Contained fiscal deficit while addressing the liquidity crunch

Research Digest | July 08, 2019
The run up to the first budget under Modi Government 2.0 had a lot of expectations from the burdened economy, worrying farmers, pained middle class, cash struck PSB`s and liquidity hungry NBFC`s.

The New Finance Minister has envisaged a vision for a $5 trillion Indian economy driven by investments by 2024. The finance minister reduced the fiscal deficit target to 3.3% in a move signalling government`s commitment to fiscal consolidation.

Infrastructural Development: In a bid to improve logistics, reduce transportation cost and increase competitiveness the government has proposed to implement the Bharatmala & sagarmala projects to connect India through better roadways and inland waterways.

The government has also proposed for a Credit Guarantee Enhancement Corporation to be set up with special focus to the infrastructure sector along with a proposed investment permits to the FII & FPI to invest in infrastructure debt funds

The seeds of infrastructural development will be planted by developing Gas Grids, Water Grids , I-Ways and regional airports to aid connectivity.

Growth & Macro- Economic Stability through Foreign Inflows : India attracted $64.4 billion of FDI in 2018-19 when the world saw a bear phase, to boost this growth the government has proposed to increase the FPI investment in a company to sectoral limit, along with this a 100% FDI is permitted in insurance intermediaries.
FPI`s have also been allowed henceforth in listed debt securities issued by ReITs and InvITs.

De-stressing the financial sector: The Government in the budget has laid special focus towards all of the financial sector right from the public sector banks to the Housing Finance Companies to the Non-Banking Financials.

Through the budget the government has tried to boost liquidity into the NBFC`s. The government provided encouragement to the public sector banks for buying high rated pooled assets of financially sound NBFC`s amounting to a total of 1 lakh crore during the current fiscal and it will provide a onetime six months partial guarantee scheme to them for the first loss of upto 10%. This will incentivise the banks to lend more to the NBFC`s without fears of default.

Moreover the government has also decided to make RBI as the regulator for the NBFC`s and HFC`s, this will enable prompt actions for the NPA management in NBFC`s and the liquidity crisis will hope to get resolved faster. The RBI has also announced measures to give away 1.3 lakh crore liquidity relief to banks that support NBFC`s.
The budget also focused on a 70,000 crore of capital to be infused into the public sector banks to boost credit growth in the economy. The recapitalisation of the banks will provide impetus to the banks recovering from the NPA trap.

The economic survey had earlier mentioned about the urgent need to help the NBFC`s from the liquidity crunch as it had dampened the Indian consumption space.

Capital market: The FInance Minister has also urged SEBI to increase the public shareholding limit from 25% to 35% in a bid to decrease the promoter holding and increase public holdings in the shares. Currently 5 of the Nifty 50 companies have promoter holding of more than 65%. If the move gets implemented a total of 3.95 lakh crore will be the fresh supply in the stock market.

Concentration on wider formalization of the economy: The government is keen on providing benefits to formalized MSME`s under the GST bracket. The merchants under this category with an annual turnover of less than 1.5crore will be eligible for a pension scheme.

The government has also aims to widen the GST horizon by providing loans to MSME`s (total 350 crore allocation) under the interest subvention scheme for all GST registered MSME on fresh or incremental loans.

Rural India outlook: The government has further aimed to provide basic necessities such as electricity and water availability to the rural India through different schemes to be launched.The PMAY-G will focus on building affordable housing for all. 1.54 crore houses were built in the last 5 years, Till 2022 1.95 crore houses will be provided to the eligible beneficiaries.

The government will also think of ways to implement zero budget farming all over India to help farmers gain more profit.

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