The Hindu Business Line : Enhanced need for funds

If the economy continues on its current growth trajectory, the need for funds to service both corporate and retail needs is likely to multiply. The onus is then on both the banking system to accommodate this enhanced need.

The impact of the Budget on the banking and financial sectors of the economy is likely to work through two distinct channels.

First, the fiscal balances themselves would impact critical variables such as interest rates. In that context, the fact that the Finance Minister has targeted a lower fiscal deficit GDP ratio than the current year is important.

In a year where liquidity is under severe strain from rising credit demand and sluggish deposit growth, the compression in fiscal deficit is likely to reduce the upward pressure on interest rates by limiting the quantum of market borrowings by the Government.

The second impact of the Budget on the financial sector would work through institutional changes and changes in tax structure.

If the Indian economy continues on its current growth trajectory, the need for funds to service both corporate and retail needs is likely to multiply. The onus is then on both the banking system and the capital markets to accommodate this enhanced need. The Finance Minister's commitment to take specific steps to create a single, unified exchange traded market for corporate bonds could not have come at a better time.

Over the medium term, this is likely to deepen the bond markets considerably. In the short term, the increase in the limit on FII investment from $1.75 billion to $2 billion in government bonds and from $0.5 billion to $1.5 billion for corporate bonds will certainly give the debt markets a fillip. In keeping with the objectives of the Common Minimum Programme, the farm sector has got a fair share of emphasis in the Budget, particularly in the area of credit delivery.

The Budget proposal to get NABARD to open a separate line of credit for financing farm production and investment through self-help groups promises to be an interesting innovation.

The proposal to include food processing as a priority sector is a welcome move, as it would help banks diversify their priority sector portfolios a little more. The extension of 80(C) benefits to fixed deposits over five years might not have a dramatic impact on deposit growth. However, by levelling the playing field for bank deposits vis-à-vis other tax saving instruments such as the public provident fund, the Finance Minister has created the potential for revived investor interest in long-term bank instruments.

(The author is Executive Vice-President and Country Representative - India, ABN AMRO Bank NV.)