A healthy, prospering Bharat is clearly the fulcrum of the Union budget this time. A plan for inside-out growth, as it were. That’s par for the course given that for a while now, farm and rural distress has been vexing, despite two good monsoons.

Overall, Thursday’s pronouncements will touch rural lives, farmer incomes, and profitability and efficiency of MSMEs. Women entrepreneurs get a special mention, too.

Major decisions

But the four most important decisions are the facilitation of financing beyond banks through the corporate bond market, the largest healthcare scheme to cover the poor and vulnerable, and reduction in corporate tax to 25 per cent for small and medium companies, and the breach in the fiscal deficit target. First up, the corporate bond market. A troika of facilitations have been made: large corporates have to meet 25 per cent of funding needs through bonds; regulators will be persuaded to recognise ‘A’ rating category bond investments; and lastly, States are being pushed to ensure uniform stamp duty on bond issuances. Implementation of these steps will take a chunk of the lending market away from the banking channel over a period of time, and also engender greater credit market efficiencies.

But the flip side is that a slower path towards fiscal consolidation could lead to higher interest rates that, in turn, reduces the relative competitiveness of bonds compared with banks.

Yet this cyclical disadvantage does not materially alter the impact of structural benefits that can arise from the implementation of the three facilitations, such as more issuers accessing the bond market, more opportunities for investors, and greater ease and efficiency in the issuance process.

We believe that a couple of additional steps can add further shine. These include establishment of a Bond Guarantee Fund of India to provide credit enhancements for lower rated bonds, and regulatory recognition to the recently launched expected loss, or EL, scale by rating agencies.

The second-most important move is the new National Health Protection Scheme (NHPS), which proposes to provide 10 crore poor and vulnerable families coverage of up to ₹5 lakh per family per year for secondary and tertiary care hospitalisation. This is extraordinarily ambitious and sweeping as it proposes to cover a whopping one-third of Indian households. Administering this would be a big challenge given the paucity of health infrastructure in the country. To boot, the budgetary allocation to this scheme seems inadequate, and therefore, it is likely that this scheme will be administered over a period of time. So, immediate gains are unlikely.

The third important move is to reduce corporate tax to 25 per cent for companies with revenue less than ₹250 crore. This will help a lot of new economy companies, and therefore, is positive for innovation. As it is for MSMEs. This, along with the proposal to onboard public sector banks and corporates on the Trade Electronic Receivable Discounting System platform and link this with GSTN, will help improve the cash flows of MSMEs.

Fourthly, on the fiscal side, some of the initiatives have caused, and will cause, a worrying stretch, or a transient deterioration in the deficit arithmetic, but that should be expected in a pre-election year.

External push

Interestingly, while the budget proposals will incrementally contribute to economic expansion, the pace will come from factors outside the budget. In fiscal 2018, for instance, despite a near-normal monsoon and a rural-focused budget, the economy slowed and rural distress increased — all because extra budgetary factors turned adverse.

Economic growth has already bottomed out, and will get support from a strong global environment, enhanced ability of the banks to lend following recapitalisation, and another spell of adequate rains.

The writer is MD and CEO, CRISIL Ltd

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