Union Budget 2017-18: Implications for Financial Markets & Institutions

While the broad theme of the Union Budget focused on putting more money in the hands of the people and giving a push to rural incomes, the budget also had important provisions for other areas like Infrastructure, Financial Markets, Fiscal discipline etc There were some key announcements pertaining to the Financial Markets with the broad goal of making these markets and financial institutions more transparent and effective in discharging their role…

What has this Budget announced for the Financial Markets & Institutions?

  • With a view to encouraging greater FDI flow into India, the Union Budget has abolished the Foreign Investment Promotion Board (FIPB). This move was necessitated because the FDI inflows into India have been predominantly through the automatic route. Hence continuing to have a monitor for FDI flows did not make sense; especially at a time when systemic checks are in place and the government is keen to attract more FDI investment.
  • The abolition essentially means two things. Firstly, there is a possibility that more and more sectors may be brought under the Automatic route. Currently, non-automatic FDI up to a limit is approved by the FIPB while anything above that threshold is approved by the Cabinet Committee on Economic Affairs (CCEA). This move could also mean that the government will enhance FDI limits in most sectors from the perspective of ensuring “Ease of Doing Business”
  • The Union Budget has also focused on creating a legal framework for integrating the commodity spot and commodity futures market closer. The dichotomy had been created after the NSEL had gone bust in mid 2013 after the Rs.5600 crore payment crisis.
  • Integrating commodity spot and futures market will enable the introduction of innovative hedging products, commodity options and a single window hedging for corporates with exposure across spot and futures markets. This will expand the commodity market reach.
  • Budget has proposed to introduce a Bill to curtail fraudulent and dubious deposit collection schemes. The RBI and SEBI have clamped down on various illicit schemes over the last few years including the high profile Rose Valley and Sahara cases.
  • This will have two key implications. From the point of view of investors and depositors, it provides an in-built mechanism to protect their hard earned money. Secondly, it also expands the business potential for banks and NBFCs as this deposit cannibalization will stop.
  • The Union Budget has also proposed an institutional mechanism to resolve disputes in various ongoing infrastructure projects. This need is more pronounced in the case of construction contracts, PPP contracts and public utility contracts.
  • This dispute resolution mechanism will go a long way in improving the credibility and integrity of the infrastructure sector in India. A dispute resolution mechanism will also help institutional investors and PE funds to invest money with greater degree of confidence in infrastructure projects and the reduced risk will also mean lower cost of funding.
  • The Union Budget has also proposed a time-bound listing program for PSUs. This is specifically with respect to PSU companies which are currently unlisted. The government has already announced the partial divestment and the stock market listing of the four general insurance companies in India. More may follow suit in this process.
  • This will not only enable PSU companies and holding companies to monetize their investments, but also give a benchmark valuation to the industry. To begin with, 3 subsidiaries of Indian Railways will be listed including IRFC, IRCTC and IRCON. This will also ensure that quality paper comes into the market, improving the depth of the equity markets substantially. This also does away with the risk of asset inflation risk in equities.
  • The government proposes to play a key role in moving towards greater oil sector independence. Currently, India depends on imports for nearly 80% of its daily oil requirements. This works favourably in the event of falling oil prices, but can put a tremendous pressure on the deficit and the INR when the price of oil starts going up.
  • This is likely to be addressed in 2 ways. Firstly, a super oil company will be created which will be at par in size with global giants like Exxon, BP, Royal Dutch and Saudi Aramco. This will be formed by a merger of Indian oil & gas Navaratnas. Additionally, the Budget also proposes to increase the Strategic Petroleum Reserve to 15.5 Million MT by next fiscal y ear.
  • The government ETF scheme will be taken forward in a big way. In the last 2 rounds, the government has collected a phenomenal sum of money through the CPSE ETF, which collected over Rs.13,000 crore in the last tranche. It is planned to expand this ETF and also launch a new ETF which will cover more PSU stocks compared to just 10 stocks in the current ETF.
  • This will provide a simple institutional framework to raise money for the divestment program. Instead of trying to raise money in isolation for specific companies, this allows to sell a diversified portfolio of PSU companies to investors. Interestingly, this has seen an interesting appetite from institutional and retail investors.

In a nutshell, the budget has gone a long way in initiating some far-reaching institutional changes in the financial markets and the financial institutional mechanism. It is likely to make the process of financial intermediation more scientific and more purposeful. A lot would, of course, depend on the actual implementation!

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