A critical commentary on the proposals to reform India's financial system in its 2019–20 union budget

• Author: Gourab Chakraborty
• DOI: http://doi.org/10.1002/pa.2107
• Published date: 01 August 2020
• Date: 01 August 2020

PRACTITIONER PAPER

A critical commentary on the proposals to reform India's

financial system in its 2019–20 union budget

Gourab Chakraborty

Scholar, Department of Management, Institute

for Financial Management and Research

(IFMR), University of Madras, Chennai, India

Correspondence

Gourab Chakraborty, Scholar, Department of

Management, Institute for Financial

Management and Research (IFMR), Chennai

(Affiliated to the University of Madras), India.

Email: gourab.chakraborty@ifmr.ac.in

The 2019–20 Union budget aims to signal that the economic gains from cleaning of

the financial system are likely to be recognizable in the future. The non-performing

assets in commercial banks have dropped substantively in last year subsequent to

unprecedented recoveries over the past 4 years due to Insolvency and Bankruptcy

Code and other legal measures, provision coverage ratio is now at its highest in

7 years, and domestic credit growth has risen to 13.8%. The government has

smoothly carried out the consolidation of public sector banks. However, the drop in

banks' NPAs appears to be reflected by a liquidity squeeze and mirrored by mounting

NPAs confronting the non-banking finance company (NBFC). In addition, the prob-

lems are acute for the analyzed sub-group of Housing Finance Corporations. While

the government has announced its decision to streamline the regulatory processes

within this sub-sector, it has mandated the banks, the chief source of funds to mobi-

lize capital for the NBFCs that appear vital to revive India's economic growth. The

government has raised tax rates for the uber-rich and import duties on a few articles

such as Gold while offering tax credits on affordable housing and electric vehicles. It

has attempted to improve the microstructure of the capital markets, mitigate ineffi-

ciencies in the pension space and enhance market penetration of insurance and

incentivize foreign investment through budgetary proposals. This article offers a criti-

cal commentary on the proposed policy actions.

1|INTRODUCTION

The Union budget is explained in the Article 112 of the constitution

of India as the government of India's (GoI) annual estimated

receivables-expenses statement over a particular April–March finan-

cial year (FY). Since 1950, the budget is presented as part of the

Finance Bill by India's Finance Minister in its union parliament. Nor-

mative economics tells us that the purported broad aim of the budget

is to foster inclusive and equitable economic growth. This overall aim

lends itself to four major fiscal policy objectives. The government

articulates the manner in which it wishes to achieve these objects by

projecting its estimated receipts and payments. First, the budget

intends to facilitate the optimal allocation of the economy's resources

towards economic growth, in the economy's best interest. This aids in

optimizing the revenues of the non-public sector enterprises and the

government, which can be employed to promote public welfare.

Second, the GoI is advised by the directive principles of state policy to

enable employment opportunities in the economy, put efforts to erad-

icate poverty and promote access for Indians to health care and edu-

cation. Third, the government proposes in the annual budget, to

tweak the structure of state subsidies and to alter the status of the

direct (by the rates and brackets) and indirect taxes (by the rates and

the list of goods and services) in order to achieve sustainable reve-

nues, and with an aim to change the disposable income of a particular

income segment to influence aggregate consumption and to mitigate

the economic disparity within the population. Fourth, at first sight,

price stability lies in the domain of the monetary policy central bank

of an economy and smoothing of the economic cycle in several econ-

omies has been effected by monetary policy tools. In addition to that,

the government implements a deficit budget to stimulate economic

growth and shore up deflating prices and devises a surplus budget to

lower inflated prices. Often the political economy and electoral

Received: 16 October 2019 Revised: 13 January 2020 Accepted: 3 March 2020

DOI: 10.1002/pa.2107

J Public Affairs. 2020;20:e2107. wileyonlinelibrary.com/journal/pa © 2020 John Wiley & Sons, Ltd 1of12

https://doi.org/10.1002/pa.2107