Budget: No ‘big bang’ but progress for financial sector

With the growing integration of India into the global economy and with the sheer size of the Indian economy, the country’s budget speech has become a keenly anticipated event. Rating agencies, multinational companies and global financial institutions now join Indian companies, financial institutions and individuals in trying to read the “tea leaves” and predict policy changes in the coming budget. The buildup to the 2015-16 budget speech on 28 February was particularly strong as this was the current government’s first “full” budget and was expected to be a cornerstone of its growth-oriented policies.

Financial sector reforms

The budget included the anticipated roll-out of the goods and services tax (GST) from 1 April 2016, a much awaited reform that will replace the current chaotic indirect taxation structure with a single tax. The implementation of GST would reduce the cascading effect of cost on goods and services across India and would also have the added benefit of creating a common market for goods and services across India. Indeed, this has been touted as a pan-India “free trade” deal. However, the budget was short on details of how GST would be implemented, a notable omission considering that GST will require the buy-in of all the states as well as constitutional amendments.

To improve liquidity for micro, small and medium-sized enterprises (MSMEs), the finance minister announced that the government was establishing an electronic trade receivables discounting system to finance trade receivables of MSMEs. The Reserve Bank of India (RBI) in December 2014 had released guidelines for setting up and operating such a system, based on public comments received on a concept paper issued by the RBI in March 2014. Establishing such a system appears to be a popular idea and the budget speech may provide the impetus required for its roll-out.

Sawant Singh is a partner and Aditya Bhargava is a principal associate at the Mumbai office of Phoenix Legal.