Can we bank on the Budget?

With the structural change in the ruling National Democratic Alliance, will the government be able to move on the bank privatisation front in this Budget?

State Bank of India Chairman Dinesh Kumar Khara is batting for tax relief on interest income in the forthcoming Union Budget – something all bankers, hand on heart, would love to see when growth in banks’ credit is outpacing the growth in deposits, for many. 

Currently, banks need to deduct tax – popularly known as tax deducted at source, or TDS – when one’s interest income on deposits held exceeds Rs 40,000 a year. For savings accounts, up to Rs 10,000 interest earned is exempted from tax.

“If at all some relief could be given in the Budget regarding tax on interest earnings, it will be an incentive to depositors… The banking sector uses deposits mobilised for the capital formation in the country,” Khara told news agency PTI last month.

Bankers have been pitching for this for years but have not been able to convince the finance ministry. When it comes to paying tax, investors in mutual funds and direct equities have an advantage over bank depositors. Also, unlike other financial asset classes, deposits are taxed on an accrual basis – not on redemption.

India’s household net financial savings plunged to a five-year low of Rs 14.2 trillion in FY23, sharply down from Rs 17.1 trillion in FY22. As a percentage of GDP, the household net financial savings in FY23 dropped to 5.3 per cent, the lowest in around five decades. Between FY12 and FY22 (excluding the Covid-19 year, FY21), the net financial savings were around 7-8 per cent of GDP. Tax benefits can make deposits attractive and push up household financial savings.

Similarly, the health insurance sector wants lower GST for the policy buyers and higher tax deductions (under Section 80D of the Income Tax Act), particularly for senior citizens, even as the fintechs are rooting for the government to support their right to innovate. 

These are evergreen issues. At the macro level, the  twin objective of the Budget is likely to be fiscal consolidation and growth.

The Interim Budget, presented in February, ahead of the general elections, targeted a fiscal deficit of 5.1 per cent of GDP for FY25. Despite the shortfall in disinvestment receipts and telecom revenues, the handsome growth in GST collection and higher dividends from the public sector undertakings as well as the Reserve Bank of India (RBI) will help bring down the projected fiscal deficit of the current year to at least 5 per cent of GDP. The target for FY26 is 4.5 per cent.

If that happens, the gross market borrowing of the government could be pegged at around Rs 13.6 trillion for FY25, down from Rs 14.13 trillion projected in the Interim Budget. The net market borrowing could be Rs 11.1 trillion, down from Rs 11.75 trillion. FY24 had seen the highest-ever gross market borrowing by the Centre – Rs 15.43 trillion (net Rs 12.29 trillion), more than double of FY20, the year before the Covid-19 pandemic ravaged the world. 

Incidentally, the Centre has already reduced its borrowing for FY25 via treasury bills. Relatively lower supply of bonds and higher demand, following India’s inclusion in the JPMorgan Government Bond Index-Emerging Markets (GBI-EM) global index suite, will keep the bond yield stable.

Let’s turn to what the banking industry has been waiting for the past three years. In February 2021, Finance Minister Nirmala Sitharaman, speaking about “strategic disinvestment”, had said, “A number of transactions namely BPCL, Air India, Shipping Corporation of India, Container Corporation of India, IDBI Bank, BEML, Pawan Hans, Neelachal Ispat Nigam Ltd, among others, would be completed in 2021-22.”

Whats more, “Other than IDBI Bank”, the Budget speech proposed “to take up the privatisation of two public-sector banks and one general insurance company in the year 2021-22. This would require legislative amendments, and I propose to introduce the amendments in this session itself.”

The previous Budget emphasised the need for greater private capital after taking “concrete steps” to make the banking system robust. Accordingly, it “proposed to sell the balance holding of the Government of India in IDBI Bank to private, retail and institutional investors through the stock exchange.”

Barring some speculative reports on the identity of two public sector banks that would be privatised, we have not heard anything on this front. There is silence on the IDBI Bank privatisation too. 

More than a year ago, on March 17, 2023, Department of Investment and Public Asset Management (DIPAM) Secretary Tuhin Kanta Pandey tweeted: “Reports appearing in a section of the media indicating the possibility of deferment of IDBI Bank disinvestment are misleading, speculative and baseless. The transaction continues to be on track as per the defined process in the post-EoI stage following receipts of multiple EoIs.” That’s the last time we heard about IDBI Bank privatisation. DIPAM manages government holdings in public-sector enterprises.

How long will it take to make the IDBI Bank disinvestment happen? The bids were invited from the prospective buyers in October 2022, and in January 2023, DIPAM received several expressions of interest (EoI). 

Life Insurance Corp of India (LIC) is slated to sell 30.24 per cent in IDBI Bank, bringing down its stake to 19 per cent, and the government plans to sell 30.48 per cent, paring its stake to 15 per cent. After the sale, the combined stake of LIC and the government will drop from 94.72 per cent to 34 per cent, passing on 60 per cent to the new owner, making it a truly private bank.

Media reports last week suggested that the RBI has given its 'fit and proper' approval on the bidders for IDBI Bank ahead of the Budget. There's nothing official about the development.

Take a look at the stock market performance of the public sector banks vis-à-vis private banks and the dollops of dividend they are paying to the government. In FY24, the government received Rs 1.54 trillion dividend from the PSUs – 55 per cent higher than Rs 99,913 crore in FY23. Most of the public sector undertakings are in the pink of health and their market capitalisation has been at a historic high. In the past year, the BSE PSU index has offered more than 100 per cent return. Isn’t this the best time to bite the disinvestment bullet in banking?

Well, that’s easier said than done. The intention to bring down the government stake in PSU banks is as old as this century.

In 2000, then finance minister Yashwant Sinha had announced a plan to bring down the government holding to 33 per cent with a caveat that the government would retain management control over public sector banks, ensuring that the reduction of its stake would not lead to privatisation. This was a take-off from the recommendations of the second Narasimham Committee on banking sector reforms in 1998.

In 2014, another committee – the Committee to Review Governance of Boards of Banks in India, popularly known as PJ Nayak Committee – recommended bringing down the government’s stake in these banks. This time, to below 51 per cent.

The National Democratic Alliance (NDA) government at the Centre has been focussing on reforms in the banking sector in a big way. In January 2015, the government organised the first Gyan Sangam, a unique offsite of the CEOs of public sector banks and financial institutions. In August 2015, then finance minister, the late Arun Jaitley, followed it up by announcing the Indradhanush Plan to address many critical things in the sector, including governance. 

Consolidation of the public sector banking industry followed and, finally, the February 2021 Budget spoke about privatising two public sector banks and one general insurance company, besides IDBI Bank.

With the structural change in the ruling NDA, will the government be able to take it forward in this Budget? Your guess is as good as mine.

The writer is an author and senior advisor  to Jana Small Finance Bank Ltd. His latest book is Roller Coaster: An Affair with Banking. To read his previous columns, log on to www.bankerstrust.in 

X: @TamalBandyo