India's Financial Future: Key Reforms and Budget Predictions

SBI Research's pre-budget report urges the Modi government to focus on decarbonization, digital currency, and ethical AI, alongside existing financial sector reforms. The report also suggests tax parity on bank deposits and enhancing the pension system. The full Budget for 2024-25 will be presented on July 23.

SBI Research has recommended that the government under Prime Minister Narendra Modi should prioritize new reforms, focusing on areas such as decarbonization, co-lending with NBFCs, digital currency, and ethical AI. These recommendations come as part of a comprehensive pre-budget report.

The report suggests that efforts should also be directed towards reforming the customer redressal system, ensuring tax parity on bank deposits, implementing HR reforms, and pursuing further consolidation in public sector banks (PSBs). Additionally, it highlights the need for greater awareness, innovation, and reforms in the National Pension System (NPS) and pension products.

The eagerly anticipated full Budget for 2024-25, set to be tabled on July 23, will be the first under Modi's third term. Over the past decade, key reforms have included the Jan Dhan scheme, digitization, financial inclusion, PSB recapitalisation, API-based banking, the Insolvency and Bankruptcy Code (IBC), GST, and platform business models.

The SBI Research report, led by Soumya Kanti Ghosh, Group Chief Economic Adviser, emphasizes that the upcoming Budget may propose a future agenda for continued financial sector reforms with a focus on ESG (environmental, social, and governance) principles. Specifically, the report recommends modifying the 'tax on deposit interest' to provide flat tax treatment across maturity ladders, aligning it with mutual funds and equity markets.

The report notes that household net financial savings dropped to 5.3% of GDP in FY23, with a slight increase expected in FY24. It argues that making deposit rates more attractive could boost household financial savings and CASA (Current Account Savings Account), potentially increasing GST revenues through higher spending.

According to SBI Research, increasing bank deposits would not only stabilize the core deposit base and the financial system but also enhance household financial stability. It points out that the banking system is better regulated and more trusted compared to other volatile and high-risk alternatives. Furthermore, the report calls for the removal of differential tax treatment between deposits and other asset classes, which are currently taxed only on redemption.

Sitharaman's upcoming Budget speech on July 23 will mark her sixth, surpassing the record of former Prime Minister Morarji Desai who presented five annual budgets and one interim budget between 1959 and 1964. The budget session of Parliament is scheduled to begin on July 22 and conclude on August 12.

(With inputs from agencies.)