A Budget for ‘Shubhkruta’

The Budget must combine elements of ‘new and novel’ with the ‘tried and tested’, both incremental and disruptive, to usher in the year of light

RADICAL UNCERTAINTY MAKES DECISION-MAKING REQUIRE NEW PARADIGMS, where data, probabilistic analysis and similar tools provide limited support, say Mervyn King, former Governor of the Bank of England, and John Kay in their book Radical Uncertainty: Decisionmaking for an unknowable future. India’s Finance Minister faces an unenviable task in the Union Budget to transition us past uncertainties ranging from Omicron, supply chain disruptions, interest rate normalisation and possible taper tantrums, inflationary pressures, climate change, as well as the opportunities of “blessings of unicorns”, the 4 Ds of democracy, demography, demand and data, plus digital public infrastructure and the flood of international ESG capital to build back better and create the “next normal”.

A humble wish list that integrates “new and novel” with “tried and tested”:

• A unified Indian financial code: Like the unified “Securities Code” announced in last year’s Budget, a single unified financial code is needed for Reserve Bank of India Act, Banking Regulation Act, Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980, Payment and Settlement Systems Act, etc. This will not be a measure of consolidation, but instead an opportunity to embed regulatory governance best practices in the statutes. RBI undertook an exercise to set up a Regulatory Review Authority 2.0 (RRA2.0). The Indian Financial Code along with RRA 2.0 could introduce measures such as undertaking regular cost benefit analysis and public consultation ex ante; regulatory impact assessment and amendments and recalibration ex post to craft better quality financial regulation. This will also help weed out inconsistencies and help create predictability and consistency between regulated entities and eliminate regulatory arbitrage. The Indian Financial Code will also engender best practices in the manner of supervision and enforcement by RBI, which is currently a little ad hoc.

• Structuring the asset monetisation pipeline: The asset monetisation pipeline should be structured for success. Introducing a model PPP law to embed the role of the state on conflict and contractual principles could smoothen friction seen in earlier PPPs. The PPP legislation could allow for allocation, not to the bidder with the highest bid but the one able to invest in and improve the infrastructure through the life of the contract. The framework must also provide room for regular amendment of contractual terms. Establishing independent regulatory bodies operating under a set of welldefined parameters will be invaluable to PPPs, be it for tariff, standard setting, or dispute resolution. • Digital finance development: The Budget should acknowledge the opportunities for digital finance as well as threats that need regulation. The NITI Aayog released a paper on licensing “Digital Banks”. The finance ministry along with RBI and NITI Aayog must work to operationalise the idea to make financial services ubiquitous and safe; to unshackle structural constraints while remaining with the regulatory perimeter.

The entry of fintechs and Big Tech will create un-level playing fields and macro prudential concerns such as financial stability risks and customer protection. This will require reorientation of regulatory paradigms and the Budget should announce a committee to consider best practices.

Central Bank Digital Currencies can transform payment systems, and legislation to allow RBI to pilot and roll this out is critical. Blockchain and decentralised finance hold immense promise, while the multiple risks of cryptocurrencies must be regulated through moats, KYC and AML, liquidity and operational risk mitigation. • FRDI Bill: The Insolvency and

Bankruptcy Code has been a qualified success, but was a stop-gap measure. However, given the unique capital structure and centrality of continued services of financial institutions, they require a distinct framework. The Financial Resolution and Deposit Insurance (FRDI) Bill must be put back on the table, and could draw from the Dodd Frank Act’s “living will” requirement for all systemically important financial institutions. • India as the world’s tech garage: The Budget must give a fillip to India becoming the world’s leading R&D and innovation hub. This includes devising symbiotic partnerships between the public and private sectors and resolving the governance, ownership and monetisation model that marshals the potency of the private (creativity, inventiveness, product design) and public sector (size, scale, last mile connectivity). The government may also provide incentives for innovation—tax incentives, a trust-based ecosystem for regulation, among others. The FM could form a committee comprising a combination of Indian tech players and international tech majors and professionals to examine this more closely. This can be part of India’s thrust of the G-20 presidency—digital innovation from India for the world.

• India as the office of the world: Deepening India’s services exports, especially in digital, is an important reform that could complement Make in India, Digital India and Skill India. The PM’s recent statements exhorting India’s youth to skill, reskill and upskill could be the foundation for an outward-facing knowledge and skillsbased economy. The idea of India being the office of the world complements Make in India. Manufacturing and services are increasingly converging through emergent technology (like 3D printing and IoT). A focus on services can help it leapfrog to global markets beyond the plateau that traditional global value chains are hitting. • Creating more unicorns: India invests only $10 billion a year in startups, with 90 per cent being overseas capital. (By contrast, the US invests more than $135 billion annually on venture capital and start-ups, while China invests more than $65 billion, with over 60 per cent being local capital.) The requirement of daily NAVs restricts pension funds and insurance companies from investing in startups—this can easily be tweaked to allow for investment. Traditionally, debt in India has been provided to companies with large assets that can be secured or over which collateral can be created. Banks and FIs (and to some degree debt funds) do not understand new-age firms or start-ups and therefore did not fund them. However, with data, other new-age assets and revenue projections, there may be several “flow based” and other lending and other products that Indian debt markets must mature into.

These changes could help us glide from Plava (year of transition) to Shubhkruta, the year of light.

The Union Budget should look to create a unified Indian financial code, structure the asset monetisation pipeline, create a framework for digital finance, bring back FRDI, stimulate tech R&D, and help create more unicorns