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Key takeaways of the Budget
March, 02nd 2010

The Budget 2010 has focussed on strong economic growth while containing the fiscal deficit. With a view to strengthening financial stability, the government has decided to establish a Financial Stability and Development Council to monitor macro prudential supervision of the economy, including the functioning of large financial conglomerates and addressing inter-regulatory coordination issues.

Key takeaways and their impact

The Reserve Bank of India intends to issue additional banking licences to private players and NBFCs. This will aid in extending the geographic reach of banking services.

In the backdrop of the recent crisis, capital infusion in public sector banks is critical. The Government has provisioned Rs 16,500 crore for public sector banks to ensure that they attain a minimum Tier I capital of 8% by March 2011. This will primarily give a boost to public sector banks, which have a government holding of a little over 50%, which makes it difficult for the banks to raise capital from the equity market. Further, RRBs will be granted additional funds to help them enhance their lending capacities.

Budget 2010 emphasizes upon financial inclusion as the key to extending banking services to the aam aadmi . It has been proposed to cover 60,000 habitations, with suitable technology and a business correspondent model. Villages having a population of over 2,000 people will come under the banking net by March 2012, thereby providing increased banking penetration.

The provision of micro-finance has also received its due share of attention in the budget, with an initiative to link self-help groups with the banking system.

To build efficiency through use of IT and towards better financial governance, the government has proposed to set up a Financial Sector Legislative Reforms Commission to amend the financial sector laws aligning them with the sectoral requirements. To bring in more accountability in governance, this would be supplemented by the setting up of a Technology Advisory Group for Unique Projects.

In addition, an Independent Evaluation Office is being set up, to undertake an impartial assessment of public programmes. With regard to tax provisions, there are not many changes proposed. Services rendered by Investment Managers/Advisors outside India, if in the nature of fees for technical services, could be taxable in India unless protected by a tax treaty.

Further, in respect of non life insurance companies, it has been proposed that the realised gains/losses on investments, if not credited/debited to the P&L A/c would be adjusted in the taxable income and that the provision for diminution in value of investments debited to P&L A/c to be added to taxable income.

In conclusion, the Government is looking at strong GDP growth in double digits in the medium term. This would require a robust financial system with strong banks, and hence the need for faster implementation of financial sector reforms.

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