The financial sector received considerable attention in Budget 2010. The most significant aspect from a broader economic context but that also has a material bearing on the financial sector was the governments stance on budget deficit.

In the context of spiralling fiscal deficits run by governments in mature economies and mounting levels of government debt as a proportion of GDP in those economies, India had to seize the moment as well as the economic momentum that it is experiencing to rein in deficits and present a differentiated level of financial discipline that would sustain the confidence of investors and lenders to continue funding Indias growth. The Budget addresses this concern satisfactorily.

At Rs 3,80,000 crore, the governments borrowing programme for next year is pegged at levels below that for the current year. This should allay concerns of investments being crowded out by government borrowings along with adverse inflationary and interest rate expectations.

And, by committing to progressively contain deficit levels and bring government debt down to 68% of GDP over the next few years consistent with the recommendations of the Thirteenth Finance Commission (TFC), and to bring out a paper on how this will be done in six months, the government sets out an agenda for fiscal reform that at least says all the right things.

At Rs 40,000 crore, the governments target for raising funds from disinvestments represents about 80% of funds raised from capital markets during 2009. This will permit investment banks to bolster their credentials, if not their bottom lines, and, if successful, ensure that the capital markets will see a substantial supply of equity paper.

The India Infrastructure Finance Co (IIFCL) is expected to increase its funding of the infrastructure sector. Importantly, from a banking sector perspective, the FM expects IIFCL to develop a framework under which it will take out financing extended by commercial banks to infrastructure projects; a working arrangement , if devised, would permit commercial banks to lend to infrastructure projects without creating material asset-liability mismatches.

The continuing challenge, of course, is to ensure a sufficient supply of bankable infrastructure projects, something that is beyond the remit of the Budget.

Tier-I capital of public sector banks is sought to be shored up to 8% by the end of next year, with the government injecting Rs 16,500 crore of additional equity. Working on an average government ownership in public sector banks at 60%, this would imply that the markets will see follow-on public offers for Rs 11,000 crore from this segment of the banking sector.

While details are limited, the FM indicated that banking licences will be issued to private sector organisations, including NBFCs.

Yes Bank was the last private bank to be granted a licence, and that was over five years ago. Given the conservative stance of the RBI on bank licensing, the number of private banks in the country is unlikely to swell materially in a hurry.

An overhaul of outdated legislation governing the financial sector is proposed to be undertaken by the Financial Sector Legislative Reforms Commission. Indias insurance legislation dates back to 1938, the Securities Contracts Regulation Act was enacted in 1956, and the Banking Regulation Act was introduced in 1949.

Also, there are provisions relating to the financial sector contained in the Companies Act and the Income-Tax Act, all of which could do with a review to make provisions contemporary.

A proposal to amend the permitted level of foreign ownership in insurance companies has been with the government for several years, as have proposals to amend many provisions in the Banking Regulations Act. One can only hope that the reforms commissions efforts meet greater success.

The government proposes to establish a Financial Stability and Development Council to monitor macro prudential supervision of the economy . The council, intended to strengthen and institutionalise the mechanism for maintaining financial stability, is meant to operate without derogating powers of existing regulators.

The RBI is credited with having adopted elements of macro prudential supervision leading up to and during the global financial crisis. Also, it already has framework in place for monitoring financial conglomerates, something the proposed council will be charged with. Over the years, there has been much debate around the multiplicity of roles the RBI plays, and for the need to rationalise these.

Although the Budget speech says little, the announcement of the council could potentially be a signal for greater role definition to occur for the RBI.

Specific tax proposals did little for the financial services sector. However , a proposal to subject transactions in securities between unrelated parties to a fair market value test, has the potential to become a nuisance for such transactions.

Although being introduced to plug abusive transactions , the absence of safe harbours in the broadly-worded provisions could have unintended consequences. Beyond this, the financial services sector will need to await the Direct Taxes Code and the Goods and Services Act, both of which are intended to be introduced effective April 1, 2011.

In summary, Budget 2010 contains a combination of near-term actions and policy initiatives that could take longer to implement. As always, actual action will count for more than announced intentions.