Amid the Omicron fear and rising cases, the global economy is on its path to recovery from the COVID-19 pandemic. According to the first advance estimates of national income for 2021-22, real GDP is estimated to grow by 9.2% and basic gross value added by financial services to grow at 4%. The financial services sector is considered the backbone of any economy. Since the Union Budget is around the corner, here are some policy expectations from the financial services industry which include banking, insurance, and asset management.
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Insurance sector
The pandemic has significantly highlighted the importance of health and life insurance. Insurtech companies are required to be encouraged for technological innovations which require combined efforts from industry regulators and the government.
In the upcoming budget, the government is expected to introduce policies to relax investment norms and thereby enable insurance companies to generate better returns for policyholders.
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To increase insurance penetration certain tax incentives can be introduced such as a separate deduction of Rs 30,000 for first-time life insurance buyers, exemption from GST for senior citizens on non-life insurance products, and a lower GST rate on the term policies than the current 18%.
Insurance companies may be granted special tax deductions for premiums earned from businesses in rural areas to promote insurance services among the urban poor and deep rural areas.
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Banking sector
The banking industry is on the recovery path as bank credit has increased from 6% in 2020-21 to 7.3% in 2021-22. Bank deposits have declined from 11.3% in 2020-21 to 9.6% in 2021-22.
The banking industry has been focusing on innovation and digital transformation. The Union Budget could introduce policies to promote innovation in the banking industry in the form of subsidies and reimbursement of certain costs. Clarity on tax (income tax and indirect tax) and regulations on cryptocurrencies is also expected.
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The government may release a dedicated fund to improve the digital infrastructure of cooperative banks to build a more inclusive financial system.
Asset Management
The asset under management (AUM) of the mutual fund (MF) industry has grown more than 6 times in a decade from Rs 6.82 trillion in 2011 to Rs 37.73 trillion on December 31, 2021. The total number of portfolios as of December 31, 2021, stood at 120.2 million.
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AUM still has huge growth potential but it requires certain policies such as providing incentives for increasing presence in tier two cities and providing additional tax benefits for investment in certain specified schemes.
The financial services sector is the backbone of the economy. Some policy initiatives can boost and strengthen the sector in the long term while creating opportunities for financial inclusion and digital transformation of the financial sector.