Governments and regulators rarely face the ramifications of being too successful, yet that is precisely the situation unfolding in India’s banking sector, stock market, and indirect tax revenues.
Since 2014, the Narendra Modi government has been aggressively expanding access to banking services and encouraging more people to participate in the stock market. Simultaneously, it has sought to substantially boost revenue from the Goods and Services Tax (GST).
The government and sector regulators have largely succeeded in all these three areas. But success comes with its own difficulties.
More GST, less data
The most recent example of this involves the Ministry of Finance’s unofficial decision to discontinue the monthly release of detailed GST revenue collection data. Although no formal announcement has been made, the release for June’s revenue, due on 1 July, was not put out. Ministry officials say that while gross collection figures will be quietly disclosed, other previously released details will be withheld.
ThePrint reported that this change in policy stems from concerns that high gross collection figures were fuelling resentment among the public, which felt the government was collecting excessive tax.
Now, it must be said that the increase in gross GST revenue is primarily due to the administration’s success in widening the tax net. GST rates have not been increased for years; in fact, the average rate of 11.6 per cent is lower than pre-GST levels.
The other point, as highlighted by former chief economic advisor Arvind Subramanian, is that gross collection figures obscure the truth about GST. Once refunds are accounted for, the actual government revenue has only now reached pre-GST levels as a percentage of the country’s gross domestic product (GDP).
So, here’s a case of the government turning squeamish about its own success, prioritising optics over transparency. Rather than halting monthly releases, it should focus on conveying the reasons behind the rise in gross numbers. It might even earn praise, albeit grudgingly, from the public.
But even if the praise doesn’t come, the government should resume releasing detailed data, given its broader policy implications, as noted by economists Pronab Sen and Surjit Bhalla.
Success, or the appearance of it, is not something to be scared of.
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Stock market growth
The second success the government and its financial sector regulator — the Securities and Exchange Board of India (SEBI) in this case — have been grappling with has to do with retail participation in the stock market.
Prior to the Covid-19 pandemic, the oft-heard refrain among stock market analysts as well as SEBI and government officials was that our market wasn’t deep enough. Not enough people were participating.
Since the pandemic, however, this has reversed. Now, the worry is that people might be participating too much, particularly in the options market. As ThePrint has reported, India accounts for nearly 90 per cent of all options trading in the world. This was about 35 per cent pre-pandemic.
Several reasons account for this surge, but some have squarely to do with SEBI actively making it easier for people to trade in options. From reducing lot sizes to allowing an increase in the number of indices available for options trading, the last few years has seen SEBI and the exchanges doing a lot to fan the flame of the options trade in India.
But now that flame might have grown too large. From SEBI chairperson Madhabi Puri Buch cautioning about the growth of the options market to the RBI highlighting its concerns, the official line has reversed: retail participation in the options market needs to be curbed.
Last week, SEBI asked exchanges and other market infrastructure institutions (MIIs) to implement a standard fee structure for brokerages and do away with the existing slab-based structure.
What has been happening so far is that the exchanges take payment from the brokerages on a monthly basis based on a rate determined by the transaction volume of that brokerage. The brokerages charge their customers on a daily basis, often at the highest slab. The difference between what the brokerages pay the exchanges and what they earn from customers forms a significant proportion of the brokerages’ revenues.
With this change, however, that source of revenue will go, which some brokerages, including Zerodha, have said will mean they might have to charge customers an even higher fee for futures and options trades. This could dissuade casual retail traders from participating in this segment.
In fact, SEBI has also previously raised concerns about the massive participation of the public in the conventional stock market as well, particularly in small and mid-cap stocks.
Here, too, substantial success is being viewed as a bad thing.
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Expanded banking services
In the banking sector, the government has been touting the success of its ‘JAM trinity’, comprising the Jan Dhan Yojana, Aadhaar, and mobile penetration, and rightfully so. The penetration of the banking sector was one of the core pillars of the government’s relief efforts during the pandemic.
But, if you give people a bank account, they are soon going to move past the deposit aspect of banking and start taking advantage of the lending side. This is happening now. The growth of personal loans — hovering within the 25-30 per cent range — has comfortably outpaced the growth in lending compared to all other sectors since the pandemic.
This growth has been driven by housing loans and unsecured loans. While the former are relatively safe, unsecured loans are by definition riskier since there’s no underlying collateral to recover should these loans go bad.
The growth in personal loans is a natural outcome of the increased penetration of banking services. The RBI has also been strengthening non-banking financial companies (NBFCs), which have in return amped up their lending to retail customers.
But now the RBI is facing the flip side of its success. Periodically through 2023, the central bank raised concerns about the growth in unsecured loans and asked banks and NBFCs to cut back on them. When this didn’t work, it took direct action in November by making unsecured loans more expensive for lenders, which in turn made it more expensive for the borrowers.
Simultaneously, some of the asset quality metrics of these loans have started to deteriorate. For example, the RBI’s latest Financial Stability Report has pointed out that, for private banks, the share of slippages — fresh additions to non-performing assets (NPAs) — from retail loans is increasing.
In other words, the government and the RBI encouraged people to sign up for bank accounts, but are now finding that they might be using banking services, particularly the lending function, too much for comfort.
The government’s reaction to its relative success with GST is just plain wrong and should be reversed. RBI and SEBI, however, need to take a more nuanced approach. While their concerns are undoubtedly valid, they should be careful they don’t kill this burgeoning enthusiasm among the public. These are the signs of a maturing economy, after all.
TCA Sharad Raghavan is Deputy Editor – Economy at ThePrint. He tweets @SharadRaghavan. Views are personal.
(Edited by Prashant)
Nice piece! However, could have been nicer if the writer had delved deeper into the reasons behind the surge in unsecured loans beyond just saying that the whole thing is due to the increased access to financial services. Many of those availing personal loans since the Covid pandemic was declared in 2020 at 13-14% interest from commercial banks have good CIBIL scores & had always been using banking services. As for the increased interest of retail investors in small and mid cap stocks, surely the writer isn’t unaware of the fact that many of these investors don’t have the required investible resources to buy large cap stocks which trade at higher prices.