Budget 2017-18: Forging a bright future for Fintech and Startups

The Union Budget 2017-18 came across as a big push in India’s transformation from a cash-dependent economy to a truly digital economy. India had been swift in its adoption of smartphones, overtaking the US to become the second-largest market for these devices by the end of 2015. However, the country had not exhibited a similar agility in digital adoption. The Finance Minister announced a string of measures to fortify the digital infrastructure, fasten digital adoption and facilitate financial inclusion.

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Money at Your Fingertips
Aadhaar Pay is the merchant version of the Aadhaar Enabled Payment System. Merchants using Aadhaar Pay would be able to receive payments from customers just with their fingerprint. With this app, even people who do not have cards, mobiles or e-wallets would be able to make digital payments. This would boost financial inclusion and increase the tax base. Simpler payment practices will ease the effort currently involved in making transactions. Moreover, it would become easier for small businesses to apply for loans and for fintech lenders to tie loan repayments to payment receipts.

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It was encouraging to see the rapid adoption of the BHIM app. In roughly a month, this digital payment app has been downloaded by almost 125 lakh people. The Finance Minister announced two new schemes related to this – one providing cashback to merchants using BHIM and the other as a referral bonus to consumers recommending the app. As more merchants are encouraged to use BHIM and consumers play a role in spreading awareness of the app, more transactions will become digitalized.

Building the Infrastructure
Without infrastructural support, no amount of incentives can cause change. In recognition of this, banks have been asked to launch 1 million new PoS (point-of-sale) terminals by March and 2 million Aadhaar-based PoS terminals by September. Apart from banks, post offices and fair price shops will be promoting cashless transactions, taking digital payments to the grassroots.

All duties have been waived for manufacturers of PoS devices, fingerprint readers, iris scanners and other biometric payment devices. Additionally, ₹10,000 crores have been allocated to Bharat Net, a project that is taking high-speed broadband to Gram Panchayats in India.

All these strategically-designed measures would strengthen the resilience of India’s digital economy. The ramp in digital payments would not only increase the tax base but would help small business secure more loans for their working capital needs. Fintech companies would have the needed information to approve loans even faster and offer a variety of financial products based on frequency and type of receipts.

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Discouraging Cash
While encouraging digital transactions, Budget 2017-18 simultaneously discourages cash transactions. Transactions above ₹3 lakhs are no longer permitted to be made in cash.

The Finance Minister announced a reduction of presumptive tax for SMEs with the annual turnover of up to ₹2 crores, from 8% to 6%. However, this reduction is valid only for receipts by non-cash means.

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Moving Online
The seriousness of the government to take everything online is quite evident, from the FIPB (Foreign Investment Promotion Board) permitting the e-filing of FDI applications to the withdrawal of service charge on e-tickets booked through IRCTC. GST, which the Finance Minister announced would be implemented as per schedule, would allow registration and payment online.

Advantage Digital India
The government is targeting over ₹2,500 crore digital transactions for FY18 through BHIM Aadhaar Pay, IMPS and debit cards. The importance of the success of digitalization can be sensed by the tax figures released. Of 4.2 crore people in the organized sector, only 1.74 crores filed tax returns and of 13.94 lakh companies, only 5.97 lakh have filed returns.

These figures indicate how skewed the system currently is. The initiatives being proposed by the government will increase the tax base, the tax rate can be reduced without impacting government revenue. A further reduction in the tax rate would be beneficial for businesses and the economy; thus beginning a virtuous cycle of growth.

Digital India Means a Stronger India
Most businesses struggle to survive, not because they can’t be profitable, but because they face severe cash-flow constraints for their daily operations. While these businesses struggle, traditional banks are reluctant to offer loans.

Budget 2017-18 has tried to address this by doubling the lending target to ₹2.44 lakh crores. This is in addition to the increase in government credit guarantees for SMEs from ₹1 crore to ₹2 crores, as announced by PM Modi in December 2016. Moreover, the Finance Minister proposed tax concession on provisions for non-performing assets (NPAs) and ₹10,000 crores of recapitalization for state-owned lenders.

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While these measures are welcomed, digitalization and the use of new-age technology are most critical to alleviating the problem. The RBI has already included lending NBFCs that are powered by cutting-edge lending platforms into the CGTSME (the credit guarantee scheme for SMEs). Similar initiatives need to be taken to equip FinTech lenders to help meet the unfulfilled credit demand of over $250 billion among SMEs.

The provisions in the Union Budget 2017-18 appear startup and fintech friendly. An ever-increasing number of startups are technology-dependent. These startups are likely to experience greater ease of doing business due to the heavy emphasis on the Budget on digitization. Furthermore, technological services will result in digital footprints of SMEs and consumers, which Fintech lenders can leverage to create and offer customized credit solutions.

This article was originally authored by Gaurav Hinduja. Co-founder and Managing Director, Capital Float