Budget expectations 2024 for Financial Services

The global growth is projected at 3.1% in 2024 as per OECD estimates, which is very similar to 2023 and projects a marginally higher growth rate of 3.2% for 2025. The global growth is slow but steady, but with many downside risks on account of the geo- political tensions driven by the Ukraine-Russian conflict, the West Asian conflict, unstable Sino-US relationship stressing the global supply chains, thereby impacting the inflationary tendencies around food and energy.

In an uncertain world, one of the key priorities of every country is to become “Anti-Fragile” a concept developed and popularised by Nassim Nicholas Taleb. Anti-fragile refers to not only building resilience to shocks but also to improve on account of the shock that it is exposed to. India, as a country, has been adopting this theme through economic policies over the past decade. To continue this path of anti-fragility, the two factors of production that India needs to focus on is Capital and Enterprise. This focus will ensure creation of the right kind of infrastructure, employment and innovation opportunities in the country, that will ensure sustained development of the country.

Foreign Banks have been and can continue to be a great conduit in this journey. While the 2022 Grant Thornton Bharat LLP report on “Role of foreign banks in shaping a Vibrant India” articulate in detail the way foreign banks add value to the Indian ecosystem, we want to highlight 5 specific points in terms of, how they have been adding value to the Indian ecosystem.

1. Foreign Direct Investment – Foreign Banks have been instrumental in creating the case for including India as a part of the global asset allocation strategy for a long time, through their global growth structure and continue to do so.
2. Assisting MNCs in building the base in India – Foreign Banks have long been partners in the India growth story, by helping assist MNCs in building and strengthening their base in India. The continuity offered by the foreign banks by offering an understanding of a geography that the MNC is new to, has helped address country risks significantly that the MNCs imagine.
3. Access to global knowledge capital – With climate change and generative AI, upending the way in which we see the world, foreign banks are enabling the Indian ecosystem to access this global knowledge capital.
4. Global Capability Centers – Foreign Banks have been instrumental in showcasing the value that the country can add across the banking value chain globally and in turn have significantly contributed to service exports and employment opportunities in the country. What started off as back-office operations with low end processes being managed in India, has catapulted itself into robust capability centers that can manage complex processes with a high level of efficiency.
5. Customer Centricity – Foreign banks have historically brought customer focus into the country and the competition that was created, paved the way for many private sector banks to develop that focus in the country.

There are many more areas where they have historically added value to the Indian economy over a period, contributing to a Vibrant India. However, these foreign banks have not been treated at par with the Indian peers and have a significant tax disadvantage. The average tax rate for a foreign bank in the country is north of 40% vis-à-vis the tax rate of sub-30% for their Indian peers.

There are many other areas of disparity between the Indian peer Banks and the foreign banks, but this article is focused on bringing out the tax disparity that exists, so that the government could look at rationalising the tax rates for foreign banks. We believe that rationalising the tax rates would reinforce the thrust on “Ease of doing business” in India and also incentivise a lot of foreign banks to consider a significant presence in India, which will thereby increase the flow of capital and trade flows amongst other benefits.

This article first appeared in ET BFSI on 30 June 2024.