We all knew it wasn’t going to be easy. Union finance minister Arun Jaitley had to come up with a budget that would be both a ‘thank-you-voter’ act and a trailer to a grander economic overhaul that India Inc and investors would like to see this government usher in.
The lawyer-turned-politician appears to have made a good beginning, but the road ahead could be long, one that he will be able to traverse only with visionary thinking and political will.
In offering relief to tax payers, slashing duties on goods that the urban middle class aspires for, setting aside funds for entrepreneurship and smart cities, among others, Jaitley has sought to deliver on Prime Minister Narendra Modi’s promise of acche din.
Read: Thank you, voter: Budget has Modi’s imprint all over it
The Union finance minister has brought clarity to several tax-related issues, promised not to destabilise the tax regime and laid down a new fiscal roadmap that promises to reduce deficit on the government’s account to 3% of GDP by 2017. All of these will surely help in improving business sentiment and adding to confidence among India Inc.
In moving to increase the cap on foreign direct investment (FDI) in defence production and insurance from 26% to 49% and with measures such as treating incomes of foreign portfolio investors as capital gains, Jaitley has sent a clear message overseas — India is open to business.
Two days earlier, railway minister Sadananda Gowda proposed to allow 100% FDI in rail infrastructure. Thursday’s budget proposals also included allowing FDI in low-cost housing projects — a measure that would bring some cheer to the real estate sector and help reverse its slide over the past year.
Yet, the expectations were so high that there wasn’t much euphoria, even among some of the BJP’s core constituents. That’s because the budget comes across as lacking in substantial and credible measures to tackle such primary concerns as high inflation and shrinking jobs.
The Union finance minister has ticked many right boxes on the fiscal front to keep pressure off prices, but these may not be enough to bring relief to consumers.
The problem with inflation in our context is that it is driven much by supply side constraints and pass-through effects of global crude oil and commodity prices that are beyond the control of a finance minister. In his budget, Jaitley has proposed a price stabilisation fund for farm goods — a good idea, which is yet to be tested. The biggest risk to inflation, however, lies in a possible monsoon failure that we may be staring at soon. In other words, the extra money that the finance minister has sought to leave with the salaried class by increasing the tax exemption limits could just go in paying more for food.
As for jobs, the budget rightfully places a lot of emphasis on skill development — an issue that Modi is focused on. The proposals to set up a Rs. 10,000-crore venture fund for micro small and medium enterprises, technology start-ups and similar funds for rural entrepreneurs are welcome moves. But these are initiatives which will take time to have their impact.
Read: Good news for salaried class: Jaitley's budget will help you save more
In the short-to-medium term, what matters is how quickly the economy revives. The government’s own forecast is that the economy would likely grow 5.4% to 5.9% this year and that too if there is no setback to global economic recovery, crude oil prices remain stable and the delayed monsoon’s impact is minimal. In times such as these, governments usually step up spending to create jobs. But the Union finance minister has been constrained by the legacy of what he inherited — a widening fiscal deficit that has prevented the central bank from lowering interest rates and creating an environment more conducive to investment and growth.
This government appears to be laying a lot of emphasis on public-private partnership (PPP) as a more desirable approach to boost investment in infrastructure and other economically critical areas. Unfortunately, India’s experience with PPP projects so far has been pretty dismal. Unless Jaitley and his government have already figured a new way to pursue PPP projects announced in the budget, these may not hold out much for India’s growth story.
The biggest takeaway from this budget has been Jaitley’s effort to bring back the focus on fiscal consolidation. Even though the budget has something in it for everyone, it has resisted the temptation to slide into a revenue-eroding populist mode.
The finance minister is looking to keep spending on a tight leash and has announced a high level panel to recommend longer-term measures to manage government expenditure. The downside to this, however, lies in the revenue numbers, which in Jaitley’s own words are “ambitious targets”. Meeting the tax revenue and disinvestment targets is tied to a robust recovery of the economy and a buoyant stock market. Should the economy fail to recover as projected, the fiscal worries might just persist longer and make it difficult for easing monetary policy to encourage investment.
All told, the budget for 2014-15 has been on balance a sensible and good start for the NDA government. The fact that, other than political rivals, it didn’t come in for strong criticism from most quarters suggests that this government continues to enjoy the goodwill with which it came to power and still has time on its side.
Read: Narendra Modi's first budget a victim of his own success
The real challenge for Jaitley and his government will be to come up with a grander vision that does what the previous UPA government, despite a raft of social sector programmes and plenty of rhetoric about inclusive growth, failed to do — bring all those sections of our society who have been left out of India’s growth story to lead the economic recovery in the years to come.