The macroeconomic context to this year's Union Budget was very challenging. Earlier, the Prime Minister had reminded us about our predicament in 1991. While the present situation is not as dire, the challenge of the twin deficits loomed large. High oil prices caused current account to widen, and in turn caused fiscal deficit to worsen. Growth had dropped from a high of 9.3% a few years ago to barely 5%. To top it all, rating agencies threatened a downgrade, especially due to the fiscal situation. The finance minister's challenge was thus to walk a tightrope between collecting higher tax revenues, reviving growth and increasing social sector spends.
This is, after all, the last pre-election budget for the government. Considering all these constraints, the FM has given us a pragmatic and credible budget.
It comes in the wake of several reform-oriented decisions already taken by the government since the FM assumed office in August. These included capping subsidies on fuel, and enabling FDI in several sectors. The FM has sought to provide a growth impetus in this budget through a variety of measures. These include investment allowances, funding for infrastructure, private public partnerships, and focus and boost to housing. The tax holiday of section 80IA is an example which will bolster infrastructure. The port sector and inland waterways are but two examples of several initiatives in infrastructure, which will bear fruit in the medium term. The new funding for infrastructure bonds also augur well. Housing is a sector which has a huge multiplier effect, because of a direct impact on construction, as well as an indirect impact on demand for consumer goods. It is also crucial for job creation. Hence, focus on housing is well timed.
The FM's emphasis on education and human capital mirrors what was described in great detail in the Economic Survey. India's demographic dividend gives it a unique structural advantage. In the next 10 years we will add almost 20 million young workers to the labour force each year. For such large scale quality job creation, we need to improve the business climate, especially for SMEs, and also increase the skills and human capital of the youth entering the labour force.
The SME sector gets an opportunity to raise capital with a lighter regulatory burden. The FM has also outlined several ways to revive financial savings through bond and equity markets, and also inflation indexed bonds. This raising of the domestic savings rate will have an impact on the current account.
This budget has hugely stressed the human capital aspect. Even though the overall projected spending growth is more than 16%, the mix is much more toward Plan spending, i.e. capital items.
On the revenue side, keeping excise and service tax rates unchanged is welcome, especially in the current slowdown phase. The surcharge on high-income bracket was perhaps inevitable, but should also be accompanied with continuing effort to widen the tax net.
Overall, the budget maintains extreme fidelity to the vision of inclusive and sustainable growth.