Given its unambiguous mandate at the last election there were high expectations from the maiden budget of the government of Indian prime minister Narendra Modi. However, the fiscal parameters within which the budget was crafted remain constraining.
GDP growth has dropped to the lowest in almost 25 years, consumer price inflation remains high and the previous government factored in revenues in advance, rolled over expenses in 2013-14 and overestimated revenues for 2014-15 to arrive at a fiscal deficit figure of 4.1% of GDP for the current financial year.
Finance Minister Arun Jaitley struck a fine balance between the burden of high expectations and the fiscal constraints.
Jaitley has budgeted a fiscal deficit of 4.1% of GDP in 2014-15 and 3.6% in 2015-16. If achieved, this will relieve fiscal pressures on prices and help ameliorate inflation. There is apprehension that with current revenue and expenditure prospects this aim is somewhat optimistic.
However, non-conventional sources of revenue are being tapped; for example, there are ambitious programs of reducing tax litigation, which would free up large amounts of tax revenue, and privatisation, which would also replenish government coffers.
This budget has enacted a considerable amount of tax reform. First, there is a commitment that by the end of 2014 the Goods and Services Tax will be in place. This would greatly improve finances at both state and central levels and make for more efficient domestic production. The exemption limit for income taxation has been raised, a move that will directly benefit about 20 million taxpayers and boost consumer confidence in the economy.
Many excise duties have been rationalised, several tobacco products have been subject to additional taxation (a welcome move since India has very high incidence of tobacco related diseases) and the scope of the service tax (a buoyant source of revenue) has been increased.
Trade and investment policy
The budget has made a strong move to boost international trade. Despite the fact that Modi’s election campaign made a strong pitch for the revival of the manufacturing sector there have been sharp cuts in several custom duties. The government has rightly signalled that trade liberalisation is good for manufacturing sector growth provided labour laws are made more flexible (as they are currently being made) and strong push is given to infrastructure, which the current budget also has.
Several incentives for domestic investment were announced and the foreign direction investment (FDI) limit in insurance and defence sectors were raised to 49%. Provided the administration of FDI entry is well handled this move should boost foreign investment in both these sectors.
The budget lamented the sharp drops in domestic saving and investment rates (in excess of 3% of GDP from their respective peaks) and identified that the drop in saving has come from the corporate and government sectors and not the household sector.
Boosting economic growth
The budget provides more tax incentives for household saving, discourages government dissaving by reducing the fiscal deficit and tries to reduce the burden of lower corporate savings by, among other measures, recapitalisation of some banks and providing new banking licenses. There is a significant boost to infrastructure, including in remote areas of the country.
The novel policy of creating 100 new urban centres will serve as a focal point of new economic activity and boosts to and incentives for housing finance (the goal is to provide housing for all by 2022) will create millions of jobs. Budgetary allocations for skill development among youth indicate that India is continuing to take the task of capitalising on its demographic dividend seriously.
The budget has directly addressed the needs of the poor and less privileged sections of society as well. The Food Security Program is postponed by a few months but will be implemented, the Mahatma Gandhi National Rural Employment Guarantee Scheme will target asset creation in the rural sector and, increasingly, subsidies will be paid to poor households through direct bank transfers. There has been substantial increase in public investment in education and health.
A budget is an important but not the only economic policy instrument at a government’s disposal. Economists, market analysts, political pundits, investment agencies and the general public all view the budget through their own individual prisms. The day after the budget it is clear that not everyone is fully satisfied with it.
Indeed that is not possible. However, a composite analysis would reveal that this budget has struck a fine balance between these often competing claims. In the process it has laid the foundation for pursuing the broader economic goals of the new government.