Arun Jaitley makes a tentative start

Arun Jaitley inherited an economic mess created by several years of mismanagement. His first budget as finance minister of the National Democratic Alliance government should be seen as an initial, tentative attempt to nurse the economy back to health.

Jaitley has done well to set himself a fiscal deficit target for the current fiscal year that is far more aggressive than what the financial markets had expected, following worries about unpaid subsidy bills by the previous government. However, a lot depends on how well he does on two fronts: taxes and subsidies. The tax collection goal is very ambitious given the fact that growth in nominal gross domestic product (GDP) will be muted; the implicit assumption of tax elasticity of 1.5 is more realistic during an economic boom rather than a weak recovery. Meeting the disinvestment target will be critical in case tax revenues underperform.

The budgeted level of subsidies as a percentage of GDP is now close to the average levels seen in this century but a poor monsoon could force the finance minister to spend more. The food subsidy is anyway expected to increase because of the introduction of the food security law. No finance minister in recent times has been able to resist the temptation of crafting budgets with unrealistic assumptions about taxes and subsidies. Jaitley has not been an exception, which is why we have argued in these columns for a fiscal watchdog like the US Congressional Budget Office to provide an independent view on the budget numbers.

The fact that India runs a large primary deficit shows that the task of fiscal consolidation is far from done.

The budget has several attractive features: a focus on infrastructure development, concrete moves to make financial savings more attractive, higher foreign direct investment limits in defence and insurance, an attempt to deal with at least some of the administrative problems that worry investors and some efforts to foster entrepreneurship.

The surfeit of small spending promises is obviously an irritant but perhaps a cheap way to signal to the aspirational middle class that backed Narendra Modithat it matters even after the election.

Hidden in the Jaitley budget is a radical step that was first taken by P. Chidambaram in February. The finance minister has slashed budgetary support for ministries such as panchayati raj, rural development, and woman and child development. Some of them have budgets that are a mere tenth of what they got in 2013. It seems these ministries are being downsized. Good. New Delhi will be content to funnel money to the states that are in a far better position to spend what has been allocated for various social schemes. This move should be seen as part of a broader intent to refashion federal relations in India.

Budgets that are presented in July by a new government have a certain quality: they offer cues about the broad direction of economic policy over the next five years. The second budget that is presented in February after a government has settled in tends to be far more radical. The best example is the modest budget presented by Chidambaram in July 1996 as finance minister of the United Front government and then the celebrated dream budget he came up with in February 1997. A milder version of this switch could be seen between the first Manmohan Singh budget of July 1991 and his second offering in February 1992.

The lack of an overarching economic strategy in the first Jaitley budget should be seen in this context. It hopefully precedes a more ambitious reform programme to be unveiled in February. A lot now depends on how committed the Modi government remains to the tough fiscal targets that it has set itself even as it tries to get economic growth back on track.

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