An optimistic and brave budget
Jaitley has announced a panoply of measures for re-igniting investment sentiments and boosting growth
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Arun Jaitley faced a stern test in presenting his first budget. At first glance, he seems to have come out unscathed and unsinged. He was expected to strike a balance between fiscal consolidation, speeding up growth and inclusion. He has pulled it off, with some caveats, that hopefully won’t be game spoilers.
On fiscal consolidation, he accepted the challenge of bringing the fiscal deficit down to 4.1% of GDP by 2015 and then reduce it to 3.6% and 3.0% in the next two years. All three are his predecessor’s numbers. The numbers somehow do not add up. For example, the tax revenue is assumed to rise by 19.8% over the actual collection in FY14 with a nominal GDP growth of 13.4% which looks unlikely. The assumption of a real GDP growth of 6%, too, may be optimistic. Service tax collections are expected to increase by a whopping 39.7% over the actual collection for FY14. Even after reducing the negative list, this is rather high. To achieve the fiscal target while not cutting subsidies and other expenditures, he has assumed disinvestment revenues of ₹ 63,425 crore—high but manageable if he takes some of the Maharatnas and the large PSU banks to the market along with others, such as Hindustan Zinc and Balco, where he has to simply complete the privatization process. Overall, the fiscal exercise reveals Jaitley’s complete reliance on the finance ministry mandarins and either an unwillingness or inability to take a hard look at the fiscal mess he has inherited and strike out on his own fiscal correction trajectory. That may have restored the government’s credibility, which could now face a rather stern test in the coming months. I hope he is successful in taking the GST forward as promised. That will assure investors and markets about fiscal promises.
Jaitley has announced a panoply of measures for re-igniting investment sentiments and boosting growth. For me the higher allocation of public resources for addressing the infrastructure deficit in highways ( ₹ 37,800 crore), ports ( ₹ 11,000 crore), 100 smart cities ( ₹ 7,000 crore) along with other measures to promote private investment are crucial. He is expecting public sector enterprises to make capital investments up to ₹ 2.47 trillion in FY15. If it materializes, it will surely help ignite the investment cycle. The liberalization of FDI regimes in defence, insurance and urban real estate will also attract investment and spur growth. His clarity on promoting the special economic zones, encouraging differentiated banking initiatives will bring a cheer to all those who have been discouraged by the previous government’s prevarication on this count.
On inclusion, his has been a rather modest but brave attempt in the given circumstances. Raising personal income tax exemption limits and giving more concessions for financial savings by households and raising the cap on housing loan interest payments will put additional purchasing power in the hands of the neo-middle class. Not rationalizing subsidies may disappoint the analysts and purists but by appointing the expenditure management commission, Jaitley may well have laid the basis for that in the coming months.
Rajiv Kumar is senior fellow at the Centre for Policy Research, New Delhi.
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