Before the budget was presented, a television channel asked me for the top three things that I would be looking for in the budget. I told them that I would be looking for not just recapitalization of government-owned banks, but also a road map for the future of the banking sector in general. Ditto for non-banking financial companies (NBFCs). The second expectation was of imaginative proposals on the sale of government assets. The third and final one was on the fiscal deficit management—not just in quantitative terms, but also its underlying use. A minor relaxation of the deficit target would have been alright if it were backed by a credible, transparent and accountable spending plan.

The government has announced recapitalization support of 70,000 crore for the banks it owns. But, there is no sign of a road map for their corporatisation, governance improvement and partial privatization. Similarly, from initial reports, it emerges that the government has created an enabling mechanism for NBFCs to sell their assets through banks, with the government providing a first-loss guarantee of about 10%. This is a partial boost to the liquidity of NBFCs. If my guess is correct, then the stress in NBFCs may persist. Of course, this is a “first glance" view.

As far as I could see, there are no headline-grabbing asset-sale initiatives. Paragraph 26 mentions development of public infrastructure and affordable housing on land parcels held by the Union and state governments through joint development and concession. No sale. The disinvestment target has been raised to 1.05 trillion from 0.9 trillion in the year before. This, together with a statement that the government would maintain its stake in central public sector enterprises at 51%, including the stake held by state-owned financial institutions, is a significant step forward in divesting government stake.

The fiscal deficit ratio is even lower than the interim budget’s 3.4%. Budgeted dividends/surplus from the Reserve Bank of India, nationalized banks and other financial institutions are nearly double the budget estimate for 2018-19. Budgeted receipts from the goods and services tax appear realistic. An attempt has been made to tackle the “angel tax" issue, though the devil may lie in the details.

One headline that grabbed attention pertains to the government announcing its intention of issuing sovereign debt in foreign currencies. Apparently, India thought of it in 2013 but did not go ahead as the macro fundamentals were deemed dodgy then. But, probably the best time to borrow would be when the domestic currency is undervalued. The Indian rupee in the second half of 2013 was close to being undervalued. Right now, India’s macro fundamentals are not weak, although big question marks remain over the economy’s growth rate, its sustainability and vulnerability to a global stock market correction. In other words, the risk is tilted towards further weakness of the Indian rupee. In 2013, it was tilted towards its strengthening after a hefty correction.

On the other hand, the timing is opportune in another sense because global central banks are back to considering further crazy monetary easing moves. To that extent, raising foreign currency borrowing now is a case of good timing. Another upside is that the government would not be crowding out domestic savings, which have declined in recent years and show no signs of reviving. That is a good thing.

The government’s move to raise the income tax surcharge on those with taxable income of above 2 crore might trigger capital flight. The government’s calculation is that technology and big data would enable them to catch capital flight and net the expected tax revenues from the hike in surcharge. But, usually evaders are one step ahead of tax collectors. At some point, a too progressive income tax structure may become regressive.

Instead, there is a case for lowering the tax threshold with modest tax rates if the current low inflation rates are sustained. Accountability of both the government and taxpayers will increase if more income earners are in the tax net than with a top-heavy tax structure.

The relief in the calculation of securities transaction tax on derivatives, the exemption from income tax scrutiny of investments received by startups from Category II alternative investment funds, the slew of incentives announced for businesses carried on from international financial services centre, plans to raise foreign direct investment limits in several sectors, plans to finance infrastructure through capital markets (and by facilitating instruments like credit default swaps) rather than through revival of term-lending financial institutions, and the plan to issue foreign currency sovereign debt fit into a pattern of encouraging foreign financial flows into the economy. This may be a rational response to stagnant domestic savings or, disturbingly, may reflect increasing financialization of the Indian economy.

A big mandate, an uncertain near and medium-term economic outlook, and the impact of global warming coming to India faster than one expected had all called for risk-taking. The government has taken risks, but one hopes they are the right ones.

V. Anantha Nageswaran is dean of IFMR Graduate School of Business (Krea University)

These are the author’s personal views

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