The Narendra Modi government’s debut budget did not deviate from the path set by the Congress-led UPA government. It did not slash fund allocations to its flagship entitlement schemes or cut petroleum product and fertiliser subsidies. It did not take any bold measures, like easing in labour reform to give the manufacturing sector and job creation a boost. It did not alter tax rates or do away with the plethora of exemptions. In a nutshell, Finance Minister Arun Jaitley appeared to take the UPA’s cues. He kept the single most important macro-economic indicator — the fiscal deficit as a percentage of the gross domestic product — at the level set by P. Chidambaram, his predecessor. The markets were seemingly happy with Jaitley’s determination to follow the path of fiscal rectitude. His reassuring words to foreign portfolio investors, encouragement to small entrepreneurs, promise of tax stability and certainty, pushed the benchmark Sensex up 350 points during the two-hour-fifteen-minute budget speech. But nagging doubts over his ability to achieve the “daunting” deficit target of 4.1 per cent of the GDP in 2014-15 slowly dragged the Sensex down. The benchmark index finally closed 72 points lower than the previous day.
What Jaitley did quite adeptly is pluck the low hanging fruit, which the UPA government failed to all through its second term. Take foreign direct investment in defence and insurance, for example. The UPA dithered over it. Allowing 49 per cent FDI in defence will help India bridge the technology gaps in indigenous manufacturing. It will simultaneously let ancillary manufacturing units flourish. Similarly, 49 per cent FDI in insurance, even if it comes without commensurate shareholding rights, will bring in foreign investors who see huge potential and promise in India given its low insurance penetration. The finance minister also identified the real estate sector for adding momentum to business activity by announcing taxation benefits for real estate investment trusts, individual borrowers and financial institutions. Incentives to this sector spur the construction business, which has a significant multiplier effect. This has boosted the confidence of India Inc.
Given the phenomenal mandate the people gave to the Modi-led BJP in the Lok Sabha elections, however, the NDA government could have taken the tough decisions and administered the “bitter medicine” for a larger good that Modi has spoke of so eloquently. But Jaitley chose not to overwhelm the macro pundits. Perhaps it was the wisdom gleaned from his government’s decision to roll back suburban rail fares the very next day after announcing the hike. The finance minister took only guarded and time-tested steps to spur growth. For instance, he extended investment allowance to incentivise small and medium companies, the backbone of the manufacturing sector, and also gave a fillip to affordable housing. For the neo-middle class that the prime minister often referred to during his election campaign, Jaitley extended a range of sops such as new small savings schemes, higher income tax exemption and investment limits under Section 80C and higher deduction under home loan repayment. Not only that, he announced the setting up of a slew of IITs, IIMs and AIIMS to meet the rising aspirations of this class. There was something for almost every issue that has dominated public discourse in the last couple of years — from the safety of women in big cities to a skills upgrade for the minorities.
Could the Modi government have done more on growth, inflation, jobs and reforms? Especially given the backdrop of a high-decibel election campaign that promised a lot, and the decisive mandate that mirrored the people’s belief in the promises made. Having criticised retrospective tax amendments, Jaitley could have taken a decisive stance, instead of stopping at promising a stable tax regime and not resorting to retrospective changes. Similarly, on subsidies, he could have talked of a timeframe to do away with the administered pricing regime of petroleum products. In a single line, he proposed to overhaul the subsidy regime, including food and petroleum subsidies. One of the biggest indirect tax reforms — the Goods and Services Tax — first talked about in the 2007-08 Budget, has not seen fruition and Jaitley refrained from setting a deadline for its introduction. To give industry flexibility in employing labour, BJP-ruled Rajasthan has set an example, with its cabinet clearing amendments to three critical laws. A strong signal of intent by the Centre in this area, which falls in the concurrent list, would have prodded other states.
Jaitley has kept quiet on these tricky subjects. Perhaps the silence was deliberate. The debut budget could be seen as the first of a five-part economic statement the NDA government has in mind.