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Strong Mandate, Weak Budget


I write at Outlook: Strong Mandate, Weak Budget:

Arun Jaitley’s first budget sends mixed signals to financial markets, and one strong message: this is not a dream budget. The dream budget, if you heard the political campaign, was one in which taxes would be lower. They aren’t, by much. There’s a token increase in the tax slabs and exemption limits that was long overdue after years of heavy inflation.

The dream budget would not tax us retrospectively — instead, Jaitley has decided there will be a committee that decides if a retrospective tax should apply or not. The budget should have reduced our fiscal deficit — instead, it finds solace in targeting the exact number that the previous government had left behind. The dream budget should have reduced subsidies. They remain, and become bigger.

The budget speech itself saw the markets oscillate from the deep disappointment that there was nothing major to expect to an opt­imism that there would be, and finally a resi­g­nation that this government was ano­­ther one that would spend Rs 200 crore on a statue while allocating Rs 100 crore for a metro project in Lucknow.

Bonds should have reacted positively to a fiscal deficit target of 4.1 per cent. But we should be sceptical, as no government seems to have been able to rein in deficits in a drought year. The drain on the exchequer by having to either waive loans, ease taxes or pay more for food will easily move that deficit number into the 5 per cent territory.

Foreign investors should have liked it that Foreign Direct Investment is allowed in defence and insurance, up to 49 per cent. But this too will go through a process and requires Indian management. There wasn’t a murmur about increasing the amount of government rupee debt foreigners can own (they are up to their limit of just 2 per cent of all such debt). But Jaitley allowed companies to withhold less as tax when companies paid interest to non-residents. The rupee went from below to above Rs 60 to a dollar, an indication that foreign investors weren’t quite that enthused.

But there were some positive assurances. The government promised to rein in food inflation by releasing food stocks they have procured to ease prices. The Food Corporation of India would be reformed, and the leaks in the Public Distribution System (PDS) would be plug­ged. They plan to overhaul the subsidy reg­ime, and create a better urea policy for fer­tilisers. They also plan to clean the Ganga and work towards interlinking India’s rivers. These augur well for agriculture, and would have a strong impact, if successful, on interest rates, if inflation were to come down. The market, though, is like goldfish—it remembers no promises and lives in the present.

But we didn’t hear much about disinvestment, except that the government still wanted to own 51 per cent of public sector enterprises. Taxes were juggled around, but there still isn’t any clarity on the Direct Taxes Code or the GST—both are key reforms that are needed for clarity. While they want to increase governance and reduce government, expenditure was hiked up by 12.6 per cent in the year. We have a tough monsoon that’s 42 per cent short of normal, but there’s no contingency plan.

There are just eight months left in the year, and the Modi government had just 45 days to prepare, so expectations had perhaps run ahead of themselves. While the budget itself stood its ground as a sincere one, it didn’t leave the impression that this was a government which got the first majority mandate from Indians in over three decades.

This is an archive of the article I have written at Outlook.


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