FM shows he won't cross the expense red line

The Budget has improved India’s macro credibility by not crossing the self-imposed 5.3% fiscal deficit Laxman Rekha. Despite that, it manages an election year push by better focused expenditure programmes—clearly targeting women, youth, minorities as well as the poor.

It has survived the glare of the rating agencies. It is surprising then the first reactions are subdued from abroad but more enthusiastic in India itself. The reason is we were more doubtful about the government’s ability to deliver and had a greater fear of runaway populism. The foreign investor wants stability but she also wants growth. A fiscal deficit achieved by cutting Plan expenditure may compromise the latter. Although the fiscal deficit exceeds Budget estimates only by 0.1%, the revenue deficit is still 0.5 points higher.

The details that improve incentives to invest, save, and spend better seems more positive than the overall macro figures. Departments that did not spend their full allocations have lost increments, motivating them to spend in time. Multiple and overlapping central schemes are to be reduced to 70. There is some attempt at convergence across departments running social service schemes.

That the investment allowance is given only till 2015 will encourage firms to invest today. There are many incentives for and some attempt to improve the instruments available for financial savings. Raising these is imperative to reduce the current account deficit and dependence on volatile capital inflows. There are many measures to develop a range of financial services.

There is lip service to stability, predictability and friendliness of the tax regime. But there has been much tweaking of rates. The damage of a sharp 10% surcharge on the super rich, however, is limited by restricting it to only one year. The incentive to take avoiding action reduces. Luxury brands can survive a rise in excise rates. Not enough has been done to broaden the tax base or signal the move to GST. The assumed 13.4% nominal GDP growth is probably an overestimate. But deficit targets will again be met by cutting out the laggards in the government who are not able spend in time.