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The budget is undoubtedly the most important policy event in the Indian policy calendar. Friday's announcement was particularly significant considering that fiscal stimulus provided by government in last three financial years, amounting to about 4% of GDP, has been an important driver in putting the Indian economy back on track towards achieving over 8% growth.

The macroeconomic backdrop of the budget was much more sanguine than it was in the last year. The economy has convincingly recovered from the shock of the global financial crisis helped by policy stimulus from Reserve Bank of India and the government.

The stage, therefore, was set for the government to chalk out a plan for the next four years aiming at rapid infrastructure development, making the tax code of the country more effective and simple, improving the investment climate in the country and more importantly chart out a course for fiscal consolidation.

In that context, the budget for the fiscal year 2010-11 has touched upon all the critical issues required to deal with both immediate and future challenges for the economy.

The guiding principle of the budget is to not only raising the level of GDP growth to 9% but to also make the growth process more inclusive and sustainable.

The key announcements on both the expenditure and revenue side are along the expected lines. Fiscal consolidation has been pursued while keeping some stimulus in place, thereby balancing the conflicting objectives of supporting the growth momentum without straining public finances any further.

The finance minister Pranab Mukherjee has been guided by the recommendations of the 13th Finance Commission - the constitutional body which decides on tax revenue sharing between Centre and states —in putting together a roadmap for reducing fiscal deficit. Along with aiming to reduce the fiscal deficit from 6.7% of GDP in the current fiscal year to 5.5% in the next and eventually to 4.1% by FY2012/13, the finance minister for the first time indicated that the consolidated public debt would also be reduced from 76% of GDP to 68% over the next four years.

This time-bound approach towards reducing the fiscal deficit and public debt is important in enabling growth and if achieved will help improve India's sovereign rating to investment grade.
On the spending side, focus on infrastructure, rural development and social sectors continues.As a result, the allocations have been increased for infrastructure development and government's flagship schemes like NREGS. Budgetary allocation to infrastructure has been stepped up to 2.5% of GDP.

The overall budget size is budgeted to increase by 8.5%, which is significantly lower than the average yearly increase of 14% seen during the UPA regime since 2004.

However, seen in the light of the fact that there were substantial savings on the expenditure front, as no payments due on Pay Commission implementation or farm loan waivers, some of this muted increase in budget size was "automatic" in nature.

Moreover, the Budget once again lacks any serious effort in expenditure rationalisation, particularly in reducing the subsidy bill.Tax revenue proposals also show continuity. The government remains committed to simplifying the tax code. The grand taxation reforms, of both direct and indirect tax regimes, which have been in the making for last couple of years, are only one year away.

The decision to implement the Direct Tax Code (to replace the Income Tax Act) and subsuming layers of indirect taxes into the goods & services tax (GST) regime by next fiscal year will help in improving the efficiency of the taxation system and will help boost growth.

Proposals made on the personal income tax front will help increase disposable incomes in the hands of the individuals, through further widening of the tax incidence slabs, would help in supporting consumption demand at a time when inflation, is approaching double-digits.

Similarly reduction in the surcharges on corporate taxes would also help reduce the tax burden of the sector, though this has to be balanced against the increase in MAT to 18%. On the indirect taxes, a 2% increase in the excise duty and widening of the service tax net are essentially aimed at moving towards the GST regime next year.

The size of government's net market borrowings program for the next year, pegged at Rs. 345,100 crores to fund the fiscal deficit, is clearly the biggest negative.

Large borrowings by the government will add to the upward pressure on interest rates.

The equity markets saw a muted rally following the announcements and that was reflected in some appreciation of the rupee. The renewed focus on fiscal consolidation will help support the fundamental growth story of India and help attract greater capital inflows in the future. That will be positive for all asset markets, especially for the rupee.

Views are personal