Clearly, the pressure to deliver a ‘dream’ Budget was immense. And it was heartening to see the government resisting that temptation. By eschewing growth adventurism and sticking to the Interim Budget deficit target, the finance minister delivered a Budget that continues on the fiscal consolidation path of the last two years. Indeed, by committing to the fiscal path laid out by the Kelkar committee for the next two years, just as his predecessor had done, he reinforced the hard-earned macroeconomic stability that separates India from other emerging market economies today. The striking continuity with the previous government’s approach of the last two years, not just in the fiscal numbers but also on several policy proposals, may have been inadvertent but it only goes to show how economic reality circumscribes policy options.
The commitment to macroeconomic stability reduces India’s tail risks when growth-inflation dynamics are precariously balanced. By not adding to aggregate demand, the Budget lowers the risk of an inflation flare up, an unwarranted widening of the CAD, and fears of the rupee coming under sudden intense depreciation pressures. What it indicates is that bringing down inflation rather than pump priming growth is this government’s primary near-term objective and that it believes it is in it for the long haul and intends to focus on lasting reforms.
But like everything else, the devil is in the details. By committing to stick to the Interim Budget’s fiscal deficit and not raising the privatisation target sufficiently despite the much more buoyant stock market, the government also bought into the Interim Budget’s very ambitious 20% tax revenue growth. Under current growth and inflation forecast, it is very hard to see the revenue target being met. And that means that just like the last two years, this year too can see spending being strangulated to meet the deficit target.
Separately, one was also disappointed that the government did not take this opportunity to break away decisively from the policies and reforms of the previous government. One wasn’t expecting a fully worked out work plan for the next five years, but one did expect a clearer articulation of the principles that would underlie the direction of future policies and reforms. Instead, the Budget reiterated the now old argument that much of India’s economic woes are simply a result of the dysfunctional decision making by the previous government. Perhaps this is what the new government believes. So, we should