The Union Budget was presented against a backdrop of a very unfavourable macro-environment of weak growth and high inflation and tremendous expectations of businesses, and the people at large. After all, the new government has just won a historic mandate, not seen in last 30 years. Therefore, it was prudent of the finance minister to start his speech with a reality check—the economic situation presents a serious challenge and steps announced in this budget are only a beginning.
Let us start with the broader fiscal consolidation strategy. In the last two years, the fiscal consolidation strategy was largely hinged on a sharp squeeze in Plan expenditure. However, the latest budget brought the focus on growth back into the fiscal consolidation strategy, through higher allocation to Plan expenditure and policy actions in construction and manufacturing, among others. This is a welcome shift, well-suited to the current state of the economy. Having said that, the fiscal deficit target of 4.1% does look aggressive but in my view, 20-30 bps slippage should not be a cause of concern.
Outside the fiscal math, there are several aspects of the budget that needs highlighting. First the budget has stressed on execution rather than announcing ambitious schemes. For example, for the infrastructure sector, the government seems to be following a cradle-to-grave strategy by tying the loose ends—generating demand through higher Plan outlays, encouraging private participation through REITs/liberal FDI policies and addressing long-term funding issues through SLR/CRR holidays, recasting PPP guidelines, among others. This, along with hassle-free administrative structure (the hallmark of Modi’s way of governance), completes the eco-system conducive to faster implementation of infrastructure projects.
Second, the budget undertook several concrete measures to revive manufacturing and construction. Liberalisation of FDI in the defence sector should help in the modernisation of defence by bringing in capital and technology, while kick-starting the domestic auxiliary manufacturing units. More importantly, fixing the inverse duty structure in many areas of manufacturing would also give a fillip to domestic manufacturing in areas such as electronics and chemicals. This is not all. The construction sector, which has strong forward and backward linkages in the economy, has been given a fresh impetus by giving pass-through status to REITs and by easing regulatory norms to attract FDI.
Many people feel disappointed at the lack of a concrete road map for subsidy rationalisation or GST. In my view, this is an issue of sequencing of reforms rather than that of