By all accounts, the finance minister has done a most commendable balancing job. To fully appreciate today’s Budget, it is important to understand the context that it was framed in. Inflation has now been above-comfort levels for almost a year and policymakers have therefore felt the need to continue with the calibrated withdrawal of the fiscal stimulus that was injected in the aftermath of crisis.
At the same time, there have been some signs of a slowdown in recent months with both industrial production and non-oil import growth slowing over the last quarter. Given all this the FM was in the unenviable position of having to walk a tightrope. On the one hand, it was important he continue on the path of fiscal consolidation – as laid out in the recommendations of the 13th Finance Commission, on the other, it was important he not withdraw the stimulus too hastily as it would risk slowing the economy down further.
He has indeed surpassed market expectations on fiscal consolidation by targeting an even lower fiscal deficit (4.6 % of GDP) than laid out by the Kelkar Committee (4.8 %). As such, net borrowing for this fiscal is expected to be almost Rs 40,000 crore lower than what the debt market had expected, causing bonds to rally. More importantly, however, the fiscal consolidation was not achieved through broadbased increases in excise duties as was feared in some quarters. Instead, the FM curtailed the growth of expenditure (less than 4% increase over FY11) to achieve the desired consolidation.
In addition to this fiscal prudence, the government demonstrated its intent in pushing ahead with the reform process. The FM reiterated his desire to introduce GST legislation in this session of Parliament and implement DTC from April 1, 2012. In addition, in a welcome move, retail foreign investors have been allowed to invest in Indian equity mutual funds. This could result in significant capital inflows over the next few quarters, a much-needed buffer in the wake of moderating foreign institutional flows.