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Why expectations are high from Jaitley's first Budget

Last updated on: July 08, 2014 12:00 IST

Image: Finance Minister Arun Jaitley will have to do a balancing act in the Budget.
Photographs: Reuters

For a more sustained fiscal fix, the government will have to switch public spending from subsidies and handouts to facilitating jobs and investment.

Investors have very high hopes for the new pro-business Indian government's maiden budget on July 10.

It has three priorities: restarting a stalled investment cycle, repairing the government's fiscal health and reforming the supply side of the economy.

Addressing all three will be a daunting task. But with a mix of honesty and creativity, Prime Minister Narendra Modi and his Finance Minister Arun Jaitley just might pull it off.

Fiscal repair is where honesty is needed the most. Admitting that last year's actual deficit was more like five per cent of GDP, not the 4.5 per cent announced by the previous government, would be a good start. 

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Why expectations are high from Jaitley's first Budget

Image: The upcoming Budget may focus on infrastructure development.
Photographs: Courtesy, Uttar Pradesh Tourism

That lower number was an accounting artefact; using it as a baseline for fiscal correction will either mean intolerable austerity or a return to book-keeping shenanigans.

Instead, the focus should be on boosting revenue.

Speeding up privatisation is one way to achieve that goal: the government is contemplating an ambitious asset sales target of $11.7 billion, Reuters reported on July 6.

That's almost equal to the proceeds of the past four years. A creatively designed amnesty for bringing back wealth parked illegally in overseas tax havens could also help.

Using the proceeds to invest in infrastructure and recapitalize state-run banks could ease the immediate resource crunch.

The investment cycle would restart.

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Why expectations are high from Jaitley's first Budget

Image: Investors are expecting an ambitious plan for skilling up India's 435-million-strong workforce.
Photographs: Reuters

For a more sustained fiscal fix, the government will have to switch public spending from subsidies and handouts to facilitating jobs and investment.

This will require supply-side reforms. Investors are expecting an ambitious plan for skilling up India's 435-million-strong workforce.

Freeing employees from archaic labour laws is the next step.

Making the corporate tax regime more predictable, for instance by scrapping the retrospective amendment to tax laws introduced in 2012, will also help improve the business climate.

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Why expectations are high from Jaitley's first Budget

Image: Easing restrictions on foreign investment in railways would help to deepen the country's manufacturing base.
Photographs: Reuters

Easing restrictions on foreign investment in defence, railways and e-commerce would help to deepen the country's manufacturing base.

By the time he presents his next budget in February, Jaitley will have had a chance to make reluctant state governments drop their objection to a long-delayed federal sales tax, which could well become the Modi government's most important legislative reform.

For now, though, a judicious combination of restart, repair and reform should be enough to keep investors happy. 

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Source: source