A good balancing act, Mr Jaitley!

Budget sends reassuring message on the sustainability of gradual reform, surmises Claude Smadja

This was Finance Minister Arun Jaitley’s third Budget and, to some extent, the hardest so far in terms of the challenges to be addressed and the contradictory imperatives to be reconciled.

By outlining that this was a Budget presented at a time when the global economy is in trouble, but when India’s economic growth remains solid at 7.6 per cent, the finance minister was setting the stage for what was expected to be a very delicate balancing act between the need to present a growth-oriented Budget while reaffirming the imperative of fiscal consolidation, with a deficit targeted at 3.5 per cent of gross domestic product.

Sticking to the target was crucial for the government’s credibility towards the international financial market, even if such a choice obviously meant some difficult trade-offs in terms of being able to generate a higher growth potential for the Indian economy.

Despite the finance minister’s pledge that the pace of reforms will continue, foreign investors will be disappointed that -- except for permitting 100 per cent foreign direct investment in marketing for Indian-made food products and opening up the road sector to private investment in the private transport segment -- this Budget does not open up more areas to foreign investment.

Neither does it truly chart the road map for the much-needed implementation of the goods and services tax.

It remains also to be seen whether the encouragement given to public sector companies to divest assets would be followed by action, considering that less than half the targets for divestment had been met previously.  

However, the positive element is that the Budget sets the orientations for supporting the development of domestic consumption -- especially among the less favoured categories of the population, where measures such as the additional deduction for first-time home buyers of low-cost houses, the raising of the deduction limit on rent cost and the additional relief for small and medium income taxpayers are applicable.

These are measures that should translate directly into increased consumption, thus impacting positively on GDP growth.

All the measures announced to support the agricultural sector go in the same direction, coming on the heels of two disastrous monsoons that have significantly eroded the farmers’ situation and purchasing power.

This is definitely a most welcome effort for a country where 60 per cent of the population still relies directly or indirectly on agriculture.

In that respect, a positive factor lies in the combination of structural improvements in domains such as electrification of villages and the irrigation networks with direct support measures for beleaguered farmers.

Worth mentioning also are the measures intended to support SMCs, new manufacturing companies and young entrepreneurs -- especially women -- thus pushing ahead with the Start Up India initiative launched by the government.

In the same way, it is worth noting the measures in the Budget that will help support the implementation of Digital India.

This comes with tax incentives for the manufacturing sector to encourage companies to create new jobs in the context of Make in India.

Although industrialists will consider that the Budget does do enough for their sector, there is, nevertheless, an improvement in the framework conditions to allow manufacturing to increase its share of the country’s GDP -- an absolute priority for achieving a sustainable nine to 10 per cent annual growth rate.

In this context, one key factor for assessing this Budget is the scale of effort it foresees for infrastructure development.

Considering the need to balance the different urgent needs for financing, the increased resources allocated for road and rail transport expansion and the reviving of 160 airports are a plus.

They represent probably the maximum the government could mobilise in a situation where private infrastructure funding remains weak.

It remains to be seen how the pledge to remove the obstacles and uncertainties inverstors continue to face when getting involved in the infrastructure sector translates into actions.

There is the need to stress even more the crucial linkage -- the symbiotic relationship -- between the development of the manufacturing sector and the development of infrastructure -- and to create even more synergies between the set of complementary pillars.

That the government is now putting more emphasis on public-private partnerships can only offer encouragement for more private sector involvement.

Jaitley’s margin of manoeuvre was obviously limited by three major constraints coming on top of the need to stick to the goal of fiscal consolidation: The allocation of significant funding for the agricultural sector, mentioned earlier; the impact of salary increases for civil servants; and the need to devote resources — although presumably not enough -- to recapitalse a banking sector increasingly weakened by the increase in non-performing assets.

An important test in the coming months will be the additional reforms that have to be implemented in this sector if it is to play a greater contributing role to GDP growth.

Those -- in India as well as among the international business community -- who were expecting new, bold, reformist measures in this Budget will presumably be disappointed.

We have, however, seen already with the previous Budget that this government is not opting for a big-bang approach, whether by conviction that a more gradual approach will work better in the long term or because of the recognition that domestic political conditions and the international economic context do not provide the ground for such an approach -- or maybe because of a mix of these two reasons.

All in all, this Budget has to be seen as a growth Budget and a good trade-off between what could be done to promote a further, faster, expansion of the economy and the need to show a convincing determination of the government to achieve fiscal consolidation.

It also provides a reassuring message about Prime Minister Narendra Modi staying the course -- maybe not as forcefully as some would have hoped but in a way that will at least ensure sustainability of the effort. Would it have been realistic to expect more?

Image: Finance Minister Arun Jaitley arrives at the Parliament to present the Budget in New Delhi, February 29, 2016. Photograph: Adnan Abidi/Reuters

Claude Smadja is the president of Smadja & Smadja, a strategic advisory firm. Twitter: @ClaudeSmadja