Finance Minister Arun Jaitley presented the first full budget of the Narendra Modi-led NDA government on February 28 amidst high expectations of fundamental, high profile reforms that would set India on the path for long term growth. The government was well placed to make systemic changes in the country’s economic system, with falling global oil prices, a positive response to coal and spectrum auctions, low inflation, forecast of a normal monsoon, a strong mandate in the Lower House and no more elections until the end of the year. While the budget did not contain any high profile  reforms, FM Jaitley has presented a balanced budget that contains several key decisions which will have a significant effect on the Indian economy.

Revenue sent to the states

The most far-reaching impact of the budget is the government’s decision to accept the recommendations of the 14th Financial Commission to devolve a greater share of revenues to the states, inaugurating an era of fiscal federalism in India. It will be important to see how states deploy these new fiscal resources. There is also a strong focus in the new budget on public spending in infrastructure, with the government planning to invest eleven billion in the sector over the next year. In addition, FM Jaitley has proposed reimagining the PPP model in infrastructure projects, with government bearing a major part of the risks, a key development for the sector.

Improvements to the investment climate

Improving the ease of doing business was another key element of the budget. FM Jaitley announced the launch of an e-biz portal that integrates fourteen regulatory permissions at one source. An Expert Committee is also being set up to suggest draft legislation for replacing multiple prior permissions with a pre-existing regulatory mechanism. Several other measures to improve the ease of doing business were also announced, including a comprehensive bankruptcy code to replace the archaic insolvency laws in India, starting commercial divisions in Indian courts and introducing an over-arching Indian Financial Code in place of a maze of regulations that currently govern the financial services sector in India.

An unpredictable tax regime has been a major inhibitor for foreign investment over the last few years. The government took several positive steps in the new budget to bring some much-needed predictability to this area. It announced a phased reduction in corporate tax from 30 to 25 percent over the next four years while also making adjustments to remove discretionary powers in the hands of tax officials and reduce the number of tax disputes. Tax rates on royalty payments were reduced from 25 to 10 percent to encourage entrepreneurship. The budget has also fixed April 1, 2016 as the roll-out date for the single goods and services tax and the contentious General Anti-Avoidance Rules have been delayed for two years.

Growth prioritized

The new budget prioritised economic growth over fiscal consolidation by moving the deadline to achieve the medium-term fiscal deficit target of 3 percent of GDP from two years to three years. This has provided Jaitley with a window to increase the total public investment by almost twenty billion in the current fiscal year, with the goal of restarting the investment cycle, which will have a multiplier effect on the economy. Another potential challenge could be the decision to increase service tax rates, which could slow down the consumption engine of the economy. However, this could be balanced by the tax breaks provided on old age pensions and insurance.

Allaying the opposition’s concerns that the government was planning to curtail the welfare programs of the previous government, the FM increased by almost a billion dollars the allocation to the previous government’s flagship welfare program, the Mahatma Gandhi National Rural Employment Guarantee Scheme, the world’s largest guaranteed job program. Working on the principle that a government can be both “pro-business and pro-poor,” Jaitley announced universal social security for all Indians and welfare programs for senior citizens and promised to rationalise subsidies through “Jan Dhan Yojana,” which is the government’s on-going project to open bank account for all Indians and direct benefit transfers using the government’s unique identity card called “Aadhar.”

After the BJP’s defeat by the populist Aam Aadmi Party in the state elections for Delhi assembly in the run-up to the announcement of the budget, there were several media reports that the government would put aside its reformist agenda in favor of a populist budget. This proved incorrect – the budget includes several forward-looking reforms whose cumulative positive impact is expected to result in economic growth of more than eight per cent in the next year. The industry, business analysts, and stock markets welcomed the budget, with the benchmark BSE Sensex closing 141 points or 0.5 percent higher the day the budget was announced. The Reserve Bank of India (RBI) also responded positively to the budget by cutting its policy rate for the second time in the year by twenty five basis points. Even the normally circumspect and conservative RBI governor expressed optimism, saying that “the picture of a steadily recovering economy appears right.”

Please click here for the Budget Documents.