Govt overspending would be slashed in the next three years, with the fiscal deficit reduced from a targeted 4.1 percent of GDP this year to 3 percent in the 2016/17 financial year
India’s new right wing government under Prime Minister Narendra Modi unveiled its maiden budget Thursday, promising a new era of fiscal discipline, higher growth and greater opportunities for foreign investors.
While lacking bold reform announcements in areas such as the labour market, Finance Minister Arun Jaitley laid out ambitious deficit cutting targets and analysts and business leaders mostly praised the budget as “realistic”.
Jaitley told parliament the right wing government, in office since May, inherited a “challenging” situation of low growth and high inflation from the previous Congress government.
He stressed that he wanted to lay out the broad directions in which the Modi administration aimed to travel – towards lower government borrowing, more privatisation and greater openness to foreign investment.
“It’s a roadmap, it’s a directional budget,” Jaitley told state run television afterwards.
Government overspending would be slashed in the next three years, with the fiscal deficit reduced from a targeted 4.1 percent of GDP this year to 3 percent in the 2016/17 financial year.
“We cannot leave behind a legacy of debt for future generations,” he said.
Foreign investment caps in the defence and insurance sectors would be lifted to 49 percent from 26 percent, while growth was projected to crawl back to 7-8 percent by 2018 from 4.7 percent last year.
After initially losing ground in reaction to the budget, which also proposed private investment in India’s dilapidated ports, roads and other infrastructure, shares climbed 1.7 percent to 25,877.66 points in the afternoon.
“The budget is very realistic” and “pro-business”, Paras Adenwala, head of Mumbai based Capital Portfolio Advisors, told a foreign news agency. “This is just the trailer and the real picture is just starting,” he added.
The budget also contained measures to spur low cost housing and new sewage and clean water initiatives, while boosting spending on defence by 12 percent compared to the budgeted amount last year.
But a lack of “big bang” reforms, despite the BJP winning the biggest single party mandate in three decades, disappointed some investors who had expected more.
“The budget was just spread out to satisfy everybody,” Sandilya, the chief executive of automobile and manufacturing company Eicher Group, told reporters. “It seems to be kind of broad-based, not very exciting kind of a budget.”
On taxation for instance, Jaitley stopped shy of scrapping a controversial retroactive tax passed by the left-leaning Congress that had discouraged foreign investment, but he promised a “stable” tax climate.
He also said in his marathon over two-hour budget speech a long anticipated direct tax code to widen the government’s revenue base would be studied by a committee rather than announcing a timetable for implementation.
He set a year-end target for clearance of a long pending national good and services tax to replace a web of federal and state taxes to facilitate easier business transactions.
There was no mention of reforms to tight labour laws that analysts say restrict hiring and have deterred investment in the sorts of manufacturing businesses the government hopes to promote.
Since taking charge after ousting Congress, swept out by voters angry about weak growth and scandals, Modi has sent strong signals he will pursue his “Modinomics” agenda of “maximum governance, minimum government”.
The Bharatiya Janata Party (BJP) has consolidated ministries and scrapped cabinet panels to streamline administration and speed up decisions.
With two thirds of India’s 1.25 billion population living on less than $2 a day and worries about a below average monsoon, Jaitley said the government would continue to care for the poor and there would be no rollback in massive subsidies.
“It is the poor that suffer the most,” Jaitley said. “We have to ensure our anti-poverty programmes are well targeted.”
Jaitley gave no growth forecast for this year but the Finance Ministry’s Economic Survey forecast Wednesday expansion of 5.4-5.9 percent in 2013-14 though it cautioned the patchy rains threatened the projection.
