A Stable Budget without Populist Giveaways for Uncertain Times


A budget should be assessed in the context in which it is presented. The external and internal economic environment during the time of Union Budget presentation was and continues to be uncertain. The slump in economic activity due to demonetisation, the rising price of crude, the emergence of de-globalisation tendencies in certain parts of the developed world and the strengthening dollar had rendered the economic environment uncertain. An appropriate response to this uncertain environment was a stable, well-balanced and responsible budget. This was precisely what Union Finance Minister Arun Jaitely presented on February 1.

Popular but not populist

Pushing for growth while maintaining fiscal prudence is a tough task. But the FM achieved this with a 25 per cent increase in Government’s capex while sticking to a fiscal deficit target of 3.2 per cent. He did not resort to populist giveaways with an eye on imminent elections. Income tax relief to all, though modest, has been well received. Also, the FM has refrained from additional resource mobilisation through additional taxation except the surcharge on incomes exceeding Rs. 50 lakh. The budget focuses on three thrust areas, viz., infrastructure, rural spending and SMEs. Transportation – national highways and railways – has been accorded a pride of place with outlays of Rs. 64,000 crore for national highways and Rs. 55,000 crore for railways.

Affordable housing, which has been accorded infrastructure status, is a top priority in the budget. Falling interest rates and interest rate subvention for lower segment housing loans will facilitate a boom in this sector. This will certainly benefit industries like cement, steel and building materials. The budget has an ambitious disinvestment target of Rs. 72,500 crore. The Government plans to list some good companies like IRCTC, IRCON and IRFC. This move has the twin objective of raising resources for the government and offering good quality securities to investors. The recent PSU ETF issues received good response from investors. The proposal to merge public sector oil companies to form an ‘oil giant’ aims at improving competitiveness.  The expected reduction in corporate tax did not materialise. The FM reduced taxes on companies with an annual turnover of less than Rs. 50 crore. This is a boost to the SME segment. Banning cash transactions above Rs. 3 lakh and initiatives to make political funding more transparent are steps in the right direction.

The twin balance sheet problem

A major disappointment in the budget is that India’s twin-balance sheet problem – the high level of stressed assets in the banking system and the highly leveraged companies in some sectors – remain largely unaddressed. Allocation of Rs. 10,000 crore for the recapitalisation of PSU banks is woefully inadequate. Perhaps, more measures are in the offing in this area. The stock market gave huge thumbs up to the budget with a 485-point rally in the Sensex. This is the highest budget day gain in 12 years. The Nifty is already up by 6 per cent this year, Nifty Junior by 12 per cent and the Midcap index is up by 10 per cent. The widespread retail participation and the steady and robust domestic flows – SIPs of Rs. 4000 crore and STPs of Rs. 1000 crore a month – augur well for the market. Disciplined systematic investment will reap rich rewards.