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This was Finance Minister Arun Jaitley’s last full-year Budget before the general elections due in 2019, and also with the perspective of four state elections to be held this year. So, there was no surprise that much of the resources were devoted to the agriculture and rural sectors that are crucial for the outcome of the next elections. In that respect, the results of the Gujarat elections in which the frustration of the rural sector boosted the performance of the Congress, were a warning that the Prime Minister Narendra Modi could not ignore.
However, should the electoral context and tone of the Budget be something that would worry the international business community? Not necessarily. First of all, after the double shock created by the banning of the high-value currency notes in late-2016, and then the chaotic implementation of the goods and services tax, which together significantly disrupted economic activity, it was important for the government to show that this would be a steadier year.
The growth projection for FY18-19 is basically in line with the forecast of the IMF and while the Budget deficit is seen at 3.3 per cent of GDP — higher than the 3 per cent target which will not be achieved again — it marks a decrease from the 3.5 per cent announced for FY17-18.
This is in line with what was widely expected inside and outside India. Overall, the populist/ electoral elements in the budget have remained measured with the finance minister being clearly aware of a higher-than-expected rise in oil prices, less-than-planned tax revenues and the wider deficit for FY 17/18, constraining his margin of maneuver.
More importantly, some significant increases of resources allocations in this budget focus on areas where the government attention and actions had been found wanting for too many years. For instance, the additional expenditures towards railways, road transport and airports. This also relates to more funding for education, health and social security, as the too small percentage of resources devoted to health and education has been a scourge for India and one of the factors responsible for the lackluster growth performance. The measures announced to support new hirings with the government contribution to the EPF, and women employment, as well as those in favour of MSMEs, also go in the same direction.
Many companies might complain that there is nothing significant for it, except the reduction to 25 per cent of the corporate tax rate for companies with a turnover of up to ~250 crore, which leaves bigger businesses disappointed. But it is also fair to recognise that this government has already made important progress in terms of ease of doing business.
It was also important that the budget allows for additional funding and action on developing the digital economy and is paying attention to the development of artificial intelligence and to exploring the potential of the blockchain technology, areas which are crucial for being a player in the 21st century economy.
There is, of course, no underestimating the electoral considerations. At the same time, there is no sign of the kind of spending spree that would have raised legitimate concerns in the international markets. But the government will be under tremendous scrutiny in the coming months to see how this budget will be implemented and it is certainly aware that foreign markets and investors would react very badly at any sign that populist temptations and electoral pressures are supplanting fiscal caution and good governance.
Claude Smadja is President of Smadja & Smadja,
Sumit Sekhar has contributed to the write-up