On the one hand, there were tremendous expectations about the Narendra Modi government's maiden Budget; on the other hand, there was also an acute realisation of the limited margin of manoeuvre open to the new government, given the weak economic context, mounting inflationary pressures, the negative impact of an expected bad monsoon and the fact that almost half of the budgeted fiscal deficit had already been eaten up in the first three months of the fiscal year. So everybody knew that Mr Modi and his finance minister would be walking a very fine line at a time when - more than ever - India needs to send a strong message to domestic as well as foreign investors.
Looking at the Budget presented by Arun Jaitley, one would say that the right message had indeed been sent. True, there was no major, earth-shaking structural reform announced, no striking long-term vision sketched out. However, it is the broad agenda, the multiplication and complementarity of the measures outlined by Mr Jaitley and a careful balancing of the need to go for growth while moving towards an indispensable fiscal consolidation that may convince the international business community that India is again open for business.
The raising of the foreign direct investment cap from 25 per cent to 49 per cent in the defence and insurance sectors is, for instance, a major step forward, which definitely opens the way to a much-needed greater involvement from foreign financial institutions, and defence and defence-related high-tech companies. Depending on the way it will be implemented, it can provide a boost to areas that have a multiplier impact on India's economy and its technological capabilities, while contributing to strengthening the country's security and military posture.
In the same way, there was no scrapping of the retrospective taxation of mergers and acquisitions that has spooked domestic and foreign companies, and given India such a bad reputation for unreliability; but Mr Jaitley announced that the application of such practices would be "very cautious" and pending cases would be reviewed by a high-level committee before any action was taken. This is a typical case of the glass being either half empty or half full depending on the way you want to perceive it; but it should at least provide a modicum of reassurance to investors. The same could be said of the raising of the divestment target for the fiscal year: while there were some expectations of an even larger increase, if the government is able to capitalise on the buoyancy of the markets and achieve its objective, this will be a departure from the past - and it will go a significant way towards improving the overall performance of the economy while adding to government revenues.
The incentives for the manufacturing sector, as well as the measures to accelerate the development of the energy sector and of infrastructure like the smart cities scheme, also go, definitely, in the correct direction. However, households will also find some elements to cheer about in the Budget, with a potential positive impact for economic activity. In that respect the tax-relief measures for some categories of the population, as well as the incentives to develop the housing sector, seem well focused in terms of helping to sustain domestic consumption and well calibrated in view of the severe budgetary constraints.
In that respect what is reassuring for the international business community - and most certainly for Indian business leaders - is that Mr Modi and his finance minister have kept their word in terms of avoiding the populist tendencies characteristic of many actions of the past government. No new subsidies in this Budget - and a pledge to stick to the target of a Budget deficit of 4.1 per cent of gross domestic product (GDP) for this fiscal year, with a reduction of the deficit to 3.6 per cent of GDP for the next fiscal year. Everybody knows that this will be extremely difficult to achieve, given the condition of the economy and the expenditures already undertaken. However, the new government will enjoy positive à priori expectations from the international business community, given the credibility of its intentions and the clear orientations it is giving to its economic policy.
This is definitely a Budget aimed at reconnecting India with growth, and it should be saluted as such. Of course, one can always lament the absence of this or that hoped for measure, or wish for more details on some of the actions or orientations announced. Messrs Modi and Jaitley are right to position their first Budget as "the beginning of a journey to sustain seven to eight per cent growth in the next three to four years". This is the way the international business community - and most probably the domestic business community - will look at it.
Many countries around the world are today engaged in an effort to restructure and reform their economies, to restart growth, and to capture investors' attention. India can now aspire to pride of place in that group. This is a promising start for Mr Modi. But the experience of past disappointments with India remains vivid. The positive impact of the strong signal sent by the Budget will have to be vindicated and sustained by what comes next. The foreign and domestic private sectors must be brought back into action. This is where - past this first step - the litmus test lies for Mr Modi: reform is good; implementation even better.