In the run-up to the Budget presentation on Saturday February 28, expectations from the Finance Minister Arun Jaitley were running very high. Dispassionate observers were aware that the level of expectations has been so high that no Finance Minister could possibly match leave alone beat them. The fact that such exaggerated expectations prevail during practically every Budget season was lost sight of, however.
From the stock market point of view, it appeared that only an out-of-the-ordinary Budget would inspire the market; anything less would lead to a disillusionment. Expressions such as these are ill-defined and are often mere semantics.
The reasons to expect another dream Budget, a la 1991 were, however, not far to seek. Most of them are grounded in the belief that the first full budget of the NDA Government will have to contain some “big-bang” measures covering not only the financial statements of income and expenditure but some spectacular reform measures. In other words, the studiously cultivated image of the Modi Government will have to find expressions in the Budget.
The wish-list has been large. So much so, despite addressing a very wide range of issues, the Budget fell short of expectations at least from the point of view of those expecting a ‘dream budget’.
The stock markets, which at best reflect the short-term expectations, soared on Friday after the Survey was presented but on the day of the Budget had a roller-coaster ride before closing slightly higher than on Friday.
The message from every Budget is to await a considered opinion rather than depend on immediate reactions from the financial markets. The first full Budget of the NDA government will be evaluated in terms of the most common yardsticks.
One, how credible is its fiscal consolidation roadmap? For this year, a fiscal deficit target of 4.1 per cent seems achievable. The Survey wants a concrete action plan to achieve the medium-term target. Besides, fiscal consolidation should be obtained in a transparent manner. In the event, the time-frame for achieving medium-term target of 3 per cent was pushed back by a year.
Two, a related matter is expenditure reform. The perennial problem of subsidies falls into this category. Tax reform is another extremely important matter. The Government signalled its intention to usher in the goods and services tax (GST). Fiscal federalism received a boost with the Fourteenth Finance Commission awarding a larger share of gross tax revenues to the States and the reduced space available to the Centre has been cited as one reason for going slow on fiscal consolidation. The Budget has promised to reduce corporate tax from 30 to 25 per cent over the next four years. This is as close to a ‘big-bang’ announcement as any. Obviously, the Budget has to be a balancing act between revenue and expenditure, and reconciling the claims of different parties. Understanding the mechanics of this Budget will take time. The stock market’s horizon is much narrower than what a considered opinion would take. Unrealistically high expectations will lead to disappointment.
(This article first appeared in The Hindu dated March 2, 2015)