WIREDGOV

Shehla Hasan, CBI India Head and Policy Director, reflects on the first full budget of the Modi Premiership, delivered by Finance Minister Arun Jaitley at the end of February.

Arun Jaitley, India’s Finance Minister, delivered what could be called a direction setting Budget at the end of last month. His opening lines were a direct echo of a headline from The Economist, when he said that ‘the world is predicting, it is India’s chance to fly’.

With sweeteners for investors, jobs and some tax exemptions for the middle class, and concessions for the poor and the senior citizens, the Finance Minister had something for everyone.

Mr. Jaitley predicted 7.4% GDP growth for 2014-15 and between 8-8.5% in 2015-16, according to the new definition of GDP growth in the country.  By extending the period for reducing the fiscal deficit to 3%, and thus allowing the deficit target for 2015-16 to stand at 3.9% instead of the expected 3.6%, he freed up considerable funds for investment next year, notably in the infrastructure sector - the big winner from this budget - with knock-on benefits across the economy.

Nonetheless, this Budget was a steady one, with no big bang reforms announced and the introduction of the Goods and Services Tax still a year away. In addition to infrastructure, there was a big push for the government’s Make in India programme, similar to the GREAT Campaign in the UK, with a 5% cut in corporate tax rate to 25%, over the next four years.

The Minister added another surprise for investors by announcing the postponement of the General Anti-Avoidance Rules (GAAR) by two years, setting the tone for an easier tax regime. However, he has upped the service tax and excise duty on many items which is bound to dent consumer’s pockets, and replaced the wealth tax with a 2% surcharge on the rich who earned more than Rs 1 crore (£ 100,000) annually.

Overall this was a pragmatic and pace-setting budget that has been well-received by most commentators. It was set against a far more challenging political backdrop than might have been expected, meaning that Mr. Jaitley had to produce a budget which was re-assuring to both business and the poorer sections of society. He managed this while avoiding the temptations of populism.

With an eye on important state elections later in the year (in Bihar) and next year (in Bengal), a lot of hope is riding on the ‘Make in India’ project, which is seen as having the potential to create many jobs for the middle class. With a time-bound pruning of corporate tax rates and deferment of the GAAR, the government has also tried to make investing in India more competitive than the other growing Asian economies.

Domestically, by coupling this with a £ 7 billion injection into the infrastructure kitty this year, the government will hope to make progress towards winning over state governments in getting future reforms off the ground.