He concentrated on fiscal consolidation, delivering against most expectations a fiscal deficit target of 4.1 per cent of GDP for 2014-15. By keeping government borrowing low and additional taxes only on spending items like dividends and cigarettes, Jaitley hopes to keep inflation low, reward savings and investment, and so push growth.
He will also hope his performance makes RBI Governor Raghuram Rajan cut rates and please investors. Yet he made clear that this budget would not be a please-all and it showed. The steps I will announce are only the beginning of a journey towards a sustained growth of 7-8 per cent or above within the next 3-4 years, he said early on in his speech.
To achieve the troika of restoring the pace of growth, containing inflation and concentrating on fiscal consolidation he raised the foreign direct investment cap for insurance and defence to 49 per cent, imposed an additional 3 per cent tax on dividends, put in place a host of protectionist duties on imports to spur domestic manufacturing, taxed travel by radio taxis, advertising through mobiles and online media and import of coal and retained import duty on gold. He restricted the sops to domestically manufactured LCD and LED TVs, mobiles and footwear.
His tax exercise leaves him poorer by Rs 14,675 crore but he has stuck close to the ambitious estimate of predecessor P Chidambaram of a nearly 20 per cent rise in tax revenue despite a nominal growth rate of only 13.4 per cent in economy this fiscal.
Jaitley expects to make up the slack with mop-ups through non-tax revenues including the revived Kissan Vikas Patra, which is like a bearer bond and was used to soak up black money in the last decade, and Rs 50,000 higher tax breaks for investment in Public Provident Fund.
He is banking on the hope that private investment will help add jobs and a government with a clear majority in Parliament will pass critical reform measures.
While initially the market tanked when he announced that the retrospective tax on companies like Vodafone would stay, the mood lifted when he declared that capital gains made by portfolio investors will not be taxed at the higher rate of business income and followed it up with tax breaks for a host of manufacturing sector companies.
For encouraging housing investment, he hiked by Rs 50,000 the cap on tax exemption for self- occupied houses and offered a sweetener of a similar amount as income tax threshold limit. The BSE Sensex swung intra-day by 609 points or 2.4 per cent to close almost flat at 25,372.
Among the things Jaitley surprisingly skipped was a date for the rollout of GST and a plan to cut subsidies. On GST, in a post-Budget interview he said, Once I establish my credibility with the states, which I hope to do during the course of the year, I will then bring the Constitutional amendment and the concerned legislation.
On subsidies, he announced the setting up of an Expenditure Management Commission to suggest a reform plan.
Because of the financial straitjacket, the ministers more than two-hour speech was littered with token allocations for a host of institutes from AIIMS, IIMs and IITs to agriculture universities and cultural institutions. He made large spending announcements for only two sectors the roads programme with Rs 37,880 crore and Save Ganga with a cumulative investment of Rs 8,000 crore including waterways.
Pointing to the limited fiscal space, Jaitley later said, I prepared my Budget in just 45 days, with a 4.1 per cent target for fiscal deficit that was already announced and therefore, its prudent economic planning not to create uncertainty and go with the target.
But global rating agencies remained cautious on their India outlook. Standard & Poors welcomed steps for fiscal consolidation but said, The Budget has no immediate impact on the sovereign credit rating on India (unsolicited rating BBB/Negative/A-3).
Fitch was more critical: We are surprised that the Budget has stuck with the outgoing governments fiscal consolidation path. The agency is currently unsure how this can be met without further revenue-strengthening or expenditure-saving measures.