Budget FY15 doesn’t present any overarching vision of how the Indian economy would shape up over the next five years. It seems more a continuation of the Interim Budget presented by the UPA earlier this year, even retaining the deficit target at 4.1% of the GDP, something which the BJP had trashed before it came to power. The Budget posts deficit targets at 3.6% for FY16 and 3.0% for FY17 but gives no indication of how this can be achieved. In fairness, the Modi government has been in office for only a month-and-a-half now, and the finance minister also holds the portfolios of defence and corporate affairs in addition to party responsibilities. Thus, we must expect many announcements in the coming months which should otherwise have come in the Budget.
The broad expectation was that Budget FY15 would reduce the fiscal deficit (it does not); propose actions to generate employment (it does); stimulate savings and investment (there are many tax concessions and allowances as well as expenditures and administrative changes that will do this); reduce inflation (the Budget can only reduce spending, which could reduce inflation in the medium-term, but the government had announced earlier direct actions like anti-hoarding, imports, distribution of grains in stock, etc), and prune expenditures (it does not).
Besides, it was expected to lay out the plan for disinvestment and the privatisation of state-owned enterprises (SOEs). Sebi has suggested that the government reduce its holding in SOEs from the currently permitted limit of 90% to 75%, resulting in significant disinvestments. However, the Budget makes no mention of such privatisation. It projects an income of around R75,800 crore from the disinvestment front, but this figure seems inordinately high and presupposes a buoyant market.
On the FDI front, the Budget manages to keep up hopes, raising the caps for defence manufacturing and insurance. However, the condition attached, of Indian management control, will not help. Another shot in the arm for FDI is the government committing to vastly limit the application of retrospective taxation—it is proposed that all such demands in the future must pass the assessment of a high-level committee. The clarity in transfer-pricing norms the Budget offers will be encouraging for existing companies with foreign linkages as well as new entrants. At the same time, remaining mum on the Vodafone matter, the Budget failed to tackle the potential erosion of investor confidence.
It also tries to remove bottlenecks related to compliance