While many complained about a six day working week, there was much to be pleased about and the markets rallied in the afternoon to finish firmly in the green.
A once in a generation opportunity
We had highlighted the once in a generation opportunity for the government to redirect fiscal spending away from unproductive subsidies, towards a growth-enhancing infrastructure push given the drop in oil prices. We saw good evidence of this, with annual capex spend up 25% – including the doubling of road spending and rail investment up 30%.
Meanwhile subsidies were reduced, with total spend amounting to 1.7% of GDP versus 2.1% last year (this is the lowest level in 8 years). The government relaxed its fiscal targets – plumping for a 3% fiscal deficit target in 3 years rather than 2 – in order to stimulate growth through enhanced spending. Further, corporate tax will be lowered to 25% from 30% over a 4 year period.
With the government focusing on ‘cooperative federalism’ through increased involvement from the various states, revenue share to the states was increased by 1% of GDP.
A constant drip of reform
Some may be initially disappointed that bolder steps were not taken and a greater mix-shift away from subsidy spending to infrastructure would have been welcomed. However, that would have come at a greater political cost – something the BJP are carefully trying to manage. So called ‘big bang’ reforms were unlikely to be introduced during the budget session.
The finance minister was keen to highlight that the budget day represents just a single day out of a full year when reformist steps can be taken. Indeed, we believe that this is one of the most attractive features of the Indian market: the reform agenda is being characterised by a constant drip of reformist action rather than short periods of hyperactivity.
