Economists say FM delivered a balanced budget; now all eyes on RBI

The government's first full-term Budget drew applause for being growth oriented but also attracted criticism on missing big reforms push and a disappointing upwards projection on the fiscal deficit for the coming year. However, with the task at hand of igniting infrastructure investments economy watchers said the Finance Minister did a nice balancing act.

Highlighting that the Budget was rather low on reforms and focused more on delivery Sujan Hajra, chief economist at Anand Rathi, said, "Budget did not deliver big bang announcements rather it focused on improving procedures and easing “doing business” conditions. It (Budget) clearly recognised the role of public investment to kick start the investment cycle. The resultant deferral of fiscal consolidation process should, therefore, be seen in this light."

While the markets were expecting some major reforms from the government, the FM stuck to reality given the constraints to fiscal space in delivering a balanced Budget. The minister in his budget speech highlighted the government performance in backdrop of Jan Dhan Yojana, Make in India and Swachh Bharat Abhiyan while assuring that the government would achieve this year's fiscal deficit target of 4.1 per cent.

However, he revised upwards the fiscal deficit target for the coming year to 3.9 per cent from 3.6 per cent while saying the target is to reach 3 per cent level only by 2017-18.

Most analysts welcomed the revision of the target by the government as long as it keeps to its commitment of medium term fiscal consolidation.

"We had flagged risks of a higher deficit target to accommodate realistic economic assumptions, higher public expenditure and increased devolution to states. The higher target is unlikely to attract the immediate ire of rating agencies and the markets, but will need the higher-frequency fiscal performance to back that faith," Radhika Rao economist at DBS Bank said.

"Apart from the near term growth boosting measures, the Budget also presented a roadmap with regards structural enablers. Budget lays down the roadmap for corporate tax rationalisation, GST implementation by April 2016, laws to curb black money, introduction of Bankruptcy Law and many more. This only indicates the government's long term vision and preparation for laying foundation for double digit growth," said Vikas Khemani, president & CEO - Edelweiss Securities.

The focus of the Budget this year did not stray from boosting investment. In presenting the tax proposal for the economy the finance minister laid major stress to convey the markets that India was transforming into an investment friendly destination.

"The deferral of GAAR for two years, rationalisation of capital gains at the time of listing of REITs and InvITs, a roadmap for reduction in the rate of and exemptions for corporate taxes, and re-emphasising a stable and predictable tax regime are encouraging," said Naresh Takkar, CEO, ICRA, the Indian arm of international rating agency Moody's.

Ball back in RBI's court

With the FM presenting a balanced budget addressing the concerns of both businesses and the middle class in the backdrop of strong domestic macroeconomic fundamentals and soaring expectations the focus of the policy now shifts to the Reserve Bank of India.

RBI had cut rates after defying calls for looser monetary policy last month and had held back further rate cut early this month awaiting the fiscal policy drift and fresher data on inflation.

The central bank is scheduled to hold its next monetary policy meet in the first week of April and though the Budget statement is expected to snip policy rate it may look at the risks of inflation going back again. Already the crude oil price is bobbing up and certain essential food item prices have firmed up.

Some, however, express doubt over a rate cut soon enough. Radhika Rao of DBS, said, “For monetary policy, there is a reiteration that inflation will be in focus under the new monetary policy framework and the RBI (with the policy committee) will seek to keep inflation below 6 per cent. Overall, the Budget is pragmatic and positive and we wait to see if the contents ticked all the boxes for the central bank to ease rates. Our initial sense is that the Budget as a stand-alone might not be enough  reason for an immediate rate reaction from the central bank.”

(Edited by Joby Puthuparampil Johnson)

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