Understanding Budget 2014

The finance minister Shri Arun Jaitley has just released the Budget for the remaining 9 months of FY
2014-15. With a decisive mandate in the recent elections expectations were high, perhaps too high
considering the ground realities.
Low growth rate does not allow for much growth in Tax collections
Inflation has been high for years and controlling it is priority which implies that Fiscal Deficit has to
be kept in check.
At the same time, growth needs to be boosted for Job creation (without increasing government
spending).
Welfare schemes and subsidies by the previous regime have put government finances in a bind. 44
paisa of every rupee goes into repaying old debt. The subsidy bill had reached alarming proportions.
I would like to look at this Budget in three major aspects
Fiscal Consolidation:
The FM has gone for a bold Fiscal Deficit Target of 4.1% and has set a target to bring it down to 3%
over the next three years. While subsidies have not been pruned much, he has tried to increase
productive spending. NREGA for example will continue but will be directed at building rural assets
largely aimed at irrigation.
An ambitious target of 58,000 Crore has been set for disinvestment. While UPA attempts at
disinvestment yielded poor returns, the current mood of stock markets may allow the government
to meet the target. But I hope the government will not stop at selling minority stakes in PSUs but
look at complete sale in at least some cases like Air India.
Limited government funds have been directed specifically at infrastructure. The funds for road
construction have been raised by 21% to 37,880 Cr. Again an ambitious plan for setting up 16 new
ports is welcome. Also PM Modis ambitious plan for 100 Smart cities has been kick-started though
with a modest budget allocation. This has been coupled with plan to create airports in smaller towns
and a focus on tourism.
Kick-starting Growth
Given the state of government finances, the FM has wisely focussed on private and foreign
investments for growth.
FDI caps in insurance and Defence have been increased to 49%. While it is welcome in insurance, in
defence 49% is probably not enough, it needed to be 74% or even 100% to get foreign firms to invest
in manufacturing and more importantly technology transfer.
Liberalized FDI norms and Taxation for Real Estate Investment trusts to increase investments.

Banks allowed to raise long term capital for infrastructure lending without being affected by CRR and
SLR norms.
Also to meet Basel III norms, Indian banks will require 2.4 lakh crores of capital which is clearly
beyond the scope of the government. So the FM has signalled that Banks will have to raise funds by
reducing government stake in the banks.
Budget as a Policy signal
Perhaps the best way to understand this Budget as first major policy signals from the new
government. What is the message it conveys.
Stable tax regime with clarity in tax laws as well reduction in tax related disputes/Litigation
Simplification of rules and processes (cutting red tape) in doing business
Gradual Shift from subsidies to productive spending (teach a man to fish rather than giving him fish)
Better state centre relations, which would be critical in rolling out GST and other reforms
I have not focussed on the smaller announcements and allocations which are dime a dozen in all
budgets. A few of those are worth mentioning
Small hike in It exemption limit. But more importantly a hike in 80 CC exemption and in Tax benefits
for home loans which encourages savings and home buying
5 New IITs/IIMs continuing the earlier government policy
All in all a good start, but the real test will be in implementation of intent and for those who were
expecting big bang reforms should look at Feb 2015.