New Delhi: It has been a week since the Bharatiya Janata Paty (BJP)-led National

Democratic Alliance (NDA) government presented its first budgetenough time to

understand the intent and interests of the new dispensation, and to study the fine print.
Before that, though, it is important to understand the context in which the budget was
presented. For one, it came after 10 years of budgets presented by the Congress-led
United Progressive Alliance (UPA) government, which ignored growth and focused on
redistribution. The Indian economy grew to almost $2 trillion in size, but, by the end of
the 10-year period, was plagued by high inflation (brought about largely by the lack of
capacity across areas) and high interest rates. Worse still, a spate of corruption
scandals involving its ministers forced the UPA into a shell. The alliance did try to come
out of the shell in its last few months in poweran effort largely powered by then
finance minister P. Chidambarambut this was too little, too late. Finally, a rash of
imprudent actions by the tax administration spooked investors, domestic and foreign.
Meanwhile, the rash of spending resulted in a high fiscal deficit, equal to 4.5% of gross
domestic product (GDP) in 2013-14. The result was almost universal disgust with the
way the UPA had run things, not just among businessmen but also among the salaried
classes (inflation was taking its toll on them and diluting the famed India consumption
story) and the poorthe very focus of the UPAs entitlements Raj (they wanted jobs, not
handouts, and the government was creating very few of those). According to the
Institute of Applied Manpower Research under the Planning Commission, India saw
60.7 million new jobs being created between 1999-2000 and 2004-05; it only saw 2.76
million new ones being created between 2004-05 and 2009-10. An NDA government
ruled India between 1999-2000 and 2004-05 and memories of those days (some rosetinted by age as it usually happens, but many accurate) made many think that the BJP
would do the right thing by the economy if it came to power again. After all, it was that
NDA government which launched the disinvestment programme and invested in the $10
billion Golden Qaudrilateral project that aimed to connect the four metros as well as
other networks. The Quadrilateral was part of the National Highways Development
Project that connected parts of the country that hadnt been on the grid before. That,
and the mobile telephony boomagain, the result of a 1999 decision by the NDA to
move to a new revenue-sharing telecom regime that spurred growth in subscribers

produced the economic impact such rapid gains in connectivity are expected to deliver.
The new telecom policy of 1999 was announced in March of that year by an NDA
government that ruled India for a year, 1998-99. At the time, India had around one
million mobile phone users. By 2004, it had more than 35 million. The weight of these
expectations was on Arun Jaitley, the new NDA governments finance minister, when he
presented the budget on 10 July. He was expected to: make it easier to do business in
India; revive growth; create jobs; attack inflation; and bring down the fiscal deficit. And
depending on the economic leanings of the person one was speaking to, he was
expected to continue to fund the entitlement programmes of the UPA, or prune, even do
away with them, in an effort to cut government spending. Any analysis of the budget has
to begin by measuring how he fared on each of these dimensions, and then move on to
specific initiatives he announced. So, how did he do?
Doing business in India
Tax disputes were the central reason why many multinational companies decided India
was a tough place to do business. The most high-profile case was of Vodafone Group
Plc, which was asked to pay a witholding tax related to its acquisition of what is now
Vodafone India Pvt. Ltd from the Hutchison group (Hutchison was the seller and
Vodafone, the Indian tax department argued, needed to have withheld tax related to the
latters gain from the sale, even if this was of shares of companies not based in India,
although the underlying asset, the telco, was in India). Vodafone won its case in the
Supreme Court in 2012, but the then finance minister Pranab Mukherjee, retrospectively
amended a tax law allowing the government to still tax the transaction. The ensuing
controversy dented Indias image among global investors. The matter is in arbitration
now. Jaitley was expected to announce the repeal of the amended tax law in his
budgetand end the controversybut he stopped short of doing it, claiming the matter
was taking its own course. However, he did say his government wouldnt normally resort
to retrospective amendments to get its way, and announced the creation of a committee
to look at any new cases related to Mukherjees amendment. Still, his statement of
intent regarding retrospective changes in tax laws indicated a move towards enforcing a
stable tax regime, and this was bolstered by the reiteration of the governments

commitment to the goods and services tax (GST), which will create a unified Indian
market and, if some experts are to be believed, boost GDP by up to 2 percentage
points, and the direct tax code (DTC). Jaitleys budget was replete with several other
announcements on tax aimed at reducing the number of tax disputes, such as one
simplifying transfer pricing rules. And late in the evening of the day Jaitley presented the
budget, the government resolved its case with Fiat SpAs Indian unit over the payment
of excise duty on discounted cars being sold below their production cost. The change
ended months of uncertainty after the Supreme Court ruled that the excise would have
to be paid on the cost of production plus a notional profit and not on the transaction cost
if this was lower than the cost of production. The government clarified that it would
charge excise duty on such sales at the cost of transaction. In terms of foreign direct
investment (FDI), Jaitley raised the cap for FDI in the manufacture of defence
equipment and insurance to 49%, from 26%, in both cases. All this do make it easier
(and attractive) to do business in India, although investors expecting an outright repeal
of the retrospective tax on Vodafone are likely to have been left disappointed. Intent: A;
Delivery: BReviving growth
The Indian economy expanded by 4.7% in 2014-15, the second year of sub-5% growth.
The slowdown, from the 9%-plus peaks of the mid-2000s, can be attributed to several
reasons: the state of the global economy; lack of progress on large infrastructure
projects; high interest rates; and a decline in investment. The Reserve Bank of India, or
RBI, has kept interest rates high on account of high inflation and the seeming
unwillingness of the previous UPA government to address the fiscal deficit (in general, a
high fiscal deficit could mean high inflation), but more on the second later. As for the
first, Jaitleys budget did have several measures designed to tackle inflation, including
the creation of an effective price stabilization fund, a so-called protein revolution (much
of food inflation can be tracked back to high demand for foodstuff other than cereals),
and signalled its intent to create a national agricultural market. Infrastructure received a
lot of attention (as had been expected) in the budget, but it is clear that the publicprivate partnership (PPP) model will remain the core of the governments thrust in this

area. Such models are contingent upon transparent pricing, efficient and independent
regulation, and clear dispute redressal mechanismsand all three are areas where
India can improve. Jaitley seemed to acknowledge this and said he would set aside
Rs.500 crore for the creation of 3P India, an institution that will help mainstream PPPs.
The budget has also acknowledged that funding is a significant problem for many
infrastructure developers, largely on account of the unavailability of long-term
infrastructure financing in India. It has sought to address this by creating Infrastructure
Investment Trusts and a so-called 5:25 structure that makes it viable for banks to fund
infrastructure projects. RBI is working on ways to make the 5:25 structure for loans
work. The structure envisages banks issuing 25-year loans but resetting them or
transferring them to another bank or financial institution after every five years.
Infrastructure Investment Trusts have been offered several tax incentives that should
make it easy for them to attract investments (there will be no long-term capital gains tax;
the trusts unit holders receive tax-free dividends). Jaitley also announced the creation
of six asset reconstruction companies. The government followed up by saying two
would be devoted exclusively to cleaning up bad debt in the power and roads sectors.
According to government estimates, while around 28,000 megawatts (MW) of thermal
capacity in the country is stranded due to reasons such as the inability of state
electricity boards to purchase power, 260 PPP road projects worth Rs.60,000 crore
have been stalled due to various reasons. The efficacy of many of these measures will
depend on how they are implemented, but theres no denying the fact that they are wellintentioned initiatives that could have the desired result. Intent: A; Delivery: A
Creating jobs
India adds 12 million workers to its labour market every year. In an attempt to train
these workers, most of whom do not have any skills, Jaitley announced the creation of
Skill India, a programme that clubs together various existing schemes across ministries.
He also proposed changes in the Apprenticeship Act, so as to make it easier for
companies to take on and train workers. The move follows a similar one by the BJPruled state of Rajasthan. In the past month, Rajasthan has cleared amendments to
three key labour laws: the Industrial Disputes Act, the Factories Act and the Contract

Labour (Regulation and Abolition) Act. The amendments, once passed, will
fundamentally alter the purview of the existing Union government labour laws in
Rajasthan and make it more employment-friendly. The fourth, an amendment of the
Apprentices Act of 1961, is awaiting clearance by the state assembly. The budget also
sought to create jobs by focusing on start-ups: Rs.10,000 crore to promote start-ups
that focus on delivering products and services to small and medium-sized businesses.
Another Rs.200 crore will go to establish a technology centre network that will promote
innovation and entrepreneurship in agri business. Jaitley set aside Rs.100 crore for a
rural entrepreneurship scheme. And Rs.200 crore will go towards developing young
entrepreneurs from underprivileged backgrounds (or from the so-called scheduled
castes). The way the Rs.10,000 crore fund-of-funds aimed at start-ups focused on the
domestic market will work isnt clear, but it could be just the cataylst the Indian
entrepreneurial ecosystem needs. Alternatively, it could be just another government
fund managed by a retired bureaucrat. Intent: B+; Delivery: C
Fighting the fiscal deficit
The expectation of several right-leaning economists was that the budget would crack
down on subsidies. That was always going to be unlikely in a year when states such as
Maharashtra and Haryana go to the polls, but Jaitley did announce the creation of an
Expenditure Management Commission that would review the allocated and operational
efficiencies of government expenditure to achieve maximum output. In plain English,
the commission will try and remove unproductive and ill-directed subsidies. Indeed,
Jaitley added in his speech that the government would overhaul the entire subsidy
regime, but would protect those who need to be protected. Interestingly, Jaitley chose to
stick to the ambitious 4.1% of GDP target for the fiscal deficit that Chidambaram
presented in his interim budget in February. The math behind Jaitleys target is still not
clear (as that behind Chidambarams wasnt). Jaitleys budget raises total expenditure
by Rs.31,678 crore from the interim budget, and sees tax receipts lower than those
envisaged in the interim budget. Non-tax revenue, though, is higher by Rs.31,179 crore.
This includes dividends from state-owned companies, and proceeds from sale of
telecom spectrum and disinvestment. The government has budgeted receipts of

Rs.63,425 crore from disinvestment. All these are plausible numbers. The one that isnt
is the almost 17% increase in net tax revenue over 2013-14. Any lapse on the tax front
could see Jaitley missing the fiscal deficit target. Still, he is a brave man to have taken
it. Intent: B+; Delivery: B- With 28 new schemes involving an outlay of Rs.100 croreto
be fair, it is likely even that will not be spent by some in the remaining eight months of
the fiscalthis budget also had something for almost everybody. In addition, it made all
the right noises about everything:

subsidies; growth; banks (fewer,stronger state-

owned banks); the fiscal deficit; and small savings. If it lacked anything, perhaps, it was
a central unifying theme, a big picture of sorts.