In the face of threatening global financial squalls, the Budget provides credibility, a steady course for steering the economy, and welcome improvements in tax administration. The market initially plunged during FM Arun Jaitley’s speech but recovered when he stuck to his fiscal consolidation schedule, outlined ways to end retrospective taxation (and settle big outstanding cases), avoided anticipated changes in service tax and capital gains tax, and outlined ways to greatly reduce tax disputes. The big risk ahead is not domestic: it is that foreign investors will pull billions out of India in the current emerging markets panic. They will be reassured by Jaitley’s measures on ending “tax terrorism” and sticking to the planned reduction of fiscal deficit to 3.5% of GDP despite huge pressure to postpone targets to finance his 15.3% increase in public investment. This fiscal prudence opens the way for interest rate cuts by the Reserve Bank of India, maybe within a few days. The third Budget of a government is often its last chance for radical reform. This Budget has no radicalism. It reflects the Economic Survey’s plea for “persistent, creative, encompassing incrementalism”. Fiscal space has not been created for giveaways in the past two Budgets of the NDA government, a political risk. Rahul Gandhi will not be able to call this a suited-booted Budget. The ultra-rich will pay an additional income tax surcharge of 3%. An additional tax of 10% will be levied on dividends over Rs 10 lakh. All cars will be hit with an infra cess ranging up to 4% for luxury cars. Jewellery will bear higher tax. The securities transaction tax on options has been tripled. Jaitley will use these funds to ensure electricity to every rural household, a pukka road to every village, and cooking gas cylinders to 5 crore poor households in the next two years. A new cess of 0.5% will be levied on all services to fund agricultural schemes. Loans to small and medium enterprises under the MUDRA (Micro Units Development and Refinance Agency) scheme will expand from 1 crore to 1.8 crore borrowers next year. A record Rs 38,500 crore will be spent on MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) programmes. Government spending will emphasise agriculture, rural infrastructure and health. Jaitley’s proposed Aadhaar Bill will eliminate court objections to using the ID for a major shift from leaky, corrupt and wasteful subsidy schemes to cash transfers into the bank accounts of the needy. A pilot project is planned for cash transfers in lieu of the fertiliser subsidy. Another proposed Bill will help resolve disputes in infrastructure publicprivate partnerships, provide guidelines for PPP renegotiation and create a credit rating system that reduces lending risks. Quality of Fiscal Deficit To Improve The main disappointment is that Jaitley’s reduction in corporate tax from 30% to 29% is limited to small companies and new manufacturing units and startups which won’t have any immediate profits anyway. He has merely tinkered with old exemptions, not slashed them. At this rate, he will find it difficult, probably impossible, to get corporate tax down to 25% by the end of his term. He has once again raised taxes sharply on cigarettes but exempted beedis. Since smoking causes cancer, this implies that Jaitley wants to save richer cigarette smokers from cancer but is happy to let poorer beedi smokers die by implicitly subsidising their cause of death. Jaitley has not seized the chance offered by the T20 World Cup to legalise betting on cricket and garner huge revenues from it. The RS 25,000 crore for bank recapitalisation is well below expectations, and could mean a slower revival of public sector bank lending. The tax amnesty to black money assets can encourage further such accumulation in anticipation of future amnesties. And dozens of changes in indirect taxes, supposedly to stimulate production, sit ill with Jaitley’s pledge to limit exemptions and exceptions. The disinvestment target has been cut from Rs 69,500 crore last year to Rs 56,500 crore, of which strategic disinvestment (meaning privatisation) is to be Rs 20,500 crore. Last year too strategic disinvestment was proposed but absolutely nothing was sold, and the government funked even listing companies for sale. This chicken-hearted approach does not raise high hopes of the government doing better this year. Spectrum sales are expected to fetch a whopping Rs 99,000 crore, which may be optimistic in today’s gloomy markets. The quality of the fiscal deficit is to improve: the revenue deficit will fall from a budgeted 2.8% of GDP this year to 2.3% next year, and the primary deficit from 0.7% to 0.3% of GDP. The distinction between Plan and non-Plan spending is to be abolished. A new medium-term fiscal framework will set fiscal targets as a range of figures, not an absolute figure. Whether this will improve transparency is unclear. The middle class will complain that Jaitley has not changed the income tax exemption limits. But he has raised the tax exemption for rent-payers from Rs 24,000 to Rs 60,000. Fiscal prudence means there is not enough to hand out sops to everybody. The big problems facing the economy are not domestic. Emerging markets are crashing in tandem with the Chinese slowdown. Deutsche Bank, Europe’s biggest bank, now has a price-book ratio of 0.4, as bad as that of Indian public sector banks. US bank profits are crashing. A major global slowdown seems on its way. If so, Indian exports may fall further, and Chinese dumping may increase. The mass exit of foreign portfolio investors can wound financial markets. If even a fraction of these fears come true, all Budget figures will become irrelevant. Instead of aiming optimistically for rapid growth, India may have to hunker down for sheer survival.