This Union Budget was riding high on expectations, signalling reforms — a cue from Economic Survey, active steps on disinvestment and realistic expectations of government revenues, both tax and non-tax. Of this list, the government has largely met expectations with respect to tax collections, remaining relatively muted on the other two! From a markets perspective, the Budget has ‘under-delivered’ on the ‘implementation-intent ratio’.
The message the government has sent out is that it can and will spend. The positive takeaway from the Budget is its push for consumption orientation, both rural and urban. Significant enhancement of expenditure programmes like NREGS and Bharat Nirman are expected to propel rural consumption — one of the key drivers of India’s economic growth in FY09. Likewise, the removal of surcharge on personal income tax will raise personal disposable incomes and likely manifest in higher consumption.
The financing of these expenditure programmes will almost entirely be through higher market borrowings. The implication of this for monetary policy thus entails maintaining easy liquidity conditions for longer time than earlier envisaged. The government bond yields may re-test the recent highs with frontloading of additional borrowing.