The big debate in the countdown to the budget was whether Finance Minister Arun Jaitley will stick to the path of fiscal prudence despite the economy’s needs for a booster dose of public spending. The answer, as it turned out, was a clever balance of spending and catering to populist needs while minimising fiscal slippage.

The fiscal deficit, the difference between the government’s total receipts and expenditure, was Rs 5.95 lakh crore in 2017-18, or 3.5% of GDP, which was higher than the forecast of 3.2% but the same as 2016-17. The 2018-19 budget unveiled in parliament on Thursday, however, hopes to rein in the fiscal deficit at 3.3% of GDP.

The slippage for 2017-18 and the projection for 2018-19 are in line with analysts’ estimates, but Jaitley remains optimistic.

“This budget blends fiscal prudence with the requirements and needs of the economy today. This year there was a series of circumstances; for example, only 11 months of goods and services tax collections, expenditure on necessary reforms which increased spending,” Jaitley said.

“However, we also covered up a lot through increased direct tax collections, and higher-than-expected income from disinvestment …Next year I will have 12 months of revenue for 12 months of expenditure.”

Most analysts had factored in a deviation from the government’s path of fiscal consolidation. One reason was the government’s massive recapitalisation programme for banks announced before the budget to address the economy’s twin balance sheet problem, of growing non-performing assets (NPAs) of banks and the mounting debts of the corporate sector.

Over 2017-18 and 2018-19, the government will spend Rs 2,11,000 crore on a recapitalisation programme for banks. Although Rs 1,35,000 crore will be through recapitalisation bonds, which will be neutral to the fiscal deficit as the bonds issued by the government will be subscribed by public sector banks, the government will still need to spend at least Rs 18,000 crore from budgetary allocations. Of this, Rs 8,000 crore will be spent in 2017-18.

The other reason why the government missed its fiscal deficit target was increased spending on the agricultural sector to appease the electorate as the country heads for 13 state elections and the 2019 general election over the next 12-24 months.

Jaitley is looking to balance the books through the re-introduction of the long term capital gains tax of 10% on gains arising from the transfer of listed equity shares exceeding Rs 1 lakh without allowing any indexation benefit. All gains up to January 31, 2018 will be grandfathered, but experts fear the impact will be felt on Dalal Street.

While many in corporate India held back their criticism of Jaitley’s populism, they expressed concern over the impact of the long term capital gains tax on markets.

“While the LTCG tax has been imposed, there is no tinkering with the Securities Transaction Tax, which makes India probably the only country in the world to have both taxes at the same time," said  B. Gopkumar, executive director & CEO, Reliance Securities.

"Grandfathering of cost prices for LTCG will prevent any knee-jerk reaction in stock prices but imposition of the tax is a clear negative for equity markets as far as sentiments are concerned.”

Markets reacted negatively to the tax, but Jaitley defended the decision. “There comes a time for the economy to take some difficult steps,” he said.

The one factor that could upset the government’s calculations is crude oil prices. It is normal practice for finance ministry officials to share the crude oil prices estimates on which budget has been formulated, but this year Jaitley chose to stay silent.

“I am personally not willing to share a view on where crude oil prices will move. Nobody predicted how it would fall and nobody predicted that it would increase. Having said that, there is a certain range that will keep us comfortable,” Jaitley said.

But the big question that remains is: Will the government manage to rein in its fiscal deficit in the year ahead given its ambitious spending plans?

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