India’s Fiscal Fortune

CAMBRIDGE – Indian Prime Minister Narendra Modi's government must be feeling lucky. The decline in world commodity prices, led by crude oil, has made managing the national budget easier. And now, after the Central Statistics Office revised its methodology for calculating GDP data, that task has become easier still. According to the CSO, as a result of the methodological change, annual output growth in the second quarter of 2014 stood at 8.2%, up sharply from the original estimate of 5.3%.

Based on the revised GDP figures, India is expected to average 7.4% growth in the fiscal year ending March 2015. Moreover, the country is projected to grow at an 8-8.5% rate in the next fiscal year. No budget changes could generate such a marked, cost-free acceleration in growth. It is fair to say that the usually staid statistics department stole the thunder from this year's budget.

Nonetheless, Finance Minister Arun Jaitley's budget succeeds on several fronts – not least in its alignment of vision and implementation. Specifically, it advances the government's vision of a pro-growth agenda that enhances the ease of doing business in India, while targeting better delivery mechanisms for welfare schemes.

On the expenditure side, the budget is expansionary, scaling up investment spending dramatically, introducing new welfare programs, and increasing credit for various sectors. While there is no significant effort to cap spending on some of the largest fiscal programs, including the National Rural Employment Guarantee Act (which guarantees 100 days of wages to rural households) or the fertilizer subsidy, measures to improve implementation and reduce leakage are being put in place. Though the budget mentions disinvestment in loss-making public-sector units, the budget conveys no sense of urgency on this front.