Optimistic Indian budget for challenging economic times

Immediately after the much awaited budget was announced by Indian Finance Minister P Chidambaram, Indian shares went up by 0.35 percent or 67.7 points. Why? Because of some unexpected policy measures that he announced, also dubbed as flexible measures by some analysts.
A 16 percent rise in public spending was the most salient and the most talked about announcement by Chidambaram for the 2013-14 budget. The finance minister envisions that the rise in public spending will help spur the Indian economy which had been under the radar for sluggish growth recently.
Yet, an increase in public spending also seems to conflict with deficit reduction that should be on top of Indias fiscal agenda. "The growing deficits, fuelled by the government subsidies on essential items such as food and fuel, have triggered warnings of a downgrade of the countrys credit rating," said an article in the BBC on the matter.
But before jumping to conclusions about the judiciousness of Chidambaram, his other policy measure calls for an increase in revenue to finance the greater public expenditure. To be precise, Chidambaram has raised the tax charge for the richer Indians.
Domestic firms with an income of more than Rs100 million (Indian rupees) will have to pay additional surcharge, while those earning more than Rs10 million will also pay 10 percent more in taxes.
Such a design of fiscal management is said to lend some flexibility in managing the public ledger as theres room to cut down expenditure in order to keep the fiscal deficit in check. Theres a strong likelihood that the Indian government will not be able to meet revenue targets.
However, analysts are critical of how it will be capital expenditure - important for growth of an already slowed down economy - that will take the hit. "If he (Chidambaram) falls short in revenues, he can cut some of the plan (capital) expenditure, but that will again hurt growth," Barclays economist Siddhartha Sanyal was quoted by Fox Business.
With the possibility of meeting the revenue target appearing a tad optimistic, the ability to cut some planned expenditures here and there seems necessary. Right now, it is very important to contain Indias fiscal deficit, as failure to do so could mean India will become the first of the BRIC economies to have its credit rating downgraded.
There are hopes that Chidambaram might successfully be able to contain the fiscal deficit. "The direct priorities seem to be reining in the fiscal deficit and avoiding populist measures. The fiscal deficit numbers look doable," Sujan Hajra, chief economist at Anand Rathi, Mumbai-based securities firm told BBC News.
The critical point, however, is that the government achieves the fiscal deficit target without compromising on capital expenditure which is very essential to boost the growth rate of the country, which had remained disappointing for most of last year.