Risk averse. That is the shortest way to describe the finance minister P Chidambaram’s budget for 201-314. Faced with the multiple challenges of reviving a sagging economy, reining in the twin deficit (fiscal and current account) and propitiating large votebanks in the last regular budget before elections, he has preferred to avoid taking any chances, taken care not to tread on unsuspecting toes and stuck to his prescription of “prudence, restraint and patience”. While paying lip service to every political constituency and populist schemes, he has not lost sight of the imperatives of sound economic management. He made all the right noises and put no wrong foot forward.

On the flip side, the budget looks like a patchwork of good ideas and initiatives rather than a coherent document informed by an overarching vision. While it has something for everyone, it offers no strategy to kickstart the growth and pull the economy out of the morass in which it has fallen.    

The key highlight of the budget is the evidence of fiscal discipline. Mr. Chidambaram has managed to contain the fiscal deficit at 5.2 per cent of the GDP this year by pulling the purse strings in the latter half and promised to bring it down further to 4.8 per cent next year. Revenue deficit - the real villain - is estimated at 3.9 per cent this year and 3.3 per cent next year.

Despite the disastrous budget by Mr. Pranab Mukherjee, ballooning of subsidies and the collapse of economic growth, the fiscal deficit for 2012-13 is just 0.1 per cent of GDP more than the original target, thanks to very aggressive expenditure cuts, mostly in development and defence. International rating agencies have been watching government finances closely and had threatened a rating downgrade if deficit was not reined in. The budget numbers should help prevent a sovereign downgrade.

Yet it would stretch credibility to take the budget estimates on deficit at their face value. The secret of the projected lower deficit of 4.8 per cent of GDP for 2013-14 lies in some optimistic assumptions both about revenue and expenditure. The former are overestimated, and the latter are underprovided.

While the economy is barely out of the woods (December 2012 quarter GDP growth was 4.5 per cent), the finance minister has budgeted a 21 per cent hike in revenues which includes a 19 per cent increase in tax revenues and 32.8 per cent increase in non-tax revenue. Tax revenue in 2012-13 is below the original estimates, and any organic growth beyond 15 per cent is dicey, assuming 6 per cent growth, 6 per cent inflation and 1.25 times the tax buoyancy. If growth remains below the projected level, so would the tax revenue. Mr. Chidambaram expects over Rs. 55,814 crore from disinvestment (including Rs. 14,000 crore from selling government stake in non-government companies) and over Rs. 40,847 crore from telecom spectrum. He will need lot of luck with these numbers, if past experience is any guide.

The finance minister’s tax efforts have been directed at those who can pay. He has imposed a 10 per cent surcharge on individuals with a taxable income of Rs. 1 crore and more, while offering token relief to middles classes. Domestic companies with a taxable income of Rs. 10 crore or more will now pay surcharge at 10 per cent instead of 5 both on earnings as well as the dividends they distribute, and foreign companies in higher tax bracket will pay surcharge at 5 per cent instead of 2 per cent. Imported luxury cars, yachts, motor cycles as also SUVs, cigarettes, upmarket cell phones etc. will cost more. He would have done better to expand the tax base rather than squeezing the current taxpayers more, but the fact remains that those asked to pay are not in a position to complain.     

On expenditure side, the shadow of politics looms large. Like a benevolent uncle distributing candies, Mr. Chidambaram mentioned by name almost all political constituencies (farmers, women, minorities, youth, workers in unorganized sector) as also pet schemes of the UPA chief Sonia Gandhi and held out a lollipop of generous allocations. How much of this allocation is actually spent and what part of it reaches the purported beneficiaries is anybody’s guess.

So, after a sharp expenditure compression of Rs. 60,000 crore in 2012-13, the FM has budgeted a 16.9 per cent hike in 2013-14 expenditure - a growth last seen in 2010-11 when economic growth was 9.3 per cent as compared to about 6 per cent in 2013-14.

What is significant is that it will be difficult to keep a lid even on this bloated expenditure. The biggest challenge, of course, will be in the case of subsidies. This year, the one item on which expenditure has not been controlled is subsidies, which have overshot the budget by a huge Rs. 67,000 crore. Yet the finance minister expects subsidies to fall below 2 per cent of GDP, a figure last seen before the Lehman crisis. We could assume therefore, that diesel prices will keep rising in small doses for the rest of the year. Even then, cutting subsidies on cooking gas and kerosene is going to be a big challenge. The outlay of Rs. 90000 crore for food subsidy may prove inadequate. According to Mr. Ashok Gulati, chairman of Commission for Agricultural Costs and Prices, the Food Security Bill if enacted (as promised by Mr. Chidambaram) will need Rs. 6 lakh crore over three years. The fertiliser subsidy may overshoot budget estimates unless urea prices are hiked.

Mr. Chidambaram rightly identified the current account deficit (CAD) on the external account as an even bigger challenge than the fiscal deficit. Driven by high oil prices and huge gold imports, the dollar deficit has greatly increased India’s vulnerability to external shocks and its dependence on foreign capital inflows. Winning and retaining confidence of foreign investors has assumed crucial importance, if only to avoid credit rating downgrade with serious consequences for the corporate sector and capital markets.

The budget, therefore, naturally contains several sops for the FIIs. FIIs will be allowed to participate in the exchange traded currency derivative segment to the extent of their rupee exposure in India. They will also be permitted to use their investment in corporate bonds and Government securities as collateral to meet their margin requirements. SEBI will simplify the procedures and prescribe uniform registration and other norms for entry of foreign portfolio investors.

But the real change may lie in the reclassification of FII inflows. The needless confusion between FII and FDI has been cleaned up. Foreign investments of 10 per cent or less in a company will be treated as FII and with more than 10 per cent as FDI. The finance minister said a committee will be constituted to examine the application of the principle and to work out the details expeditiously. This is expected to create some more room for FII investment. Currently, various regulators have placed caps on FII holdings in the sectors regulated by them.

Alas, the fine print of the Finance Bill contains some provisions that spooked the market. As regards foreign investors' claims under various tax treaties, the Finance Bill states that a tax residency certificate will be a necessary but not sufficient condition for allowing such claims. Thus, for instance, a Mauritius government tax residency certificate would not be enough to avoid paying taxes. The government later said it would issue a clarification if need be, but the damage is done. We should not be surprised if the revenue department uses this as a handle to invoke "look through" rules, even though the implementation of the General Anti-Avoidance Rules, or GAAR has been deferred to April 2016.

There is more in store. In the case of GAAR, while the onus of proving tax avoidance was put on the taxman after the Shome Committee examined the matter, the Finance Bill puts the onus back on the assessee. And, despite the hope generated by the Shome Committee’s recommendations on retrospective taxation, the budget is silent on this big sentiment-dampener.

The finance minister realizes that reviving investment is crucial to restoring the growth momentum in the economy. The restoration of investment allowance is an incentive for the companies to set up new units or expand capacities within the next two years. The message is: ‘Don’t sit on cash. Start spending on expansion or cough up more tax.’ Whether they will take the bait is another thing. Tax incentives can work, at best, at the margin. They cannot make up for absence of business confidence, which is lacking in the current policy environment. Moreover, the two-year time limit to avail of the incentive goes against power, metal and infrastructure companies, whose projects take longer to complete.

Massive investment in infrastructure is the key not only to revive economic growth but also to improve productivity in the economy and creation of employment. The budget provides fresh impetus to financing of infrastructure by additional bond issues, enhanced credit, and by setting up dedicated funds to allow capacity creation in roads, ports, power, petroleum and urban development, among others.

While addressing the core fiscal task, the finance minister has done well to devote himself to specific economic objectives. The coal sector is likely to be opened up to PPPs, as petroleum exploration was several years ago. The proposal to review the oil and gas exploration policy to move from production-sharing to revenue-sharing contracts is a major policy shift, and champions long-pending reforms in the energy sector. A policy framework for shale gas exploration should encourage overall energy production, as well as foreign investment in the sector, hitherto muted. For savers, he has mooted inflation-indexed bonds that will at least protect savings of the middle class.

Overall, the finance minister deserves to be complimented for avoiding adventurism either of political or economic variety and striking a delicate balance among various compulsions. The problem with this kind of tight budgeting is that in the case of one slip - if the spectrum auctions flop again, if US reins in quantitative easing, if Israel attacks Iran, if EU debt crisis worsens again - the entire knitting starts to unravel.

This means the finance minister needs the entire government to back him. The Budget is just a statement of intent. If it is to work, the cabinet needs to clear projects, the taxman’s adventurism needs to be tempered and the states need to agree on a GST that is not almost useless. That is a tall order.