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[NEW DEHLI] With the strongest election mandate in 30 years and oil prices sliding, Prime Minister Narendra Modi had a chance to quickly get India's finances under control in his first full-year budget.
On Saturday, several weeks after his party got crushed in a local Delhi election, Mr Modi chose a more incremental route with a wider deficit projection to boost growth in Asia's third-biggest economy.
He's spending more on infrastructure to spur an investment cycle, buying time for longer-term moves on taxes and subsidies to make the country more competitive.
India's financial health now hinges on Mr Modi's ability to kickstart projects, better target subsidies, increase asset sales and pass stalled legislation - objectives that in the past have fallen short of plans. Since taking office he's failed to win parliamentary approval for a bill to increase foreign investment in insurance, raising doubts about how much he can accomplish.
"It will disappoint people at one extreme but generally it was OK," Hugh Young, the Singapore-based Asia managing director at Aberdeen Asset Management, said of the budget.
"People were expecting a huge, huge, big bang raft of measures. It's been more along the pattern of what we've come to expect, a series of gentle measures."
Investors had mixed reactions, with the benchmark S&P BSE Sensex changing direction at least 12 times after Finance Minister Arun Jaitley concluded the almost 90-minute budget speech on Saturday. The index ended up rising 0.5 per cent. Bond and currency markets were closed.
The highlight was a fiscal deficit target of 3.9 per cent of gross domestic product - wider than the 3.6 per cent he committed to earlier, while down from 4.1 per cent the previous year. Other key steps included a corporate tax cut and more money for roads, bridges and power plants.
While the slide in oil prices since mid-2014 had given the government space to scrap diesel-price controls and increase tariffs on local natural gas, the administration in its budget didn't follow up with bolder steps to wind down fertilizer, cooking gas and liquid petroleum gas subsidies.
The missed opportunity leaves the fiscal deficit vulnerable should oil rebound, after a tumble in crude in excess of 40 per cent since June.
"India is in a sweet spot currently, but what happens when that window closes?" Tushar Poddar, a Mumbai-based economist at Goldman Sachs Group Inc., wrote in a note on the budget.
Also missing was any detailed timeline for pressing ahead with the enactment of a national sales tax - "disappointing," according to Deutsche Bank AG economists Taimur Baig and Kaushik Das.
Meantime, a record shift in funds to India's 29 state governments also leaves less cash for Mr Modi's federal government. The combined federal and state government deficit is about 6 per cent of GDP, about twice the average in Asia, according to Goldman estimates.
"The budget underscores our view that government finances are likely to remain a constraint on India's sovereign credit profile," Atsi Sheth, the senior vice president for sovereign risk at Moody's Investors Service, said in an e-mail. "Fiscal consolidation appears difficult to achieve even by a government with a considerable parliamentary majority and during a period of accelerating economic growth."
India's economy is forecast to expand as much as 8.5 per cent in the next fiscal year, the fastest pace among the world's biggest emerging markets. The finance ministry has cautioned, however, that those figures are based on a revised method for calculating gross domestic product, and that the economy is still recovering after a slowdown in manufacturing in recent years.
Despite the higher fiscal deficit target, Mr Modi appears to have done enough to allow central bank Governor Raghuram Rajan to continue reducing the benchmark interest rate.
Mr Rajan had said he was looking for "high-quality fiscal consolidation" in addition to softer inflation before he lowers the rate again following an unscheduled reduction to 7.75 per cent in January.
Mr Jaitley said he'd make legal changes to set up a monetary policy committee and set a target for the central bank to keep inflation at less than 6 per cent. Interest-rate swaps show investors expect about 75 basis points of rate cuts in India by the end of 2015, the steepest decrease after Turkey among 14 emerging markets tracked by HSBC Holdings Plc.
"It's very clear that there have been very limited populist measures announced and the focus is largely on the capital spending side," said Upasna Bhardwaj, an economist at ING Vysya Bank Ltd. in Mumbai.
"That bit is something which the RBI should focus on and that should continue the monetary policy easing cycle."
Softer inflation and a lower current-account deficit provided the government room to slow down fiscal consolidation and step up public investment, Arvind Subramanian, the government's chief economic adviser, told Bloomberg TV India.
"This does a very reasonable job of balancing a tight situation frankly," he said of the budget.
"Markets should view it as a job well-done rather than a breach."
Still, investors have reason to be cautious.
Opposition parties that control parliament's upper house have vowed to block Mr Modi's executive orders to ease land purchases, boost foreign investment in insurance and allow commercial coal mining. That doesn't bode well for approval of a national goods and services tax that Mr Modi wants to implement in April 2016.
While the 25 per cent jump in expenditure on roads, bridges and ports may look good on paper, implementation is key. Actual infrastructure spending in the year through March is set to rise 3 per cent, short of the 21 per cent increase budgeted a year ago.
Divestment is another area where the government's figures look optimistic. Even though asset sales this year reached only about half of the budgeted amount, Mr Modi plans to more than double the take in the year starting April 1.
"They've packed the budget pretty tightly hoping nothing bad happens and they can reach their disinvestment target," said Madan Sabnavis, chief economist at CARE Ratings in Mumbai. "They're relying on that. They've taken a lot of chances."
To reduce the subsidy bill, Mr Modi is expanding the use of biometric cards and direct cash transfers to ensure benefits go to the 59 per cent of Indians who live on less than US$2 per day. Even so, the decline isn't very significant given the fall in oil prices, said Jahangir Aziz, chief economist at JPMorgan Chase & Co. in Singapore.
"If oil goes back up, inflationary pressures go back up," Mr Aziz said. "Global conditions are weaker and easier than they were in 2014, and you're skipping the opportunity."