In Arun Jaitley's Budget Today Test for Reform Zeal of PM Modi; Sensex Soars

Finance Minister Arun Jaitley, in a bright blue jacket, has reached Parliament House with the famous brown briefcase that holds the Modi government's first full-year Budget; he will present it at 11 a.m. today.

Many bill today's presentation as the most important since the early 1990s, when India launched economic liberalization. Mr Jailtey, 62, faces not only expectations of a huge population struggling for jobs, but also financial markets, which have run sharply on hopes of big bang reforms; the BSE Sensex has been the best-performing emerging market index in the world recently. (Read: 10 Key Expectations from Arun Jaitley's Budget)

On Saturday morning, the BSE Sensex jumped over 250 points in morning trade. But, analysts warn that equity markets could see a sell off of 6-8 per cent if the Budget is short on pro-growth measures. (Read: Stocks to track ahead of Budget speech)

Unsurprisingly, the build-up to Saturday's Budget speech has been dramatic, with some analysts calling it the "make or break" Budget.

India is already the fastest-growing major economy in the world, according to the new formula used to calculate GDP. But the finance minister knows that things have not improved on the ground. Investments for building new capacities have dried up, corporates continue to report a dip in profitability and the government has cut down its own expenditure to meet fiscal deficit target.

It's for these reasons that his chief economic advisor Arvind Subramanian said yesterday that the country is still a "recovering economy, not a surging economy".

In today's Budget, Mr Jaitley's biggest challenge would be to set aside enough money to kick start the economy without constraining the government's finances because rating agencies take a dim view of governments living beyond their means.

"The government has come to the view that public expenditure is now critical to get our infrastructure sector moving again, and to do that it has to find ways to put more money into the investment process without compromising on fiscal discipline," said Subir Gokarn, director of research for Brookings India.

The task is challenging, but Mr Jaitley has the comfort of low crude oil prices. India is dependent on imports to fulfil 80 per cent of its oil needs, but a crash in global crude oil prices has led to higher tax revenues and reduced expenditure on subsidies.

Investors will also be looking for big bang reforms that Mr Modi was expected to deliver swiftly, but have come in bits and pieces in the last nine months. Announcements on the implementation of Good and Services Tax or GST and sweeping reforms to labour, tax and land laws would be keenly awaited.

Mr Jaitley is also expected to rationalize subsidies, which cost 2 per cent of the GDP. Like last year, tax breaks for the salaried class are likely because the finance minister has often said that he is not in favour of burdening the middle class with more taxes. (Read: Budget: Income Tax Expectations From Arun Jaitley)

(With inputs from agencies)