Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Most Indians are getting a tax break, thanks to Prime Minister Narendra Modi's botched demonetization program. 

A halving of the tax bill for the lower middle class and a 5 percentage point rebate for most companies should go some way to help steady consumption and employment, both of which were hurt by the Nov. 8 ban on high-denomination cash.

Those cuts, plus a reduced capital-gains tax on property and a promised increase in affordable housing, lit up shares of real estate, cement and finance stocks after Finance Minister Arun Jaitley's annual budget, which also managed to placate jittery bond investors with its restrained forecast for government borrowing next year.

In a nutshell, Modi will pare income and profit taxes, spend a record 3 percent of GDP on infrastructure, and yet keep the budget deficit unchanged at 3.2 percent of GDP in the fiscal year that starts April 1. It's possible that he's overestimating the economy's potential to spring back from the cash crunch. Or he's expecting wonders from the uniform goods and services tax that will replace most indirect levies next year.

This Helped Set The Tempo
A lower-than-expected sovereign borrowing program in India's budget made investors happy
Source: Finance Ministry
*Budget announcement

For now, though, investors are giving Modi the benefit of the doubt. The rupee appreciated by as much as half a percent. Asset managers are happy to be exempted from an indirect transfer tax, which would have sent many India-focused offshore funds packing.

As expected, Jaitley offered a mix of carrots and sticks to encourage digital payments, including a proposal to ban political parties from accepting more than $30 in cash donations. However, it isn't immediately clear whether the budget will also revive stalled corporate investment and flagging credit. To some extent, a sensible fiscal policy and lower interest rates should help ease the pain for both overextended companies and undercapitalized state-run banks.

Given New Delhi's resource constraints, it's perhaps the least bad of available options.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Note: Considering the original deficit targets of 3.5 percent of GDP for this fiscal year and 3 percent for next, on average, the government is delivering a little bit more belt-tightening than it promised.

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