And the strong Modi Government's first budget, designed to lift the economy above its low growth stagnation to at best between 5.5 to 6 per cent, may run into hurdles on fiscal deficit control and in macro-economic management generally, if inflation is not tamed, revenues do not pick up as ambitiously projected, and pending projects are not swiftly moved into operation.

In addition, there are new risks from global uncertainty, related to depressed growth outlook for USA and geo-political developments impacting on financial market and oil prices. All these could have negative spillover effects for emerging and other developing economies.

After an unexpected first quarter economic contraction in US by 2.9 per cent due to harsh winter and a struggling housing market, growth in the world’s largest economy and global growth itself, has been again downgraded in the IMF’s Economic Update of July 24.

BRIC nations with their own growth slowdown will also be affected by the evolving harsh environment. Their growth is projected to decrease to 4.6 per cent in 2014 and recover to 5.2 per cent in 2015. In other words, economies largely dependent on exports to USA and China could be affected.

For India, growth is kept unchanged at 5.4 per cent in fiscal 2015 and 6.4 per cent in fiscal 2016 (as in April) while China’s has been marginally reduced to 7.4 and 7.1 per cent for 2014 and 2015 respectively. In India, IMF says, growth appears to have “bottomed out, and activity is projected to pick up gradually after the post-election recovery in business sentiment, offsetting the effect of an unfavorable monsoon on agricultural growth.”.

In China, limited and targeted policy measures have been taken to support activity in the second half of the year, including tax relief for small and medium enterprises, accelerated fiscal and infrastructure spending, and targeted cuts in required reserve ratios. As a result, growth in 2014 is projected to be 7.4 per cent but likely to moderate to 7.1 per cent in 2015, as the economy transitions to a more sustainable growth path, according to IMF.

Geo-political tensions would keep investment weaker for longer in Russia while Brazil faces tight financial conditions and continued weakness in business and consumer confidence. The broad underlying message of the Update is that 2014 is not turning out to be the year for the much-hoped for strong revival for both advanced and emerging nations.

IMF lists increased geo-political risks leading to sharply higher oil prices, higher-than expected US long-term rates and a reversal of recent risk spread and volatility compression. Lack of robust demand in advanced economies and for some emerging market economies, negative growth effects of supply-side constraints and tightening of financial conditions could be more protracted.

US economy’s growth would be down to 1.8 per cent from the 2.2 per cent, estimated earlier. Global growth itself would stand reduced to 3.4 per cent and 4 per cent for 2014 and 2015 in PPP terms or 2.7 and 3.3 per cent on market-based exchange rates.

In addition, most economies, especially emerging, have to contend with the planned exit from zero interest rates by the U S Federal Reserve by mid-2015. Fed is to complete tapering of asset purchases by October and then go by economic data, with particular attention to unemployment and inflation, in the early quarters of 2015 before launching gradual withdrawal of monetary accommodation.

The Federal Funds rate had been kept at near zero since the last quarter of 2008. As against the widely-assumed start of rate revision by spring 2015, the caveat from Fed Chair Janet Yellen is that they must press on with monetary stimulus if “significant slack” remained in labour markets and inflation was still below the 2 per cent target.

In his maiden budget, astute Finance Minister Mr Arun Jaitley has largely embraced continuity rather than change, maybe on pragmatic and political considerations - but his first fiscal exercise is not lacking in notable initiatives for infrastructure financing, farming and rural markets and manufacturing. He has also kept up with furthering the UPA’s social welfare programmes.

Pro-reformers felt disappointed that the budget did not go as far as it should have commensurate with the high expectations Mr Modi himself had raised over months of unremitting advocacy of action oriented development and institutional reforms. A clear road map for reforms and growth was seen as a missing ink.

Two months into office, Mr Modi has, however, positioned himself into an overlord, to guide the destinies of 1.3 billion Indians. He can set the pace of change as he shrewdly seizes opportune moments. He has begun to pick up the threads in international diplomacy. At home, the Prime Minister is making calculated moves to see his party, BJP, become invincible all over, from the Centre to the periphery, to secure a long stretch of political authority to reshape India closer to the party's ideology

Meanwhile, Mr Jaitley has made the right noises with his commitment to peg the fiscal deficit at 4.1 per cent of GDP, as in the interim budget of erstwhile finance minister Mr P Chidambaram. For this, he relies on a high growth of tax revenues as well as on a massive haul of non-tax receipts including PSU disinvestments.

Questions remain about Mr Jaitley’s assumptions of the order of a 20 per cent rise in tax revenues which is dependent on a strong growth revival in the rest of current fiscal and about holding the deficit at 4.1 per cent of GDP, with no visible action on lowering the level of mounting subsidies

The Finance Minister believes that the budget impetus to manufacturing sector and FDI openings in defence, insurance etc and direct tax exemptions should all help to kick-start the investment cycle and raise the growth rate.

Many reform proposals are in the air but two months since the Modi takeover, there has been no vigorous push for any structural reform and the Government seems to be in no hurry to act, possibly avoiding risks before elections in states like Maharashtra. Even changes in the land acquisition law and labour enactments, of considerable importance for infrastructure building and jobs, have not gained traction. On subsidies, the indication is that if there are no oil sector shocks, Government would be able to decontrol diesel fully and cap subsidised LPG cylinders “at a more realistic level”.

Overall, the Modi Government seems to be guided by caution, which makes political sense, especially in the light of its bitter experience after a steep hike in rail fares and freight. Even disinvestment, one of the largest sources of non-tax revenue budgeted for, had been played down in the budget speech. (IPA Service)