Second acts often surprise. The landmark budget presented in 1997 by P. Chidambaram had come after a modest attempt the year before. The same can be said of the second Yashwant Sinha budget in the year 2000. Both had an impact far more than the tax reductions that people remember them for today; they gave new direction to the economy.

Arun Jaitley has followed this script. His first budget had been insipid. Expectations ran high that the second budget of the Narendra Modi government would be of a different quality. Jaitley has met these expectations.

There are three broad issues worth noting.

One, this is the first budget that has been designed against the backdrop of the new fiscal federalism. The commitment to transfer more tax resources to the states means that the finance minister has had to work with a near stagnation in tax revenues. Other sources of revenues such as dividends paid by public sector banks or telecom spectrum charges will not grow. New Delhi will operate under a stringent resource constraint.

The natural consequence of this will be the shift of greater spending responsibilities to the states. The process had already begun in a modest way in the interim budget presented by Chidambaram in February 2014. The budget numbers show the acceleration of such decentralization, as, for example, the spending budgets of several ministries that deal with state subjects have been cut while eight centrally-sponsored schemes will no longer get central funding.

Two, Jaitley has decided to slow down the pace of fiscal consolidation. This newspaper has never quite understood the position of the finance ministry on this score. The claim that the Indian economy is in a sweet spot does not gel with the simultaneous plea for fiscal activism.

Budget 2015 will have a fiscal deficit that is 0.3 percentage points higher than what the earlier trajectory of fiscal consolidation had promised. What this in effect means is that Jaitley will generate around Rs42,000 crore of extra borrowed resources, given his assumptions about nominal output in fiscal year 2016 (this figure incidentally equals the increase in budgetary support to the railways and for road building). In a way, this borrowing substitutes for the revenue loss to the Centre because of higher devolution to states.

What is good is that capital spending is being pushed up while revenue spending is being held back. Such expenditure switching was desperately needed. The much discussed need for higher public investment should be understood against this backdrop, though the budget speech suggests that much of the higher public spending will be done using the cash reserves of public sector companies and leveraging the balance sheets of new infrastructure finance institutions that will get equity from the government.

Three, Jaitley has spoken about several important structural reforms that will create a new institutional base for the Indian economy. The Economic Survey published on Friday had already downplayed the expectations about big bang reforms. However, there was enough in the budget speech on tax reforms, the new monetary policy framework, the creation of a national market for farm produce, a bankruptcy law, creating liquidity out of gold holdings, governance of banks and restructuring the welfare system. It would have been good if there were more signals about issues such as the creation of a fiscal council that will act as a budgetary watchdog or the ways to address the toxic mess in the balance sheets of public sector banks.

Analysing a budget is sometimes compared to the way the blind men of Hindoostan try to describe the lumbering elephant in front of them by touching it. Or perhaps a more modern analogy is needed: The online world has been agog with excited discussion about the dress that everyone sees in different colours.

Budget 2015 has the right strategic elements in place. It is focused on asset creation, overdue institutional change and fiscal federalism. The decision to slow down on fiscal consolidation is jarring, given that the extra borrowing space it gives the Centre is modest in the larger scheme of things (and how we wish the finance ministry tell us about what its assumption of the fiscal multiplier is).

Yet, Jaitley deserves credit for presenting one of the best budgets since at least February 2007.

Does the Budget signal the start of structural changes the Indian economy needs? Tell us at views@livemint.com

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