Modi unveils ‘revival budget’ for India
India’s government has unveiled its first budget, aimed at reinvigorating flagging growth in the emerging economic power.
The Hindu nationalist Bharatiya Janata party (BJP), led by Narendra Modi, won a landslide victory in May with a pledge to create jobs, rein in soaring inflation, balance public finances and improve infrastructure.
Modi’s reputation for effective, honest administration, built over more than a decade running the state of Gujarat, has won support in India’s business community. However Arun Jaitley, the finance minister, faces the tricky task of balancing the long-term need for structural reform, particularly of expensive subsidies for household items, with short-term protection of India’s poor, who have been hit hard by spiralling prices, Jason Burke wrote in The Guardian.
Jaitley told parliament that India’s 1.2 bln people were exasperated after two years of economic growth below 5% and had voted for change. The former lawyer promised to bring growth rates in Asia’s third-largest economy back up to 7-8%.
Amid a range of measures aimed at bringing in foreign funds, Jaitley announced that he would lift caps on foreign investment in the defence and insurance sectors but did not entirely remove the threat of retroactive taxation, a key concern for overseas businessmen.
A range of infrastructure projects – particularly railways, airports and roads – were also announced in line with pre-election promises. Subsidies would be better targeted, a long-mooted uniform national sales tax pushed through, new medical colleges set up and a range of initiatives launched to encourage participation in sports, the minister said.
Jaitley retained the fiscal shortfall target at 4.1% of GDP while leaving revenue and expenditure forecasts largely similar to an interim budget in February. At the same time, he unveiled plans to “overhaul” food and fuel subsidies to narrow the fiscal gap to 3% of GDP in 2017. He projected revenues will rise to 11.9 trln rupees ($198 bln), 1.9% more than the previous government forecast in February, boosted by higher asset sales. Expenditure will increase 1.8% to 17.9 trln rupees, with subsidies maintained at about 2.6 trln rupees.
Shubhada Rao, chief economist at Yes bank in Mumbai, said the budget was “a good beginning”. Other analysts said that although the broad thrust of the budget was positive, it lacked radical measures to tackle the big picture.
Senior opposition politicians accused Jaitley of stealing the policies of the ousted coalition government, which had been led by the centre-left Congress party. Sonia Gandhi, president of Congress, was quoted by television channels as saying the budget included nothing for the social sector.
Despite the slow growth of recent years, India is still seen overseas as one of the most attractive markets among emerging economic powers. But it is also a notoriously difficult environment for foreign businesses. The attraction of a potentially huge market is offset by bureaucracy, restrictions on investment, corruption, poor infrastructure and rising environmental problems.
Jaitley also announced a range of social measures, including funds to improve security for women in India’s cities amid a wave of sexual violence, including high-profile cases in the capital and other major cities in recent years. The budget was “almost a copy and paste of the interim budget” and “a lost opportunity” to detail bold steps to revive economic growth, Taimur Baig, director of Asia economics in Singapore at Deutsche Bank AG, told Bloomberg TV. “If they had some tough measures, Indians would have taken it. They have the appetite, they have given them the mandate, but somehow or the other the government didn’t follow through.”
Jaitley sought to manage expectations early on when presenting the budget to parliament, saying “it would not be wise” to expect big changes 45 days after the government took office. He pledged to bridge the fiscal gap by increasing revenues as a percentage of the economy, in part through expanding the tax base, while leaving subsidies untouched.
Stocks have gained 5.1% since Modi’s win on May 16, among Asia’s top performers in that time, on bets that the first parliamentary majority for a single party since 1984 will enable him to make tough choices.
“The mandate we’ve received may have sensationalised expectations, but we need to establish a careful balance to keep revival sustainable,” Commerce Minister Nirmala Sitharaman said in an interview with Bloomberg TV India. “This is the course we are on.”