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Can Narendra Modi’s Maiden Budget Revive India’s Economy and Match the Great Expectations?

Narendra Modi’s first budget was a step in the right direction butlacked the large-scale radical changes needed to tackle the true scale of India’s economic problems. 

Good Days Are Coming

In May this year Narendra Modi led the Hindu nationalist Bharatiya Janata Party (BJP) to a crushing victory over the Congress party to become India’s first ever backward caste Prime Minister. An exuberant election campaign saw him pledge to rein in India’s soaring inflation, revive growth, improve infrastructure, and create jobs for the one million young Indians entering the labour market every month. Modi’s popularity now exceeds even that of Mahatma Gandhi, and the expectations of a population who believe he will bring Acche Din (Good Days) are high.

A Yawning Economy

But Modi has inherited a dire economic situation from his predecessors. Although in the years since winning independence from Britain in 1947 India’s political and social achievements have been impressive – seeing caste hierarchies slowly diminish, a successful establishment of democracy, and secured national unity –, poverty has continued on a massive scale. Around a third of the world’s poor live in India, and a third of India’s 1.1 billion population is living in acute poverty.

And while the Indian economic reforms of the 80s and 90s facilitated an average growth rate of 6% over the past 30 years, with a peak of 9% in 2010-2011, the last four years have seen the BRIC country’s economy stall. Alongside chronic under-employment, strict regulations and bureaucracy have blocked foreign investment, fiscal deficit has been hit by extensive subsidies, and prices have risen along with soaring inflation and interest rates. GDP has faded to less than 5% for the past two years.

A Step in the Right Direction

To set India back on the road to sustained economic growth, Modi’s first, and highly anticipated, budget needed to balance short-term relief for India’s poor with longer-term radical reform to revive the economy and build for the future. It also needed a plan for labour-demanding growth to benefit the poor in the longer term.

But although the budget, presented by Finance Minister Arun Jaitley in July, was a step in the right direction including measures to improve infrastructure, reform tax, and to grow employment, entrepreneurship, and foreign investment, it lacked the large-scale radical changes that are needed to tackle India’s bigger picture.

Attempts at wealth redistribution and job-creation were present, with an increase in the income tax exemption limit to help the lowest-income workers. Infrastructure projects were announced in line with election promises, focusing in particular on railways, airports and roads. And targets were set to enhance growth and infrastructure in the agriculture sector, improving output, employment and education. A Congress-initiated rural job-guarantee scheme, to provide 100 days of paid employment a year, will become more focused on asset creation.

But whilst it was announced that subsidies (specifically for food and petrol) would be better targeted, Jaitley also confirmed the government would continue spending: he aims to maintain India’s fiscal deficit at 4.1% this year and the next, only seeking to cut it to 3.6% by 2016, and then to 3% the years following. This is the area where more radical (and perhaps more unpopular) choices are most needed.

Open for Business?

Offering a small sign that India is opening its doors to the rest of the world, a range of measures were announced to attract the foreign investment India so needs, including a lift on caps on foreign investment in the defence and insurance sectors from 26% to 49%, and plans to allow foreign investment into India’s railway infrastructure (one of the largest in the world). But the budget failed to amend the 1962 retrospective tax that allows the government to levy tax on merger and acquisition deals involving overseas companies, which has recently created furore among foreign investors. More was certainly expected in light of Modi’s achievements in encouraging foreign investment in Gujarat where he was previously Chief Minister for thirteen years.

Jaitley commented: “It would not be wise to expect big changes 45 days after the government took office”. Indeed, one can only hope that this budget is about consolidation before the government sets about its real changes. But it is sure that this cautiously pragmatic budget does not live up to the exuberant expectations. As is so often the case in contemporary democracies, the post-election practice has not matched the pre-election rhetoric.



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