India goes slow on big bang reform

July 14, 2014 - 12:31:59 am

NEW DELHI: The maiden budget from India’s new right-wing government has promised a return to high growth — but disappointed some who hoped premier Narendra Modi might use his thumping mandate to unleash radical change.

The Bharatiya Janata Party (BJP) government opted for small steps in last week’s budget, in what it called “the beginning of a journey” after winning in May the biggest electoral majority in 30 years.

While some economists felt Finance Minister Arun Jaitley should have been bolder, Deepak Lalwani, head of financial consultancy Lalcap, said it was not “realistic to have ‘big bang’ reforms so quickly”.

Jaitley pledged faster economic growth, tighter fiscal discipline, greater openness to foreign investment and revamped infrastructure. But he left intact $43bn worth of anti-poverty subsidies — raising questions about how he will meet ambitious targets to cut government overspending.

Jaitley’s predecessor P Chidambaram noted acerbically that after criticising the previous left-leaning Congress government’s subsidies as “mindless populism”, the new man in the job did not touch them. “Welcome to the real world,” Chidambaram remarked.

India’s hundreds of millions of poor are a vital vote bank, and the BJP and allies have their eyes on state elections this year. They control just eight out of 29 local governments, and anti-populist moves could alienate voters. Economists have long argued that India’s economic potential will only be unleashed when it curbs subsidies and ends suffocating regulation.

They also advocate relaxing rigid labour protection laws that discourage manufacturers from hiring, and easing complex land acquisition laws to boost industry. 

The budget left all these issues off the to-do list, although Jaitley said he hoped a long-awaited national goods and services tax (GST) to increase inter-state commerce would be ready by December.

Brokerage Nomura called the failure to tackle subsidies a “disappointment”.

But others said rather than missing the reform boat, Jaitley is playing a longer game to build consensus in a fractious democracy of 1.25 billion people in which competing business, social and political interests abound.

“Mr Jaitley has presented an admirable budget and he’s extended hope of many more reforms,” Ajay Bodke, investment strategy head at brokerage Prabhudas Lilladher, said.

Reducing subsidies at a time when farmers are struggling through a weak monsoon was not an option in this budget, said Bodke. 

The government already delivered some bitter pre-budget medicine in the form of a double-digit hike in rail fares.

“Nothing can be done overnight — things take time in India — but Modi is a free-enterprise person, and so we could have a different India in five years,” said D H Pai Panandiker, who heads the RPG Foundation think-tank. “If he’s in power for 10, we may really become a progressive, middle-income nation,” he said.

Still, Jaitley’s decision to stick to the last government’s goal of cutting the fiscal deficit to a seven-year low of 4.1 percent of GDP has raised eyebrows. He plans to meet the target through higher tax revenues and quadrupling privatisation proceeds.

But with India mired in its deepest slowdown in a quarter-century — last year’s growth of just under 5 percent is half the rate seen a few years ago — Jaitley might “regret abiding by his predecessor’s target”, said Capital Economics analyst Mark Williams.

The government says growth could hit nearly 6 percent this year and rebound to seven-to-eight percent by 2018, but cautions that the weak monsoon could hit farm output, undermining expansion.

Jaitley’s budget plucked some lower-hanging fruit. To draw more outside money, he hiked defence and insurance foreign investment caps to 49 percent from 26 percent and promised to make the corruption-plagued subsidy system “more targeted”.

He announced plans for private-public partnerships to build more roads, rail and other infrastructure to emulate rival China’s economic miracle, though analysts fretted about how many investors India will attract.

But change may not just come through budgetary measures, analysts say. AFP

comments powered by Disqus