India under pressure to deliver on ‘Modinomics’ in budget

PRIME Minister Narendra Modi’s government unveils its first full budget Saturday under intense pressure to bring about promised reforms to grow India’s economy after winning the biggest mandate in 30 years at last year’s elections.

Modi has promised to slash red tape, reform tax and overhaul land acquisition laws to try to attract foreign investment and create jobs for millions of young people. 

But economists say investors were left underwhelmed by an interim budget introduced shortly after the prime minister took charge last year and are looking for concrete details this time, including on plans to boost India’s manufacturing and improve shoddy infrastructure.  

With stocks soaring and sliding global oil prices improving public finances, economists said this year’s budget was critical to pushing reforms forward.

“This budget needs to leave a mark, just as the 1991 budget did when the economy was going through a major crisis,” D.K. Joshi said on historic reforms and moves to open up the economy to foreign investment.

“There is a huge amount of expectation. And this is the critical time to deliver,” Joshi, chief economist at local ratings agency CRISIL, told AFP.

Finance Minister Arun Jaitley is expected to increase spending on crumbling roads, railways and dilapidated power infrastructure as part of Modi’s plans to entice foreign businesses to set up shop in India.

Jaitley will likely hike capital expenditure to at least two percent of GDP, up from 1.8 in the last budget, economist Samiran Chakraborty predicted in a research note, meaning a rise to 2.8 trillion rupees ($45 billion). 

The defeat suffered by Modi’s Bharatiya Janata Party (BJP) in last month’s state elections in Delhi only increased the pressure on the new government, with some critics saying voters were tired of waiting for change.

But economists warn Jaitley’s plans will be restricted by the need for further prudence, after committing to cutting the fiscal deficit to 4.1 percent of GDP for 2014/2015 from 4.5 percent the year before.

The right-wing government’s moves are aimed at persuading the central bank to continue to unwind high interest rates to boost business borrowing and accelerate growth.

After the Reserve Bank of India’s unscheduled rate cut last month, governor Raghuram Rajan said further reductions would be linked to “high-quality fiscal consolidation” and continued lower inflation.

“It’s not an easy thing, they (the government) must stick within the fiscal bounds while increasing expenditure,” Joshi said.

Jaitley’s task has been made slightly easier by boosted revenues from lower global crude prices, which has lowered the cost of fuel subsidies and allowed India, an oil importer, to hike excise duties.

 The economy, thought to be struggling through the worst slowdown since the 1980s, is actually growing at 7.5 percent, outpacing even China, according to a new formula for calculating GDP adopted by the government last month.

As Jaitley presents the budget to parliament, investors will be searching for specifics on much-trumpeted reforms such as the “Make in India” campaign, designed to turn the country into a manufacturing hub.

“The last budget was all over the place trying to deliver a little bit of everything,” Chakraborty, head of macro research for South Asia at Standard Chartered bank, told AFP.

“But this time, the budget has to lay down the roadmap for the future as well as provide specifics about how they are going to achieve their signature policies. That will give a lot of comfort to investors.”

Chakraborty also pointed to the need for details on pledges to overhaul the tax regime, which businesses have long griped is aggressive and arbitrary and deters investment.

British mobile giant Vodafone is embroiled in a bitter, $2.4-billion battle with India’s tax authorities, while Finnish company Nokia had a plant in India seized over a tax dispute.

Hindu nationalist Modi’s other pet projects such as cleaning up the holy Ganges river and building 100 “smart cities” are also expected to feature, A.K Bhattacharya, editor-in-chief of the Business Standard newspaper, said this week. 

The premier is also expected to continue his “Modinomics” agenda of “maximum governance, minimum government”, including by handing more power to the states to implement such schemes to speed up decision-making.

“Expectations indeed are high and meeting them is probably the forthcoming budget’s biggest challenge,” Bhattacharya said.