India: Government presents a “growth-friendly” budget, but fiscal consolidation still in question
July 18, 2014
Narendra Modi made the first step in implementing his agenda to revitalize growth that led to his win in the general elections. On 10 July, the government presented the 2014/2015 Union Budget to the Lok Sabha, the Indian parliament. The cabinet also announced additional measures that, while not directly related to the budget, are also part of the government’s overall economic agenda.
The budget is expected to have a kick-start effect on the Indian economy, which has shown signs of deceleration in the past two years. Minister of Finance Arun Jaitley announced two main areas of action: on one hand, promotion of infrastructure development and foreign direct investment (FDI) and, on the other, overhaul of redistributive policies, which, according to Jaitley, represent a “large subsidy burden” on fiscal accounts.
On the expenditure side, the cabinet announced an increase in investment in roads, ports, airports and infrastructures in general by developing public-private partnerships (PPP). The budget also includes investment allowances for companies that invest in new plants and machinery, which is a move toward revitalizing the stagnant Indian manufacturing sector.
Jaitley did not provide as much detail regarding the overhaul of redistributive policies as he did for infrastructure investment programs. Thus far, a marginal reduction of the National Rural Employment Guarantee Scheme (a program that guarantees at least 100 days of wage employment, primarily in the agricultural sector) has been announced, although the impact is not expected to be significant.
Regarding the budget’s revenue plan, Modi’s administration plans to hammer out the details of a Goods and Services Tax (GST) this fiscal year. However, implementing this tax in the short-term would be complex since it implies a loss of fiscal autonomy at the state level. Therefore, delays are expected in the debate on the GST and its subsequent implementation.
By utilizing a combination of increased revenue through growth-friendly policies and reforming the subsidies scheme, the government aims to close FY 2014/2015 with a deficit of 4.1% of GDP (FY 2013/2014: 4.6% deficit), which is consistent with the target announced in the Interim Budget in February. The government expects the deficit to narrow to 3.6% in FY 2015/2016 and to 3.0% in FY 2016/2017.
Most analysts think the government will have to take additional steps if it plans to actually meet its 4.1% deficit target. Radhika Rao, economist at DBS Group Research, points out that:
The budget was a mix of hits and misses as the government outlined a road-map for fiscal consolidation, but the math still lacks transparency and remains optimistic. At the same time, sector specific measures to support investments, increase capital inflows, support to households, financial sector reforms, etc. were timely and wide-ranging.
Along with the budget, the government announced measures that will not have a direct impact on public accounts, but nevertheless are part of Modi’s ambitious plan to revitalize the Indian economy. The government announced that it would relax FDI regulations and allow for an increase in foreign companies’ participation in the transport, defense and insurance sectors. Moreover, foreign retailers will be allowed to sell online in India, which represents a step toward liberalization of the highly-inefficient retail sector. That said, the cabinet again failed to provide details on the implementation timeline for these measures.