Indian Budget 2016-17

Shows deep trenched problems in the Indian economy

Promise of rejuvenating a slowing down Indian economy lay at the core of the electrifying campaign that won Mr Modi an overwhelming support in elections nearly two years ago. Since then his commitment to shake things up and create jobs for the one million people who enter India’s workforce each month has become subsumed in political turmoil. In between, his Bharatiya Janata Party (BJP) has also lost key elections in New Delhi and Bihar, and overall his leadership has been found wanting in suppressing the radical elements in his own party who run the risk of bringing down his ‘growth and jobs’ agenda. It is in this backdrop that the Modi government this last Monday, February 29^th, presented its third budget, which outlined a spending plan of $287 billion in the coming year. The budget, as urged by Raghuram Rajan, the widely respected governor of the Reserve Bank of India (RBI, the central bank), stuck with the government’s plan to lower the fiscal deficit to 3.50 percent of India gross domestic product in the next year. The austerity measures, combined with increased social spending, were accomplished by allocating far less money — than originally thought — needed to recapitalise government banks, which are struggling with bad loans and constrained to lend to India’s cash starved corporate sector. Infrastructure spending was marked higher in the proposed budget but perhaps still short of the infusion needed to spur the kind of growth that people have come to expect under Mr Modi’s economic management.

Though India’s economy on the face of it is performing reasonably well, with 7.6 percent growth and the lowest inflation in decades, the trouble is that by this government’s own admission, it needs to grow between 8.5 to 10 percent if the prime minister’s election time promises are to be fulfilled. India faces huge hurdles to growth, including widespread corruption, a suffocating bureaucracy, enormous social spending, a stifling business environment and woeful infrastructure. However, despite these challenges to investment, the thrust of the budget had to be diverted to rural India, where compulsions arising from a two-year back-to-back drought demanded a more urgent government attention. The plan in the budget calls for some fresh agro policies, including crop insurance and credit programs for farmers in addition to pumping $5.6 billion into an existing program that guarantees 100 days of work to every rural household.

However, in general, this much awaited budget is being termed as a disappointment, as it appears more or less identical to BJP’s first two budgets, which also failed to undertake big ticket structural reforms in order to kick-start major foreign investment in the Indian economy. The tragedy with India’s economic progress has been that the economic and political cannot be separated and as Mr Modi struggles with his diminishing popularity, he finds it increasingly difficult to implement the required changes. In all fairness to him, he did try to change the investment climate during the early period of his government, raising foreign investment caps for military contractors and insurance companies to 49 percent, from 26 percent, and even tried to get through a bill allowing outsiders to gain majority stakes in local divestures – an effort that was blocked by the opposition.

To his credit, he also tried to ease India’s strict land use laws to make it easier for the government and private companies to build industrial plants and infrastructure. An effort, yet again politicised by the opposition parties: terming his a “suit and boot” government working for the rich at the cost of the poor, as a result putting him on the defensive. Naturally, Mr Modi has since somewhat pulled back from his initial Gujarat style aggressive strategy to revive the Indian economy.

And it is this very cerebral confusion that also reflects in his latest budget. To cut the deficit to 3.5 percent of gross domestic product in the financial year ending in March 2017, he is relying on raising almost 1.6 trillion Indian rupees, or $23.3 billion, from pushing telecom spectrum and selling down shares in various companies, including insurers and a state owned bank. This is twice this year’s expected haul. India’s track record and more importantly Modi’s own shifty performance over the last two years of over-promising and under-delivering leaves plenty of room for doubt – the government sold large stakes in Coal India and some other companies in the now concluding fiscal year, but still fell more than half short of its privatisation target for the year 2015-16. Ask the BJP policymakers and they argue that there are several reasons why India keeps missing its targets, but Mr Modi’s leadership is not one of them. Arun Jaitley, the finance minister, complains that investment banks are paid little for privatisation deals, so advisers don’t try very hard, but given the opposition’s negativity and certain damaging court rulings, his hands are tied to raise fee structures beyond a certain point. Politicians are also terrified about selling assets too cheaply or in some cases opt for deciding that companies are better off in state hands. For example, the mining group Vedanta was keen to buy Hindustan Zinc from the government, but the judiciary has admitted a petition by a group of Indian federal bureaucrats seeking a cancellation of this deal.

Regardless, this moaning of the minister of finance is nothing new – we in Pakistan are quite used to it by now – and the reality is that Mr Modi, the golden manager of Gujarat, is simply not living up to his election time billing. Meaningful investment in the Indian economy is still not happening, the farmers’ suicide rate is the highest ever, state owned banks are struggling with a rather large bad debt portfolio (a big chunk being of willful defaults), real reforms to shore up corporate governance remain elusive and last but not least, a big question mark still remains on equitable distribution of resources, especially to the minorities, where no one else but he himself has to be held responsible. Even the government’s assumption to sell airwaves in 2016-17 looks to be a stretch given that the Indian telecom operators are already struggling with high debts, and the banks they rely on for funding are hobbled with bad loans. By RBI’s own assessment, the actual deficit will end up in excess of 4 percent (against benchmarked 3.5%) and this could be painful as it would drive up India’s already high borrowing costs.

Mr Jaitley may have some fallback options, just as if it wasn’t for higher fuel taxes and other tinkering with domestic energy prices this year, the current budget deficit target of 3.9% would have been missed. But the Indian government probably cannot rely on an oil windfall again; and for that matter, no government including Pakistan’s, where Mr Dar ironically will be confronted with similar problems when announcing his budget three months down the road.