Modi’s first budget: Will he be a great reformer?

Barrister Harun ur Rashid
Thursday, March 5th, 2015


It is recalled India’s prime minister Narendra Modi has been compared to Deng Xiaoping, Margaret Thatcher, and Ronald Reagan as a great reformer. Commentators have variously described him as assertive, dynamic, authoritarian and nationalist.

 

Many believe he’s a genuine economic reformer. Others worry about his – and his BJP’s – hard-line Hindu credentials and wonder whether it poses a threat to the idea of a pluralist India.

 

Modi’s supporters believe he is the right man to pull India out of the quagmire of low growth, high inflation, joblessness and slack governance. One commentator believes that Modi may well have “inaugurated India’s second republic” as his record in governance makes him an “economic change-agent, not an economic waster”.

 

Modi inherits a sluggish economy. Growth has slowed to under 5%. Retail inflation, driven by food prices, continues to be high at over 8%. Manufacturing is subdued and exports are flat. Jobs have dried up in a country which needs to create 12 million a year to keep pace with its burgeoning population.

 

Expectations are running high for the new government’s first major budget.  The hundreds of millions of Indians whose votes helped sweep Prime Minister Modi to power in May last year believed that he offered the best hope for bringing growth and jobs to the country.

 

Modi has said he wants to take India into the top 50, which is where the Thatcher comparison comes in. He has said he aims to create the employment that would help lift people out of destitution by encouraging manufacturing industry to flourish – you see his invocation to “Make in India “everywhere.

 

The budget will be the first really big test of Modi’s reformist credentials, an opportunity for his government to demonstrate how it intends to reshape the Indian economy and deliver prosperity in the years ahead.

 

During the campaign, Modi repeatedly spoke about “maximum governance and minimum government”, without providing much detail about what he meant. To be sure, it is easier said than done: diminishing government and making it more accountable will require considerable institutional reform in the stubborn Indian bureaucracy. which has been described as the “worst in Asia”.

 

Main Aim

 

“The main challenge before the new government,” BJP Finance Minister Arun Jaitley, who is close to Modi, would be to “work towards redeveloping confidence in Indian economy”. The “low hanging fruit” he mentioned included boosting infrastructure, real estate, tourism, skills development and low-cost manufacturing.

 

Modi-led BJP government has unveiled its first full-year budget on 28th February. The budget is not seen introducing big reforms and is cautious.

 

Finance Minister in presenting the budget said India will grow at a rate of more than 8% during 2015-16, a key economic report said ahead of the budget. Among the major announcements made by Jaitley are:

 

  • Five “ultra mega” power projects of 4,000 megawatts (MW) will be built to ease the energy crisis
  • Spending on infrastructure will be raised by $11.3bn (£7.32bn) to boost growth
  • Creating a “universal social security” that would give poor Indians access to subsidised insurance and pensions
  • Implementation of a uniform countrywide goods and services tax (GST) by April 2016
  • Welfare money to be paid directly into people’s bank accounts to eliminate corruption and wastage
  • Wealth tax to be abolished and replaced by a surcharge on the super rich
  • Corporate tax to be cut by 25% over next four years

Analysts say the government’s challenge will be to balance its spending with the need for fiscal restraint.

 

Prime Minister Narendra Modi called it a ‘Budget with a clear vision.’ He tweeted that the Budget 2015 had a distinct focus on farmers, youth, poor, neo-middle class and the ‘Aam Nagrik’. “It delivers on growth, equity & job creation,” he said and added that the Budget was ‘progressive, positive, practical, pragmatic and prudent.

 

Critics

 

Former Prime Minister Manmohan Singh said that he doesn’t doubt the intentions of the Budget, but was worried about the lack of an adequate roadmap for fulfilment of targets.

 

Former Congress finance minister P Chidambaram accused his successor of pleasing just the corporates and the income-tax payers. Claiming that the Modi government’s first full Budget failed the fiscal test, the test of equity, and the test of rising inequality, he said, “If one asks who is pleased by the Budget, I suspect it will be the corporates and the income-tax payers (3.5 crore). Where does that leave the vast majority of the people, especially the poor, who look up to the government for succour and relief,” Chidambaram said, and added, “While the income-tax payers (3.5 crore) may have been got some relief, all others have been burdened with increases in Excise duty and Service Tax.”

 

Challenges for Modi

 

Modi has already identified India’s key challenge: to create jobs. India’s vast population should be a huge asset. Almost half of its 1.25 billion people are under 25. Find them decent jobs and you create a powerful engine for prosperity and growth. This is India’s potential “demographic dividend”.  Two-thirds of the country gets by on $1.50 (97p) a day or less, according to the Asian Development Bank; nine out of 10 Indians work outside the formal economy; and even more shockingly Unicef estimates that almost half of all Indian children are malnourished. India is ranked a woeful 142nd out of 189 countries, behind beacons of good business practice like Yemen, Uzbekistan and Iran – vivid evidence of the scale of Modi’s challenge.

 

Furthermore, analysts say India urgently needs to slash wasteful subsidies, reform archaic labour laws and clean up debt-saddled banks. Since its convoluted land acquisition law makes it difficult for industry to buy land, the government needs to free up vast tracts of idle land locked up in ailing state-owned enterprises for industry. It needs to cut red tape and regulations that scare away investment: India ranks a miserable 134 among 185 nations in the World Bank’s Ease of Doing Business survey.

 

Modi will need to depend on a heavy dose of bipartisanship to push through key laws in a parliament which his party has been accused of stalling in the past – top of the list has to be the uniform goods and services tax which could fetch India nearly $500bn (£298bn) in revenues and is more than three years behind schedule.

 

The BJP commands the lower house of parliament but it holds only 26% of the seats in the upper house, which could make it more difficult to push legislation through. Much power also lies with India’s states. “

 

Prime Minister Modi will expose a paradoxical tension between his mandate and mission,” says economist Arvind Subramanium. “His electoral appeal is based on his ability to wield power, ruthlessly if necessary. His success in governing the economy will depend on coming to grips with, and making the best of, highly circumscribed power” with the upper house.

 

Barrister Harun ur Rashid, Former Bangladesh Ambassador to the UN, Geneva

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