NEW DELHI // When India’s finance minister presents the annual budget on Monday, one of the first questions to be asked will be whether it holds any of prime minister Narendra Modi’s long-promised economic reforms.
Campaigning in 2014, Mr Modi promised bold measures to reinvigorate the economy such as slashing barriers to foreign investment, easing tax regimes, and making it far easier to do business in India.
But his finance minister, Arun Jaitley, has already presented two budgets and neither one fulfilled these promises.
“It’s now or never,” Rajrishi Singhal, an economist, said in an analysis published by Gateway House, a Mumbai-based think tank. The next two years will be filled with major state elections, so “expedient politics” will shape budget considerations, Mr Singhal wrote. “This might be his last opportunity to introduce bold reforms and sow the seeds of future growth.”
The budget – which plans the government’s expenditure and income for the year – will be presented at a time of mixed fortunes for India.
On the one hand, international oil prices are low, hovering near US$35 a barrel. The economy grew at 7.6 per cent in the last financial year, up from 7.3 per cent in 2014-15. Inflation is low, and the government can target a budget deficit – how much expenditure outstrips income – of 3.5 per cent of the gross domestic product, down from 4.5 per cent in 2013-14.
On the other hand, India is the only “a haven of stability” in an uncertain international economy, as the government’s annual economic survey, published on Friday, pointed out.
Global trade is shrinking. International investors have pulled nearly $2 billion (Dh7.35bn) out of Indian markets in the first two months of the year – a fifth of the total withdrawn in 2015. The government also faces higher expenses. India’s civil servants, for instance, are due for pay increases amounting to $16bn.
India’s public sector banks are groaning under the weight of bad loans, and recapitalising them is expected to cost $26bn, according to the economic survey.
These factors encapsulate Mr Jaitley’s dilemma, said John Samuel Raja, the founder of How India Lives, a firm that analyses public data.
If the government decides to spend more to stimulate the economy, it runs the risk of enlarging the fiscal deficit. “We will be borrowing to spend for today’s expenses,” Mr Raja said.
At the same time, Mr Raja will “look closely at how much the government spends on capital expenditure, which creates assets that will spur economic growth”.
V Anantha Nageswaran, an independent financial-markets consultant based in Singapore, also cited the “ratio of revenue and capital expenditure” as one of the key aspects to watch in the budget.
Mr Nageswaran said he would even support a slightly higher budget deficit “provided it is clearly earmarked for capital expenditure and, more specifically, for bank recapitalisation, with a clear package for improved governance” of banks.
Mr Nageswaran said he would also look for “the promised removal of exemptions and reduction of corporate taxes”.
The basic corporate tax rate is about 30 per cent, and reducing this to the proposed 25 per cent will encourage business. To make up for the lost revenue, Mr Jaitley is expected to announce the phasing out a range of tax exemptions for businesses, which amounted roughly 624 billion rupees (Dh33.3bn) in the 2014-15 financial year.
The resulting tax code – simpler and smoother – might even bring in more income, Mr Raja said. Despite the cut in corporate tax, large companies, particularly in manufacturing, will end up paying the government more since they can no longer claim exemptions.
Economists also worry that the government’s need to pay higher salaries and keep its banks afloat may curtail infrastructure spending. Mr Modi has frequently said that India needs investment in infrastructure worth at least $1 trillion.
Methods to expedite such investment "have to come from newer and innovative funding techniques and sources, changes in the regulatory environment in which infrastructure companies operate, and the tax framework which applies to the sector", Avinash Narvekar, a tax professional with Ernst & Young, wrote in the Economic Times.
Political inertia has thus far stymied other reform measures, including easing land acquisition by industries, introducing a uniform goods and services tax, and permitting foreign direct investment in key sectors such as retail.
Mr Raja said Mr Modi’s political and economic credibility could benefit tremendously from a good budget.
“During the election campaign, his slogan was ‘Maximum governance, minimum government,’” he said, referring to the prime minister’s promise to keep his government out of the way of business as much as possible. “But the Modi government hasn’t taken any significant decisions to achieve this.
“Some reform measures mean taking hard steps,” Mr Raja said. “This year might be the best to do it.”
ssubramanian@thenational.ae
