By: John Elliott

Narendra Modi has said he intends to build India into a $5 trillion economy by 2024. His finance minister, Nirmala Sitharaman, has delivered a Budget speech that picked up on that ambition and mapped out what she described as a “five-year target” and a “10-year vision” for a “new India.” Neither Sitharaman nor Modi has however explained how the necessary economic growth would be achieved or financed.

There were few policy surprises in the speech, which set an ambitious agenda for the Modi government’s second term following his Bharatiya Janata Party’s landslide election victory last month. With the mention of a 10-year vision, it did however indicate that the government envisages being in power for at least a decade.

Nirmala Sitharaman abandoned finance ministers’ tradition of carrying budget papers in a dark red briefcase, saying it was “high time to move on from the British hangover.” She used a bahi khata or red cloth folder enclosed with a string and emblazoned with the national emblem.

There were also no signs that the prime minister intends to use his political strength to drive through controversial measures such as bank privatization and labor law reforms, but instead will adopt a gradualist approach aimed at nudging India into a new growth path.

This was indicated on July 4 in the finance ministry’s annual Economic Survey, which adopted “behavioral economics” to “nudge policies gently steer people towards desirable behavior while preserving their liberty to choose.” The government, the survey added, was planning to go ahead with programs to usher social change.

It was not therefore surprising that Sitharaman’s speech was thin on economics and financial strategy.  It contained none of the usual financial and monetary statistics on revenue, expenditure, deficits and  allocations, though some of these were announced in a pre-election interim budget on February 1.

Instead, the first hour of the speech listed old and new schemes that ranged from toilets-oriented Swachh Bharat, village electrification and building highways to expanding digitization, reducing the use of cash, cleaning rivers and boosting space development. How these programs would be achieved was not spelled out. There was a surprising lack of detailed focus on primary education and healthcare services that need urgent attention.

Sitharaman was slightly more cautious than Modi about the highly ambitious $5 trillion target, saying it was the aim for the “next few years.” The current level of US$2.7 trillion would reach US$3 trillion by next March.

It would take 11 or 12 years to achieve $5 trillion in real terms at the government’s target economic growth rate of 8 percent, which has yet to be achieved. Growth dropped to a five-year low of 5.8 percent in the first three months of 2019 and the Economic Survey forecast 7 percent for the current financial year, noting that investment growth has bottomed out after years of decline. The US$5 trillion is more realistic if it is measured in nominal terms including inflation.

Nirmala Sitharaman presenting the Budget documents to President Ram Nath Kovind (center), accompanied by top Ministry of Finance officials

The survey said that the US$5 trillion figure could only be achieved with a sustained 8 percent figure and private sector as well as public sector investment that “drives demand, creates capacity, increases labor productivity, introduces new technology, allows creative destruction, and generates jobs.” That investment has however been lacking, though the budget indicated that it is relying on foreign direct and portfolio investment and overseas borrowings.

As part of a special focus on encouraging entrepreneurs, corporate tax is being cut to 25 percent for companies with revenue of up to Rs4 billion, and tax benefits are to be provided for start-ups, whose fundraising will be exempted from tax department scrutiny. There was however no relief for the biggest companies, which might have triggered much needed investment.

The government plans to ease foreign direct investment (FDI) regulations in sectors such as aviation, insurance (including intermediaries) and media animation, while local sourcing norms will be relaxed for single-brand retail companies.

Mega-manufacturing

Foreign companies will be invited to bid to set up “mega-manufacturing plants” in advanced technology areas such as semi-conductors, the solar industry, computer servers and laptops. They would receive tax exemptions and other benefits that are also being planned for manufacturing electric vehicles, with buyers receiving tax concessions.

Disinvestment of stakes in public sector companies (maybe of more than 51 percent) and in banks is to continue, including Air India that failed to find a buyer last year. Public sector banks, which urgently need reform, are being propped up with Rs700 billion of fresh capital.

A wide-ranging plan for the railways includes corporatizing factories, redeveloping 50 railway stations, and modernizing signaling systems. Labor laws are to be streamlined into four standardized labor codes, which should reduce disputes, though it falls short of significant reform.

The fiscal deficit target has been lowered from 3.4 percent to 3.3 percent for the current financial year, though economists are skeptical whether this can be achieved.

Sitharaman delivered her two-hour speech with aplomb, but it was a Modi budget, or maybe a Modi-Shah budget with input from Amit Shah, the powerful party president and Home Minister. Sitharaman became India’s first woman finance minister only three weeks ago, and her appointment astonished observers and analysts because of her record in the last government as commerce and industry minister and then defense minister.

Modi has led in some pre-budget discussions that would traditionally have been run by the finance minister, and the major decisions will have been taken by his Prime Minister’s Office (PMO) working with top finance ministry officials.

He was criticized in 2014 for not seizing the advantage of being a newly elected prime minister to tackle controversial reforms. It was thought then that he felt he needed first to learn how the central government operates.

He now has no such excuse, yet he seems to prefer incremental change, nudging forward. It remains to be seen if he has learned how to implement the myriad of policies and schemes involved.

John Elliott is Asia Sentinel’s South Asia correspondent. He blogs at Riding the Elephant.