By: John Elliott
India’s annual budget has attempted to re-boot the country’s Covid-hit economy with plans that double spending on healthcare, sell off most government-owned businesses, raise foreign direct investment limits in the country’s large insurance market and accelerate infrastructure development.
Beset with continuing mass protests by tens of thousands of farmers on highways entering Delhi that challenge its authority, the Narendra Modi government is using the budget speech to try to recover the initiative and launch what Nirmala Sitharaman, the finance minister, called the post-Covid “dawn of a new era.” India, she declared, is “well-poised to truly be a land of promise and hope.”
Skeptics will say that India has for decades been described as poised for greatness but that hopes are rarely realized. While the plans for a boost to spending may be achieved, attracting foreign investment will be a challenge and the plans for privatizing the public sector will arouse extensive trade union opposition and take years to fulfill. Private sector companies, which have been loath to invest, would have liked more stimulus.
The Modi government has not been good at delivering economic growth, which had declined to an 11-year low of 4.5-5 percent even before the pandemic hit. Modi then devastated activity with millions of job losses when he introduced a sudden lockdown last March, triggering what is expected to be a contraction of 7.7 percent in the economy for 2020-21.
The annual Economic Survey published on January 29 forecasts ambitious 11 percent GDP growth for the coming financial year (2021-22) with a V-shaped recovery, but adds that it will take at least two years for the economy to return to pre-pandemic levels. These figures are in line with other forecasts including the International Monetary Fund (IMF), which last week put this year’s contraction at 8 percent with 11.5 percent growth in the coming year, falling back to an optimistic 6.8 percent in 2022-23 when India would have regained its position as the world’s fastest-growing large economy, beating China.
The Budget’s plans for widespread privatization, selling a controlling interest in government-owned companies, expands on proposals launched last May in of five mini-Budgets launched during the year. Sitharaman said today that the government proposes privatizing two public sector banks and an insurance company in 2021-22, as well as the IDBI development bank that is already underway.
Beyond that, details contained in an annexure to today’s speech say that the government will only have a “bare minim presence” in four sectors: atomic energy, space and defense; transport and telecommunications; power, petroleum coal and minerals; and banking, insurance, and financial services. Last May’s announcement suggested that there would be investments in one to four enterprises in each of these areas. In other areas, says today’s annexure, government-owned businesses “will be privatized, otherwise shall be closed”.
There have been no full privatizations – where the government sells a controlling stake – for many years, though several are now being attempted including Air India, the state-owned container and shipping corporations, Bharat Petroleum (BPCL) and Bharat Earth Movers (BEML). Financial stakes have been sold for many years in various government corporations – this is known as disinvestment, with the government retaining control.
Sitharaman said the foreign direct investment (FDI) cap for the insurance sector would be increased to 74 percent from the current 49 percent. She also allocated Rs200bn rupees ($2.74 bn) to recapitalize state-run banks that are saddled with bad loans and have been a drag on growth.
The challenge for Sitharaman has been to balance the government’s escalating debt burden while stimulating the economy. The finance minister said that the current year is expected to end next month with a fiscal deficit of 9.5 percent compared with 7 percent that had been expected earlier. The forecast for 2021/22 is 6.8 percent, higher than had been expected.
The government’s main focus is to overcome the effects of the pandemic, which has led to a total of over 10.75 million cases (168,235 currently active) among the 1.4 billion population. This is the second biggest caseload internationally after the US. There have been more than 150,000 deaths.
The budget plans to boost healthcare spending to Rs2.2 trillion (US$30.20 billion) to start improving the seriously inadequate public health system. India currently spends about 1percent of GDP on health, among the lowest for any major economy.
The survey is basing its hopes on a successful roll-out of anti-Covid vaccines, which have so far been given to some 3 million front-line healthcare workers using the AstraZeneca- Oxford version, and Covaxin developed in India by Bharat Biotech of Hyderabad and the Indian Council of Medical Research (Delhi) that has yet to clear phase three trials
The budget contained several measures to help farmers and the Economic Survey strongly defended the government’s new farm laws, which have led to more than two months of large-scale protests by farmers from the Sikh-dominated Punjab, Haryana and elsewhere on the highways into Delhi. The survey claimed that the laws, currently suspended by the Supreme Court, would “herald a new era of market freedom which can go a long way in the improvement of farmer welfare”, but farmers fear it will lead to market domination by large corporations and the ending of government price guarantees.
On Republic Day (January 26), the farmers staged mass tractor rallies into Delhi that led to violence and the invasion of the Red Fort. According to widespread reports, the violence was at least partly triggered by government loyalists planted in the crowds, which allowed the police to attempt to close down the protests on the highways.
Since then, the police have tried to clear highways, but the groups have reassembled and the determination of their leaders appears strong, despite numerous court cases started as a result of the January 26 violence.
The government now has to face the fact that, aside from the budget, its most immediate “new era” tasks are to find an agreed solution for the farmers’ protests and to pursue a mass Covid vaccination campaign. Of the two, the vaccinations look the easiest, despite widespread concern about their efficacy.
John Elliott is Asia Sentinel’s South Asia correspondent. He blogs at Riding the Elephant.