India’s finance minister Arun Jaitley is the calm voice at the top of Narendra Modi’s Bharatiya Janata Party-led government. His role is usually not to worry so much about the economy, but to try to present a sense of sanity and reasonableness as the government’s spokesman and information minister, while Modi avoids making many comments apart from mega rally speeches, and Amit Shah, the party’s president, exudes fear-inducing Hindu nationalism.
Jaitley has performed both the economy and information functions today with his annual budget speech that ran for just over 90 minutes. He focussed heavily on helping the rural poor with schemes that aim to begin to double farmers’ incomes by 2022 (an over-optimistic and probably unachievable target), and on accelerating investment in infrastructure, especially irrigation.
That should, the government hopes, increase consumer demand and economic growth, while also (though Jaitley of course did not say so) conveniently countering the Congress Party’s opposition line that the government is “not pro-poor” at a time when state assembly elections are looming.
Three days ago, Jaitley was performing the same calming role in an often screamingly angry two-day parliament debate after caste-based riots in the nearby state of Haryana had led to widespread violence and looting that cut water supplies to Delhi. The previous week had been dominated by clashes and protests in Delhi’s Jawaharlal Nehru University with rough police action and court cases, encouraged by government ministers, that irrationally accused students of sedition.
Today’s budget has therefore come when the image of India and the 22-month old Modi government has been damaged, and something is needed to revive confidence. Jaitley’s speech of course dealt with economic confidence, but it is really more important for the government to boost confidence in its politics and to show that it is not following a pre-planned policy of social divisiveness and restrictions on the freedom of speech aimed at strengthening Hindu nationalism and at enhancing the BJP’s Hindutva appeal..
Two friends visiting Delhi in the past week from the UK and US have told me how, viewed from abroad, India looks the best hope among major economies with its 7.6% growth at a time when other countries have problems. But, they both added, the social unrest and the divisive Hindu nationalist and repressive image of the government, was worrying investors.
It is against this background of social unrest and the government’s image problem that Jaitley made his speech today. His most important macro economic announcement was that he has not relaxed the government’s target of reducing the current 3.9% fiscal deficit to 3.5% of gdp in the coming year, despite being given conflicting advice that stimulating growth was more important.
Jaitley’s economic advisers, who produced the finance ministry’s annual economic survey at the end of last week, are suggesting that this year’s official 7.6% (some critics say inflated) growth figure might drop to 7% in the coming year instead of rising.
Jaitley presented what he called a “transformative agenda”, with “nine pillars” covering benefits for farmers, rural communities, social issues such as health care, industry and skills, infrastructure, financial sector reforms, and governance and ease of doing business.
Proposed spending included $2.5bn in 2016-17 on delayed irrigation projects, $32bn on rail, road and other infrastructure. Another $3.6bn was announced to begin re-capitalising financially crippled state banks that have been hit by their often politically-inspired largesse of allowing massive bad loans to over-leveraged Indian companies.
But there were few significant economic reforms in the speech. Foreign ownership through direct investment is to be allowed in food processing and marketing businesses. The foreign portfolio investment limit in public sector corporations (apart from banks) is to go up from 24% to 49%, and 15% foreign investment will be allowed in stock exchanges, up from 5%.
Various measures were aimed at improving the ease of doing business in India’s rule-bound heavily bureaucratic environment, and a proposed bankruptcy code will ease the closure of bankrupt financial firms.
Also included were a complex array of tax measures including some relief for small businesses, and an attack tax avoidance, plus a fresh effort (following a largely unsuccessful scheme last year) to persuade tax-payers to reveal undeclared assets.
Jaitley said that companies would not be hit, as was done in the past, by retrospective tax demands. He agreed to waive penalties and interest on outstanding payments, but failed to reassure companies such as Vodafone that are involved in outstanding multi-billion dollar cases.
Overall, the budget sounded like a long list of worthwhile innovations and incentives, though critics said it lacked an overall big idea, and that it would be difficult if not impossible to implement projects fast enough to use all the funds, especially in areas such as irrigation. Palaniappan Chidambaram (above), the last Congress government’s finance minister, noted that there had been no mention of (declining) exports, which was certainly odd. There was also virtually nothing to encourage private sector investment in manufacturing, and no mention of spending on defence where there was only a marginal budget increase despite inflated pension and pay commission costs.
Exports and the private sector however were not the targets of this politically targeted budget, which was aimed, as I have said, at shifting the government’s image from being pro-corporate to caring for the rural poor.
Now Jaitley’s job is to show, and to persuade his prime minister to show, that the government also cares for India being an open and free society without the repressive Hindu nationalist overtones.