Posted by: John Elliott | July 5, 2019

Modi’s government ‘nudges’ India towards a $5 trillion economy

Finance Minister Sitharaman delivers Modi’s Budget

‘Behavioural economics’ not controversial reforms to get 8% growth

Narendra Modi has said he intends to build India into a $5 trillion economy by 2024. Today (July 5) his finance minister, Nirmala Sitharaman, delivered a Budget speech that picked up on that ambition and mapped out what she described as a “five-year target” and a “ten 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 ten-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 privatisation and labour law reforms that would encourage investment, but instead will adopt a gradualist approach aimed at nudging India into a new growth path.

This was indicated yesterday (July 4) in the finance ministry’s annual Economic Survey, which adopted “behavioural economics” to “nudge policies gently steer people towards desirable behaviour while preserving their liberty to choose”. The government, the survey added, was planning to go ahead with programmes 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. Various tax changes including higher rates for top earners.

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 digitisation, reducing the use of cash, cleaning rivers and boosting space development. How these programmes would be achieved was not spelt out. There was a surprising lack of detailed focus on primary education and healthcare services that need urgent attention, though detailed figures showed a substantial increase in funding for health..

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 $2.7 trillion would reach $3 trillion by next March.

Economists say it would take 11 or 12 years to achieve $5 trillion in real terms at the government’s target GDP growth rate of 8%, which has yet to be achieved. Growth dropped to a five-year low of 5.8% in the first three months of 2019 and the Economic Survey forecast 7% for the current financial year, noting that investment growth has bottomed out after years of decline.

Sith-Budget Prsident

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

The $5 trillion is more realistic if it is measured in nominal terms including inflation, but the survey warned that it could only be achieved with a sustained 8% figure, and with the private sector as well as public sector investment that “drives demand, creates capacity, increases labour 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% for companies with revenue of up to Rs4bn, 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, and industrialists voiced concern about a suggestion that the minimum public shareholding in listed companies would be raised from 25% to 35%, reducing the holdings of promoters.

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. Protectionism has been extended with customs import duties being raised on 36 items ranging from cashew nuts and fatty acids to stainless steel products and books, though the rates were reduced on some other items.


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%) 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 Rs700bn of fresh capital. An unpopular measure was an increase on one rupee in taxes on petrol and diesel.

A wide-ranging plan for the railways includes corporatising factories, redeveloping 50 railway stations, and modernising signalling systems. Labour laws are to be streamlined into four standardised labour codes, which should reduce disputes, though this falls short of significant reform.

The fiscal deficit target has been lowered from 3.4% to 3.3% for the current financial year, which Sitharaman almost forgot to mention, announcing it after she had finished her formal speech. Economists are sceptical 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 defence 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 criticised 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.

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