This Article is From Jul 10, 2014

Budget 2014 Will Test Government's Commitment to Reforms

Budget 2014 Will Test Government's Commitment to Reforms

Prime Minister Narendra Modi's new government presents its inaugural budget today in the first substantive test of whether it will deliver on ambitious promises to revive stalled economic growth.

The PM has warned "bitter medicine" is needed to heal Asia's third-largest economy and improve battered government finances. Expectations of bold policies have been sky high, with the Sensex stock index in Mumbai hitting a series of record highs in the past several weeks. But the prospect of reduced harvests this year due to weak monsoon rains may forestall immediate cuts to fiscally ruinous subsidies for fuel, food and fertiliser.

The BJP swept into power in May after the most decisive election victory India has witnessed in three decades, ousting the coalition led by the Congress party. Voters were fed up with Congress' failure to curb runaway inflation and the wilting of growth rates to below 5 per cent.

"I don't think we are going to see something that is completely path-breaking and transformational," said Anjalika Bardalai, an India analyst for the Eurasia Group. "But I do think there will be enough in the budget that is going to be perceived as business friendly and good for the economy."

India's economic growth has slowed to less than 5 per cent for the last two years after a decade of expanding by an average of 8 per cent, which is the minimum the government says is necessary to provide jobs for the 13 million young Indians who enter the workforce each year.

Big spending on subsidies has limited the government's ability to use its budget to make productive investments that could boost the economy's productivity in the long run. A chronic current account deficit has contributed to weakness in India's currency, worsening consumer inflation that has touched double digits in the last year.

The BJP campaign promised pro-business policies similar to those in the Gujarat state where Mr Modi was chief minister for years and focused on clearing obstacles to building roads and other infrastructure and offering incentives for large-scale investment.

Critics accuse Mr Modi of promoting a more free-wheeling capitalism with less of a social safety net, but the overwhelming victory in May indicated Indian voters, especially the young, are more concerned with the faltering economy.

Finance Minister Arun Jaitley's budget speech Thursday may go beyond traditional subjects like spending priorities and deficit-reduction targets and also touch on at least broad outlines of policies such as a more selling off state-owned industries, tax reform and allowing more foreign investment in key industries.

Government steel, coal and petroleum companies are seen as prime targets for sale, which would replenish the government's coffers and help to make inefficient industries more productive. Mr Jaitley could also announce increases in caps on foreign direct investment in areas including defence and e-commerce.

Still, inflation and the high price of oil, India's biggest import, will make it difficult to reduce the fiscal deficit that is a both a symptom and a cause of many of the country's economy woes.

Many of the measures the government sees as ultimately necessary to curb the deficit are likely to be deeply unpopular.

One of the government's first acts when it took office was to raise rail passenger fares, an unpopular move that was partially rolled back after a public outcry.

Tens of millions of Indians have become accustomed to subsidized food, fuel and fertilizer that cost the government some $40 billion (Rs 2,40,000 crore at $1 = Rs 60) per year. The ruling BJP would like to redirect that spending to areas such as building roads, railways and power plants, but any cut in social spending could provoke a backlash.