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A mixed response

Srinivas MazumdaruJuly 10, 2014

Promising growth, investments and jobs, Narendra Modi's government has presented its inaugural budget. But experts say it provided little in the way of specifics on a number of key issues.

India's Finance Minister Arun Jaitley
Image: picture-alliance/dpa

Less than two months after winning a resounding victory in an election dominated by economic issues, the Narendra Modi-led BJP government faced its first major test on Thursday, July 10, when it unveiled its eagerly awaited maiden budget in the nation's parliament.

The budget was seen as an indicator of the new government's course of action and its resolve to deliver on campaign pledges of overhauling India's economy and jump- starting flagging growth rates.

"The steps I will announce in the budget are only the beginning of a journey towards sustained growth," finance minister Arun Jaitley said while delivering the budget in parliament. "We shall leave no stone unturned in creating a vibrant and strong India," he added.

Jaitley pledged to increase the pace of economic expansion to around 7-8 percent in three to four years from the current rate of less than 5 percent.

More foreign investment

In order to achieve this, he announced a raft of measures such as allowing increased foreign investment in certain sectors, promising the introduction of a nation-wide Goods and Services Tax (GST), and assuring not to impose any new retrospective taxes, among others.

Train in India
Modi's government also announced plans to open the country's railways to foreign investmentImage: Reuters

As part of the plans, the government is set to raise caps on foreign investment in the defense and insurance sector to 49 percent, from the present 26 percent. This follows the announcement a couple of days earlier when Modi's government revealed plans to open the country's railways to foreign investment.

While some welcomed the decisions to open up to foreign investors, others heaped criticism. For instance, Mamata Banerjee, a regional politician and chief minister of West Bengal state, slammed the budget saying that the Narendra Modi-led government has "become a government of the FDI, by the FDI and for the FDI."

Pan-India tax

Another supposedly key measure is the introduction of a pan-India tax. Even the previous government led by former prime minister Manmohan Singh tried to bring in this tax, although it failed in its attempts due to disagreements between the government in New Delhi and various state administrations over the sharing of tax revenues.

The GST is expected to simplify India's cumbersome tax system by replacing a series of existing taxes such as value added tax, excise duty and service tax. It is believed that the GST will result in higher tax collection for the government and has the potential to boost growth by up to 2 percent. But despite terming it a priority, experts say that the government provided very little in the way of specifics on implementing the tax.

"The finance minister neither put forward a notional timeline nor provided any hints for how the centre might assuage the states' concerns on compensation for their lost tax revenue," said Milan Vaishnav, associate in the South Asia Program at the Washington-based Carnegie Endowment for International Peace.

On the subject of retrospective taxation, which unnerved many foreign investors and drew widespread criticism, Jaitley said the BJP-led government would provide a stable tax regime and "would not ordinarily bring any change retrospectively which created a fresh liability."

Push for manufacturing

During the electoral campaign, Modi pledged to create jobs for the millions of young people pouring out of universities and colleges every year. In a bid to fulfil this promise and confront the numerous challenges facing the economy, the government wants to promote manufacturing and launch construction projects. It allocated some $8.3 billion (6.1 billion euros) to investments in the expansion of physical infrastructure such as roads, sea and airports.

However, experts believe that despite the push for generating manufacturing jobs by offering tax concessions and investment incentives, constraints to manufacturing in India have remained unaddressed.

It is "unlikely that India's manufacturing sector will take off, unless and until reforms are introduced to ease labor laws or make it easier for firms to acquire land," said analyst Vaishnav in a DW interview.

A mixed bag

Another lingering problem that has long confronted successive Indian governments is the issue of subsidies, which are particularly sensitive in India due to the prevalence of rampant poverty. Two-thirds of the population in the South Asian nation live on less than $2 a day and they rely heavily on government support.

But many economists say the government must overhaul and reform the subsidy regime in order to put its finances in order and reduce its massive deficit. Nevertheless, Jaitley told lawmakers that there would be no rollback in subsidies, although he said that they had to be "well targeted" and pledged to cut the fiscal deficit to around 4.1 percent of GDP this year.

In a research note published after the budget presentation, India economists Sonal Varma and Aman Mohunta at the Japanese research firm Nomura pointed out that the government did not use the opportunity to come clean on subsidies, although it said it intended to overhaul the subsidy regime.

The analysts, however, argue that the budget is a mixed bag and "has positives such as a greater focus on investments, measures to attract capital inflows and to boost household disposable income through higher exemption and tax deduction limit."

India's Prime Minister Narendra Modi
It's a budget of hope and trust, says Prime Minister Narendra ModiImage: Reuters

'Nothing different'

While PM Modi called it a budget of hope and trust, the opposition Congress party slammed it, saying it was "high on rhetoric and short on delivery."

"We saw none of the big, bold ideas or a roadmap for the future in the budget," party spokesman Shashi Tharoor told Indian broadcaster NDTV, adding that "there was nothing concrete... no specific measures on how to improve growth, no decisions on the direct tax code or reducing inflation."

Mark Williams, chief Asia economist at the research consultancy Capital Economics, said that both in terms of the budget forecasts and policy measures, nothing that was announced today marks this government out as being significantly different from the last one. "If market enthusiasm for Modi's government is to be sustained, that will have to change," underlined Williams.