The formation of the government and selection of Cabinet ministers and the Lok Sabha speaker suggested broad continuity of a Modi 3.0 administration. The budget was to be the next test to ascertain what we could expect from a Modi government dependent on its coalition partners for survival.
Barring some sops, projects and other symbolic announcements for Bihar and Andhra Pradesh (home states of the two key allies), there wasn’t much difference in the spending and taxation priorities of the new government. It very much seems to be Modi 3.0.
Let’s analyse the Economic Survey and budget moves on three counts:
1) Social stability: India is a young and aspirational country. However, large parts are poor and unproductive. It is imperative for the political class to support the latter, if not for economic growth, then to ensure social stability.
What’s good: Politicians have realized that being young, educated and under-employed is a potent combination, and large numbers of such youth pose a big sociopolitical and economic risk. The five employment initiatives announced are thus a good beginning. Their design and budget allocation, though, may not be ideal or adequate.
What’s missing: Households and small businesses are yet to fully recover from the income destruction that began after demonetization and continued through the implementation of GST and the covid pandemic.
The real disposable income of households has grown about 2.5% compounded annually since 2019. It is no wonder that consumption is weak and private investment hasn’t picked up. We are yet to see a frank admission to this effect from the government, which may explain the lack of an explicit income boost.
2) Economic development and stability: The biggest assurer of social stability is growth. However, India has not been able to grow consistently above 6.5% a year, which is required to create jobs for its growing labour force and lift incomes. Yet, growing at 6.5% with stable outcomes also offers a growth dividend and this government has ensured as much.
Fiscal and macro stability: The government is prudent and tends to over achieve its fiscal commitments. It is on course to pull the fiscal deficit under 4.5% of gross domestic product (GDP) by 2025-26. However, the lack of an explicit point target after that shows the difficulty of reaching the 3% aim.
Bond markets and the Reserve Bank of India are yet to fully reward this government with lower interest rates for its fiscal prudence and inflation control.
Growth and development: Public capex (Centre+states+public sector undertakings) is only about 7% of GDP. The private capex-to-GDP ratio is well below its 2012 peak. Growth impulses are thus delayed and dependent on a revival of household spending and business investment. In this context, we see no major push to increase annual GDP growth above 7%.
3) Reforms and policy stability: “Investment is an act of faith,” said former prime minister Manmohan Singh in a July 1991 budget interview. Investors commit long-term capital based on expectations of certainty over policies, rules and taxation.
What’s good: The announcement of a comprehensive factor-market review means that reforms of land, labour and capital to increase financial flows and improve absorptive capacity will be much anticipated.
We hope the measures taken are kind to private participation. The decision to evolve an Indian taxonomy for climate finance is also good, for it can channel large amounts for a just and equitable transition.
What’s missing: The government should spell out its trajectory of import duties and GST rates for all products and services. Many products and services have seen large import-duty hikes to support the ‘Make in India’ programme. These seem half-baked. We know that they reduced imports, but we do not know if they affected our exports of intermediate and finished goods.
How will the private sector invest amid such tariff uncertainty? The decision to cut import duty on gold and silver is welcome. However, was it done to include them in the GST structure or save the government money on its sovereign gold bond payments?
What’s bad: We have had endless talk about “comprehensive direct tax reforms.” The finance ministry already has a document that goes back to 2008, the ‘Parthasarathi Shome Direct Tax Code.’ It would be prudent to adopt that document as our tax code and start afresh.
This will prevent tax tinkering, an annual event for the most part, and provide certainty to domestic as well as foreign investors. India should remind itself repeatedly that it requires long-term risk capital from domestic and foreign investors across capital markets, real estate and the infrastructure sector to fulfil its ambition of becoming a developed nation.
The author is the chief investment officer of Q India, UK, an affiliate of Quantum Advisors.
