Spending hike is best part of low-key India budget

July 11, 2014

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The new Indian government’s maiden budget fell short of the hype. But Narendra Modi’s administration earmarked substantial sums for new infrastructure, which should revitalise growth.

The July 10 budget was the most important financial test for Modi since his Bharatiya Janata Party won power with a sweeping mandate in May. Yet it lacked the far-reaching reforms many economists and investors wanted. Finance Minister Arun Jaitley gave no hard deadline for introducing a federal sales tax – a long-delayed reform which would stimulate growth and allow manufacturers to sell more easily across India’s 29 states. And rather than tackle ballooning subsidies and handouts, Jaitley pushed the problem to a new commission.

Still, he did attend to some crucial tasks. Insurance and defence-related manufacturing will be opened to greater foreign participation. And the tax code will no longer be tweaked retrospectively. This removes a major uncertainty for investors, who were spooked by the previous government using the manoeuvre to put Vodafone on the hook for about $2 billion.

The best part, though, was the budget’s focus on new capital assets – highways, ports, urban amenities, warehouses and low-cost housing. Despite a tight fiscal situation, Jaitley pushed up total spending 13 percent to $300 billion.

The increase, which the government hopes in turn will attract more private investment, is a gamble. Tax collections can’t rise quickly because GDP growth has slumped, while leaning more heavily on the bond market could lead to a spike in borrowing costs. Jaitley, therefore, is betting on an aggressive asset sales programme.

For that, he will need to keep investors excited. In the short run, markets will judge the Modi government by its ability to revive capital expenditure, in turn boosting jobs, growth and consumer spending. In the medium term, markets will hold the administration to its promise of reducing the fiscal deficit to 3 percent of GDP by March 2017, from 4.5 percent last year.

These are big challenges, and financial markets are already pricing in much of this future success. The budget has done just enough to keep those hopes alive.

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