NEW DELHI — India will focus on developing its infrastructure, streamlining its subsidy programs and easing restrictions on foreign investment in the coming months, according to the annual budget presented by its new government Thursday.
As Prime Minister Narendra Modi looked on in Parliament, his finance chief gave a 128-minute speech on the $298 billion budget, which included tax cuts, plans to establish broadband connectivity in India’s villages, and funding to improve sanitation and to clean up the Ganges, a river considered holy by the country’s majority Hindus.
More significant, the administration will move to institute a new goods-and-services tax, raise caps on foreign investment in the defense and insurance industries, and monitor enforcement of a retrospective tax law that had scared off investors in the past two years.
Promising economic reform, Modi’s Bharatiya Janata Party swept to power in May with the first outright majority in Parliament in three decades, at a time when the country is struggling with slowing economic growth, rising food prices and general malaise. India had averaged 8 percent annual growth from 2004 to 2012, but that fell by half in the past two years. Growth is expected to rebound to 5 percent this year.
The task facing the government is “challenging,” Finance Minister Arun Jaitley said in his speech in Parliament, adding, “We need to introduce fiscal prudence and cannot spend beyond our means.”
The government, in a surprise to some, said it would try to keep the deficit target to 4.1 percent of gross domestic product, the previous administration’s figure, largely by selling some of its assets.
Given Modi’s political mandate, expectations were high ahead of his administration’s first budget. But critics expressed disappointment afterward that he had not proposed more sweeping reforms and had instead opted for a wide range of smaller programs and infrastructure projects such as new ports, high-tech cities, airports and industrial corridors.
For the aspiring middle class, which helped bring Modi to power, the budget allocates about $34 million for women’s safety programs and provides home-loan incentives and tax breaks for flat-screen televisions. For the underprivileged, the government pledged to provide more electricity and roads, as well as to ensure a toilet for every home by 2019, the 150th birth anniversary of India’s founding father Mohandas Gandhi. The budget also sets aside $34 million for one of Modi’s vanity projects, a statue in his home state of a renowned freedom fighter that he hopes will be the tallest in the world.
“There was very little in terms of overall economic policy thrust. No major big-ticket announcements,” said Paranjoy Guha Thakurta, a political economist. “It’s tried to please all sections of the Indian population, but it may not succeed in pleasing anybody in the process.”
The Modi government hopes to steer the country, which badly needs more jobs and manufacturing, to the growth levels of years past. But, Thakurta noted, two unknowns loom:the possibility of below-average rainfall this monsoon season, which could increase food prices, and the effect of the ongoing Middle East crisis on oil prices.
In his budget speech, Jaitley also proposed “to overhaul the subsidy regime, including food and petroleum subsidies, and make it more targeted.”
Investors and others in the United States praised some of the Modi administration’s moves Thursday, including a proposal to increase the proportion of foreign investment allowed in the insurance industry from 26 percent to 49 percent. Legislation to this effect has been stalled in Parliament for a decade. Raising the cap is considered a significant step for investors beyond the insurance industry, “given how long-standing and politically charged the legislation has been,” said Melissa Frakman, director of financial policy for the U.S.-India Business Council.
But a similar move to raise the investment cap to 49 percent in the defense manufacturing sector did not go far enough, experts said, because many foreign investors need to be majority stakeholders to maintain control over sensitive technology.
India is the world’s largest importer of arms, and Modi’s administration hopes to beef up its domestic armament manufacturing. But the country’s limits on foreign investment have meant that overseas defense contractors have invested only $4.8 million in India since 2002, the council said. And that is unlikely to change much, even with Thursday’s announcement.
“It’s welcome, but in order to encourage more investment, it needs to be 51 percent, in our view,” said Phil Shaw, chief executive of Lockheed Martin India. But, overall, he said, the business community remains “cautiously optimistic” about the Modi government.