What a difference the prospect of a new government has made. The Indian stock market is up by a fifth this year, a shaky rupee has steadied and consumers are upbeat — buying more cars, for instance. But on July 10 Narendra Modi’s finance minister, Arun Jaitley, must dish up sensible plans in his first budget.
Jaitley insists that fiscal prudence trumps "mindless spending and populism." Yet the target he inherited of shrinking the budget deficit to 4.1 per cent of GDP this year already looks all but impossible. Two months into the fiscal year, spending outstrips revenues by more than US$40 billion, nearly half the planned annual total. More bills loom. A new law giving cheap food to two-thirds of India’s 1.25 billion people rolls out soon.
Other demands press in. If the current weak monsoon does not strengthen, millions of farmers might need help. Rising global oil prices are pushing up energy bills, and with them subsidy costs. Then come Modi’s infrastructure ambitions. He promised millions of jobs as roads, factories, power lines, high-speed trains and 100 new cities are built. Finding the money for all that is becoming a priority. And if that were not enough, Jaitley and Modi, the prime minister, who appear to work closely together, have the even bigger task of identifying which broad, liberalizing reforms they believe will bring India rapid and sustained economic growth.
Jaitley’s budget is expected to cut wasteful fuel and other subsidies. When they are not stolen, these mostly go to the better-off, especially the more prosperous farmers. Better and cheaper is to switch to cash welfare programs. Money saved could then be spent on financing health care. The new government has gone along with a long-planned increase in diesel prices. But it has partially backed down, following popular protests, on a decision made by the outgoing government to raise (subsidized) railway fares. That is worrying, especially since Modi spoke days before of the need not to back away from hard economic decisions.
But the benefit of the doubt remains with Modi and Jaitley. Cutting public money for all sorts of goods — fertilizer, cooking gas, paraffin, electricity for farmers — is in theory becoming easier. Some 640 million Indians are enrolled in a biometric identity scheme, called Aadhar. When cutting subsidies, it should now be easier to identify those who need cash transfers to cushion the blow. Aadhar, and linked bank accounts, could be extended to many more. Yet rumours suggest the administration may scrap it (it was started by the Congress party, now in opposition).
A second broad reform could be what Modi calls "co-operative federalism" — state governments getting to decide more on spending and policy. Go-getting states could experiment, for example, in reshaping a national job-creation scheme involving rural public works. And some states that have agreed to let in foreign supermarkets, such as Tesco or Walmart, could push on with it, despite opposition from reactionary bits of the ruling (and nationalist) Bharatiya Janata Party (BJP).
Then internal barriers to trade need to go, removing state checkpoints on roads as well as restrictions on who may sell farm goods over state lines. And Jaitley needs to fix a date for rolling out a long-delayed national goods-and-services tax. That would help plug the budget deficit.
Lastly, the budget should encourage more private capital to chase productive work. At the moment, the government’s borrowing is crowding out private investment. Jaitley is expected to start selling state-owned firms. He should be bold. Putting Air India on the block would send a powerful message that India is open for business.
In several industries, the addition of foreign investment and expertise would be especially useful. Jaitley is expected to face down strong lobbies among the protectionist parts of the BJP. In the defence sector, poor-quality local producers squeal about competition. They want foreign ownership of ventures limited to minority holdings; Modi campaigned on promises of a powerful domestic defence industry, helped by outsiders.
It is not yet clear exactly what the finance minister intends to unveil on July 10. But Jaitley’s propositions will reveal much about the ambitions of Modi and his allies.