India takes a sensible first step towards economic reform
The high expectations that accompanied Indian Prime Minister Narendra Modi's landslide election win two months ago apply to all he says and does. Those who voted for him and investors want two years of lacklustre economic performance quickly turned around. The modest budget his finance minister Arun Jaitley unveiled earlier this month was therefore greeted by stock markets with a dive before the contents were properly digested, whereupon they rebounded. Aspirations have to be realistic; it will take years, not mere months, to implement the far-reaching reforms envisaged to get India's economy to where it needs to be.
Modi's Bharatiya Janata Party took power with India's first outright parliamentary majority in three decades on the back of promises to overhaul the economy. Anticipation was high that the first budget would create an economic paradigm shift. But it was unrealistic to expect a shakeup within weeks. Jaitley did well to unveil measures that were down-to-earth, with 7 to 8 per cent growth targeted over the coming three to four years.
Although short on detail, what he outlined has the right approach of attracting foreign investment and building much-needed infrastructure. He promised hi-tech cities, industrial corridors, power stations and ports. Ending disliked retrospective taxes for overseas investors and raising the caps on foreign investment in the defence and insurance industries, coupled with a new goods-and-services tax, makes sense.
India's GDP growth has been about 4 per cent for the past two years, half of the average level recorded from 2004 to 2012. The rate is expected to rise to 5 per cent this year but has to be higher to drag hundreds of millions from poverty. Yet with millions of new school graduates joining the job market each year and an ever-widening gap between rich and poor, reforms must be about more than focusing on the 22 per cent of the population living below the poverty line. Financial constraints require fiscal prudence and spending within means.
Modi's nationalist tendencies and populist ways have to be tempered. A 12 per cent budget allocation for defence has worried neighbours, while setting aside US$36 million for a vanity project, a statue to be the world's tallest of a freedom fighter in his home state of Gujarat, makes light of a US$30 million plan for women's safety. Still, if the reforms can be fleshed out and targets met, India has a chance of attaining its true potential for economic growth.