View: Budget didn't address long-term economic issues
India is facing both a cyclical and a structural slowdown. The budget has offered some hope for the first.
Traditionally, India’s finance minister carries the annual budget to Parliament in an old-fashioned briefcase; photographs of him holding the briefcase up are usually splashed across the front pages the next day. Finance Minister Nirmala Sitharaman, the first woman to hold the post, broke tradition last Friday by carrying her budget in a folded red cloth cover, of the sort used by some trading communities in India to store their accounts.
Having provoked the flurry of media attention the gesture was intended to generate, Sitharaman’s deputy was happy to explain: The new finance minister meant to break with a tradition inherited from the British. It was, he said, "a step in the direction" of becoming a "superpower."
That statement left me wondering if the official in question knows what a superpower is. The budget made me wonder the same about the government.
Consider, for example, the treatment of India’s armed forces. Sitharaman barely mentioned defence spending (indeed, for much of the first half of her speech, she barely mentioned any numbers at all). Perhaps that was because the defence outlay has barely kept up with inflation for years, and under Prime Minister Narendra Modi has reached record lows as a percentage of gross domestic product. Not since China humiliated India in a traumatic border war in 1962 has any government allowed defence spending to fall so low. Last year, it came in at less than 1.6% of GDP.
Perhaps you think that, instead of defence, India is investing in its own people, as a 21st-century superpower should do? Well, only 3.4% of total federal spending was budgeted for education — down from 3.74% the previous year and from 4.3% when Modi took over in 2014. And the central government and state governments together spend less than 1% of GDP on health, a fact which this budget did little to change.
Capital expenditure, too, has been squeezed — by one estimate, from Rs. 9.2 lakh crore ($134 billion) last year to Rs. 8.7 lakh crore this year. What has grown in the budget is subsidies: The government and public-sector corporations are borrowing in order to fund a direct transfer of cash to India’s farmers.
It’s true that India’s farmers need help. But what they really need is agricultural reform that would allow them to access national and world markets instead of depending on government procurement. There was no sign that such changes are on the agenda, even though India’s procurement program is controversial at the World Trade Organization and one of the major stumbling blocks towards moving forward on multilateral trade negotiations.
India at the moment faces both a cyclical and a structural slowdown. The former is because credit and investment have frozen up, with new project launches at a 14-year low last year. The latter owes more to the fact that manufacturing and exports are both facing a crisis thanks to sustained weakness in skills and competitiveness.
Sitharaman’s budget offered hope of addressing the first problem. India’s troubled non-banking financial companies — its shadow banking sector — will be thrown a lifeline. Public-sector banks will be recapitalized and small businesses will be able to borrow at cheaper rates and get their money quicker. Start-ups have for years been complaining about harassment by tax officials; in her speech, Sitharaman promised crucial changes to the rules to reduce this persecution.
The government has also announced that it will start issuing dollar-denominated bonds, something previous Indian governments have been terrified of doing. That should hopefully mean it will appropriate a smaller proportion of domestic Indian savings, allowing some of those to be used for private-sector investment instead of government spending. That’s cheered the bond markets and might create some space for the Reserve Bank of India to continue to cut rates, perhaps more sharply than expected. I’m a little more optimistic about the short- to medium-term now.
But, if anything, I am more pessimistic about the long-term. The failure of the government’s skilling program was glossed over in the budget and, instead of looking to integrate into global supply chains in order to grow exports, the finance minister continued with the Modi government’s practice of arbitrarily raising tariffs to protect domestic industry. Who would want to set up an export-focused factory in India when tariffs are changed constantly and arbitrarily?
Investors can take solace in the fact that India will almost certainly recover from its cyclical slowdown. But I still don’t see it taking any steps in the direction of being a superpower — or even a comfortable, upper-middle income country.