Growth in India looks like stabilising at around 7.5-8% in the next few years, the fastest of any major country. If the mood was to change in favour of deep structural reforms, the prospect may improve even more. But for now India appears a steady bet for long-run success.
Arun Jaitley, the finance minister, presented his third budget on 29 February. Growth is around 7.5%, but the economy presents a mixed picture, partly because of the rather unusual experience of deflation, with the wholesale price index falling for 15 months in a row, driven down by declining oil prices. Yet, with consumer prices rising by around 5.5% a year, the notion of deflation remains technical for most households.
The GDP deflator is around 1%. This mixed picture has been reinforced by two successive years of drought, leading to distress in rural areas, amid widespread suicides of farmers hit by the global commodity price fall. In the urban economy, the problem is the legacy of bad debts hanging over (and undermining) the nationalised banks.
All this had led to a clamour for a budget to kick-start the economy. Jaitley has faced pressure to breach his deficit target and go for growth. In the event, he stuck to the objective and budgeted for a deficit of 3.5% in the year starting in April against 3.9% in 2015-16.
The government of Prime Minister Narendra Modi has given priority to investment in rural irrigation schemes, rural roads, crop insurance and health measures. The budget contained an ambitious target of doubling farmers’ income by 2022, which most commentators agree is unattainable. Getting even three-quarters of the way there would be an achievement.
Shortcomings in Indian agriculture are a drag on overall growth. If India can make agriculture profitable, its economy would show dynamism in all the main sectors. A GDP growth rate of 7-7.5% is now the Indian norm. But in view of the rising young population seeking jobs, India needs more like 8-9% growth to satisfy social and economic demands. With this budget, Jaitley may have laid the foundations for realising that goal.
The other major feature was the restructuring of the nationalised banks, to which $40bn is being committed. The Reserve Bank of India will have to oversee the process. The problem is a legacy from the final years of the previous government, when many large infrastructure projects were held up by disputes about corrupt practices, resource misallocations and other regulatory logjams. It has taken the Modi government a long time, nearly two years, to deal with this.
It is clear now that Modi is not a radical reformer. He is decisive and energetic, but he wants to make the system work better, rather than to change it radically. Compensating for the difficulty of driving through reforms, Modi has launched a multiplicity of new projects The ‘Make in India’ initiative, for example, aims to attract foreign investment in manufacturing projects, offering India as an export platform for foreign companies.
The prime minister is personally overseeing projects such as those on digitalisation, smart cities and ‘Clean India’. If such ventures underpin his reputation for managing India’s transition to sustainable growth and greater efficiency, then he can be well pleased.