Modi Budget Seen as Opportunity Missed After India Win

Prime Minister Narendra Modi’s first budget since his election win was seen as a missed chance to take tough measures on subsidies by economists at banks including Deutsche Bank AG and Nomura Holdings Inc.

Finance Minister Arun Jaitley retained the fiscal shortfall target at 4.1 percent of gross domestic product while leaving revenue and expenditure forecasts largely similar to an interim budget in February. At the same time, he unveiled plans to “overhaul” food and fuel subsidies to narrow the fiscal gap to 3 percent of GDP in 2017.

The budget was “almost a copy and paste of the interim budget” and “a lost opportunity” to detail bold steps to revive economic growth, Taimur Baig, director of Asia economics in Singapore at Deutsche Bank AG, told Bloomberg TV. “If they had some tough measures, Indians would have taken it. They have the appetite, they have given them the mandate, but somehow or the other the government didn’t follow through.”

Rising oil prices and a weak monsoon risk inflating a subsidy bill that has risen fivefold over the past decade, threatening Modi’s efforts to narrow the budget deficit to a seven-year low. Government spending has stoked Asia’s fastest inflation, prompting the central bank to keep interest rates elevated in Asia’s third-biggest economy.

“There weren’t measures that told us how this deficit target was going to be achieved,” said Atsi Sheth, a senior vice president at Moody’s Investors Services. “I certainly don’t think that we know any more about what they’re going to do over the next five years than we did yesterday.”

No Answer

Jaitley sought to manage expectations early on when presenting the budget to parliament yesterday, saying “it would not be wise” to expect big changes 45 days after the government took office. He pledged to bridge the fiscal gap by increasing revenues as a percentage of the economy, in part through expanding the tax base, while leaving subsidies untouched.

“When for 66 years various governments have not found an answer to these subsidies, I should produce an answer? Obviously, it is not possible,” Jaitley told NDTV 24X7 television channel after presenting the budget. “This is just the beginning of this government and not the end of the government. Please bear in mind improvement and reforms are an ongoing process.”

‘Sensationalized Expectations’

India’s benchmark stock index fell 0.2 percent as of 11:11 a.m. in Mumbai, while the rupee strengthened 0.1 percent. Stocks have gained 5.1 percent since Modi’s win on May 16, among Asia’s top performers in that time, on bets that the first parliamentary majority for a single party since 1984 will enable him to make tough choices.

“The mandate we’ve received may have sensationalized expectations, but we need to establish a careful balance to keep revival sustainable,” Commerce Minister Nirmala Sitharaman said in an interview with Bloomberg TV India yesterday. “This is the course we are on.”

The measures announced by Jaitley reduce revenues by as much as 0.2 percent of gross domestic product, Andrew Colquhoun, head of Asia-Pacific Sovereigns Group at Fitch Ratings, a credit-rating company, said in a statement.

“Fitch is surprised that the Indian Finance Minister Arun Jaitley has stuck with the outgoing government’s fiscal consolidation path,” Colquhoun said. “The agency is currently unsure how this can be met without further revenue-strengthening or expenditure-saving measures.”


Jaitley projected revenues will rise to 11.9 trillion rupees ($198 billion), 1.9 percent more than the previous government forecast in February, boosted by higher asset sales. Expenditure will increase 1.8 percent to 17.9 trillion rupees, with subsidies maintained at about 2.6 trillion rupees.

“The government did not use the opportunity to come clean on subsidies, which is a disappointment,” Nomura economists Sonal Varma and Aman Mohunta said in a note. “However, a greater focus on investments, measures to attract capital inflows and measures to boost household disposable income (through higher exemption and tax deduction limit) are positives.”

Jaitley had criticized former Finance Minister Palaniappan Chidambaram after the interim budget in February, saying he narrowed the deficit by cutting planned spending on roads, bridges and power plants, while underestimating and deferring subsidy payments.

‘Real World’

Chidambaram also assumed GDP growth for the fiscal year at 6.5 percent, higher than the central bank’s best-case scenario of a 6 percent expansion. The finance ministry said this week it expects the economy to expand as much as 5.9 percent.

“Welcome to the real world,” Chidambaram said in a statement, adding that the budget retained the imprint of many of his government’s policies.

India’s fiscal deficit in the two months ended May was 2.4 trillion rupees, or 46 percent of the full-year target. Jaitley proposed to set up a commission that would assess ways to cut government spending while pledging to target food and fuel subsidies to protect the marginalized and poor.

“They will take some time to meet their overriding expectations,” said Rupa Rege-Nitsure, chief economist at Bank of Baroda. “If foreign investors do the budget arithmetic, they will see that the government is trying to be more liberal and externally oriented. It is definitely a positive.”

‘Lost Opportunity’

Jaitley announced plans to revive special economic zones while building more highways, coal-fired power plants, airports and ports. The government will also spend 2 billion rupees to build the world’s largest statue of independence hero Sardar Vallabhai Patel, while allocating about 3 billion rupees on programs to ensure women’s rights and safety, Jaitley said.

India will raise the caps on the automatic approval for foreign direct investment in the defense sector to 49 percent, from 26 percent now, Jaitley said, with anything more than that requiring special approval. The FDI limit in the insurance sector would also be raised to 49 percent, he said.

Jaitley said he hoped to reach a final solution on a goods and services tax by the end of the year. He also announced a review of cases where levies were applied retrospectively, disappointing analysts who wanted the cases to be scrapped, a move that may affect a $2.4 billion claim on Vodafone Group Plc over a 2007 acquisition.

“It is a lost opportunity in terms of a bold move that would have fired up the investment climate tremendously,” said Sudhir Kapadia, a partner at Ernst & Young LLP.

Spending on fuel, food, fertilizer and other subsidies rose to 16 percent of India’s total budget in the year ended March 2014 from 9 percent in 2004, while plan spending climbed to 30 percent from 26 percent, according to budget documents. Two-thirds of India’s 1.2 billion people live on less than $2 per day, according to the World Bank.

“This is a tiny step in the right direction,” Frederic Neumann, Hong Kong-based co-head of Asian economic research at HSBC Holdings Plc, said by phone. “Jaitley delivered as much as he could, but really we have a long road ahead of us.”

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