India's Budget and Modi's Ambitions
Modi has to prove that there is enough to go around.
In his first nine months in office, Indian Prime Minister Narendra Modi has announced a raft of initiatives -- to boost manufacturing, improve sanitation, slash red tape, increase foreign investment and more. All worthy goals. What's been lacking up to now is a coherent strategy to tie these plans together.
The budget Modi's government will present on Feb. 28 is a chance to put this right. More than just another bunch of policy proposals, India needs an organizing vision for the remaking of its economy.
Boosters remain giddy about the country's prospects -- and considering the potential, their excitement is justified. Yet that potential remains unlocked. The economic revolution launched by the liberalizing reforms of 1991 is unfinished. India is only part of the way toward becoming a modern market economy. It isn't yet on the path of rapid growth it could and should be on.
The great hope for Modi is that he understands this and wants to finish the job. The budget is an excellent opportunity to prove it.
First, to be sure, investors want to hear that the government remains committed to fiscal rectitude. That means shoring up a notoriously weak revenue base, in part by making the income-tax system simpler. The push to create a national goods-and-services tax must continue. The state must be more ambitious about divesting its stakes in public companies -- not only to raise money, but also to expose them to competition and make them more efficient.
On the spending side, India's approach to subsidies and welfare programs needs a more fundamental rethink. Instead of propping up agricultural prices and holding down the price of cooking gas -- which mostly benefits rich farmers and middle-class city dwellers, respectively -- the state should transfer cash directly to those who need it most.
The money saved can be directed toward three key areas: health, education and infrastructure. None of Modi's other plans has any chance of success unless the country's infrastructure needs -- estimated at $1 trillion over five years -- are met. India's biggest infrastructure companies are saddled with debt, and banks' share of nonperforming loans is growing. Only public investment has a chance of getting these projects off the ground.
The budget has to do more than set out fiscal plans, however, important as they may be. If India is to create a vibrant manufacturing sector -- critical to finding jobs for the million or so Indians entering the workforce every month -- officials need to make it easier to do business. Here again, it's vital to think big.
Up to now, Modi has tinkered with some of the worst enterprise-squashing measures dreamed up by previous governments -- making it a bit easier to buy land to build factories, for instance. But he hasn't tackled the deeper inefficiencies that hobble the markets not just for land, but for labor and capital as well.
Onerous controls on selling and converting agricultural land for industrial use remain in place. Progress on creating a national land registry has been slow. Archaic labor laws prevent companies from scaling up by adding workers. The resulting dearth of opportunities discourages temporary workers from upgrading their skills. India lacks an effective bankruptcy code: Zombie companies limp on, minority investors are robbed, and capital that could be better used elsewhere stays tied up.
A budget can't execute such far-reaching reforms at a stroke -- but it can lay out the scope of the changes India requires. Modi's government needs such a strategy to organize its own thinking, but it's also a question of political tactics. Modi's had little success in getting legislation through the upper house of parliament, where his Bharatiya Janata Party lacks a majority. If he can get the public on his side by explaining how his reforms work together and where they might lead, he'll strengthen his hand in those negotiations.
Modi is a charismatic leader, and he has sold himself superbly. Now he must put that hard-won political capital to use and sell a bold, comprehensive plan of economic reform.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.