Tolerance Fears Cast Shadow Over Modi's Budget

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Finance Minister Arun Jaitley of India arrives to present the federal budget for the 2016-2017 fiscal year in New Delhi, India, on February 29. His role is usually not to worry so much about the economy, but to try to present a sense of sanity and reasonableness as the government’s spokesman and information minister, the author writes. Adnan Abidi/Reuters

This article first appeared on the Riding the Elephant site.

Updated | India's finance minister, Arun Jaitley, is the calm voice at the top of Narendra Modi's Bharatiya Janata Party–led government.

His role is usually not to worry so much about the economy, but to try to present a sense of sanity and reasonableness as the government's spokesman and information minister, while Modi avoids making many comments apart from mega-rally speeches and Amit Shah, the party's president, exudes fear-inducing Hindu nationalism.

Jaitley performed both the economy and information functions Monday with his annual budget speech that ran for just over 90 minutes. He focused heavily on helping the rural poor with schemes that aim to begin to double farmers' incomes in five years (an overly optimistic and probably unachievable target), as well as on accelerating investment in infrastructure, especially irrigation.

That should, the government hopes, increase consumer demand and economic growth, while also (though Jaitley of course did not say so) conveniently countering the Congress Party's opposition line that the government is "not pro-poor" at a time when state assembly elections are looming.

Three days ago, Jaitley was performing the same calming role in an often screamingly angry two-day Parliament debate after caste-based riots in the nearby state of Haryana had led to widespread violence and looting that cut water supplies to Delhi.

The previous week had been dominated by clashes and protests in Delhi's Jawaharlal Nehru University with rough police action and court cases, encouraged by government ministers, that irrationally accused students of sedition.

Image Low

Monday's budget has therefore come when the image of India and the 22-month old Modi government has been damaged, and something is needed to revive confidence.

Jaitley's speech of course dealt with economic confidence, but it is really more important for the government to boost confidence in its politics and to show that it is not following a preplanned policy of social divisiveness and restrictions on the freedom of speech aimed at strengthening Hindu nationalism and at enhancing the BJP's Hindutva appeal.

Two friends visiting Delhi in the past week from the U.K. and U.S. have told me how, viewed from abroad, India looks the best hope among major economies, with its 7.6 percent growth at a time when other countries have problems. But, they both added, the social unrest and the divisive Hindu nationalist and repressive image of the government were worrying investors.

It is against this background of social unrest and the government's image problem that Jaitley made his speech Monday. His most important macroeconomic announcement was that he is not relaxing the government's target of reducing the current 3.9 percent fiscal deficit to 3.5 percent of GDP in the coming year, despite being given conflicting advice that stimulating growth was more important.

Jaitley's economic advisers, who produced the Finance Ministry's annual economic survey at the end of last week, are suggesting that this year's official 7.6 percent (some critics say inflated) growth figure might drop to 7 percent in the coming year instead of rising.

Nine Pillars

Jaitley presented what he called a "transformative agenda," with "nine pillars" covering benefits for farmers and rural communities, social issues such as health care, industry and skills, infrastructure, financial sector reforms and governance and ease of doing business.

Proposed spending included $2.5 billion in the 2016-2017 year on delayed irrigation projects and $32 billion on rail, road and other infrastructure. Another $3.6 billion was announced to begin recapitalizing financially crippled state banks that have been hit by their often politically inspired largesse of allowing massive bad loans to over-leveraged Indian companies.

But there were few significant economic reforms in the speech. Foreign ownership through direct investment is to be allowed in food processing and marketing businesses. The foreign portfolio investment limit in public sector corporations (apart from banks) is to go up from 24 percent to 49 percent, and 15 percent foreign investment will be allowed in stock exchanges, up from 5 percent.

Various measures were aimed at improving the ease of doing business in India's rule-bound heavily bureaucratic environment, and a proposed bankruptcy code will ease the closure of bankrupt financial firms.

Also included were a complex array of tax measures including some relief for small businesses and an attack tax avoidance, plus a fresh effort (following a largely unsuccessful scheme last year) to persuade taxpayers to reveal undeclared assets.

Jaitley said companies would not be hit, as was done in the past, by retrospective tax demands, but he failed to reassure companies such as Vodafone that are involved in outstanding multibillion-dollar cases.

Overall, the budget sounded like a long list of worthwhile innovations and incentives, though critics said it lacked an overall big idea. Palaniappan Chidambaram, the last Congress government's finance minister, noted that there had been no mention of (declining) exports, which was certainly odd. There was also virtually nothing to encourage private sector investment in manufacturing, and no mention of spending on defense where there was only a marginal budget increased despite inflated pension and pay commission costs.

Exports and the private sector however were not the targets of this politically targeted budget, which was aimed, as I have said, at shifting the government's image from being pro-corporate to caring for the rural poor.

Now Jaitley's job is to show, and to persuade his prime minister to show, that the government also cares for India being an open and free society without the repressive Hindu nationalist overtones.

John Elliott writes from New Delhi. His latest book is Implosion: India's Tryst With Reality.