The big question is does Budget 2025 help India step onto the path to Viksit Bharat by 2047? If high, inclusive growth is the surest way to reach that goal, the Finance Minister’s proposals for 2025-26 generally point in the right direction. But that is not saying much.
Has reform by stealth reached the end of its usefulness?
Most budgets, from 1991-92, have charted a similar path. There is wide recognition that 1991-92 templated the optimum reform strategy for India. Sadly, it also engrained in the political class the mantra that bold reform steps are politically saleable only when the economy is on the brink of ruin as it was in 1991-92. In normal times- when government is humming along doing what is best for the economy- it is considered prudent to keep the reform tempo moderate and thereby minimize the friction from hurting entrenched interests – political, financial, and business. This is the lesson from the short period of reforms, like privatization, under PM Vajpayee, during 2000 to 2003. Sadly, that legacy endures, reducing the appetite for political risk. It will take a “Trumpian” make over to shake government out of the comfortable cruise control it is on.
Stock market red flags.
Stock markets are a reasonable barometer of short-term variations in economic prospects. The markets tanked during and after the budget presentation- possibly spooked by the continued expansive welfare outlays –amongst them free cereals with a splash of lentils distributed free to 180 million people which pegs poverty levels at about 12.5 percent of population. This set could fall below the minimum poverty income level if free food distribution is ended. In addition, affordable homes for the poor, free electricity, free bus rides for women in many cities and subsidized rail travel in unairconditioned trains are additional support systems, which drain government budgets.
The absence of substantive feel-good drivers like big bang privatization of public sector banks and loss-making state-owned enterprises, the income tax giveaways for the middle-class – worth about Rs 1 trillion in value (about 3.5 percent of the estimated tax receipts)- and import tax reductions extended as an olive branch to the new “import tax police” situated in the office of President Trump, which make the budget math dodgy, making it difficult to achieve next year’s fiscal deficit target of 4.4 percent (versus 4.8 percent this year) still well above the 4 percent outer norm, with some cushion maintained, to allow counter cyclical stimulus. Ignoring stock market reactions to the budget goes back to Finance Minister Manmohan Singh- the architect of India’s 1991-92 liberalization – so the FM is not alone in trying to feel the stones whilst crossing the river of global fiscal turbulence.
The FM has a reputation for fiscal prudence.
On the flip side are the solid credentials built up by FM Sitharaman, over the past eight years, as a fiscal conservative and scrupulously prudent accountant. She built this image from the start in 2019 by shining a light on and ending the past practice of off-budget financing by building up a huge backlog of payables to public sector enterprises, just to show paper compliance with fiscal deficit targets. The finance minister means what she says and appears to have the full backing of the Prime Minster, so markets discount the intention to preserve fiscal prudence, at their own risk. Of course, there are enough global uncertainties out there, which advise caution for investors.
Do something, anything, to show the government is in control.
Governments cannot sit on their hands waiting for foreign and domestic private investors to decide to invest. The public expects the government to have a game plan ready to meet all eventualities. The easiest option is to substitute absent private investment – lower in recent years than in previous high growth year, by about 3 to 4 percent of GDP – with enhanced public investment. This strategy presents Hobson’s choice between continuing the welfare programs or investing in public sector projects to drive GDP growth.
A median path to enhance the efficiency of public investment is to send signals to the private sector of government willingness to lower risk and enhance return. The Public Private Partnership model, which is once again in play, after a gap of nearly a decade, seeks to principally do the former. Reducing inflation and with it the interest rate level, does the latter. Monetary policy choices are also constrained by the need to retain at least a 2 percent differential between interest rates in the US and other developed economies and India, to attract inflows of financial capital (as opposed to the net outflow we are seeing today) to avoid the INR being shorted by predatory financial investors.
Within the existing domestic and global limitations, the budget has steered a course which is in the right direction but lacks the pace necessary for India to achieve its developmental goals.
History cannot be junked as speedily as the future can be imagined.
It is not generally acknowledged that whilst Viksit Bharat is a long-term goal, the immediate economic challenge for India is more pedestrian. To transition from lower middle income (LMI) level, as defined by the World Bank, to the upper middle income (UMI) category. India transitioned from low income (LI) to LMI in 2007 but remains stuck in this income category for eighteen years. India’s per capita national income in 2023 was $ 2540 in current terms which was 43 percent lower than the needed $ 4465, to transition into UMI category. China crossed this hurdle in 14 years by 2010. But it will still take us a decade more till 2033, if we grow at above 8 percent per year in real terms in INR.
Become part of the change makers team
It has been twenty-four years since China started its journey from low income to high income and it is yet to reach there yet. Their transition was also timed right with helpful global trading arrangements for domestic growth via exports for the developing world. That liberal, helpful, “win-win” game plan, to grow developing economy markets, to absorb technology products, investments, and services pioneered in advanced economies, is now in tatters. To navigate the choppy waters of a relatively “closed global economy” India must depart from the “business as usual” approach. There were insufficient indicators in the budget to assess such prospects. We seem to be in a reactive mode, waiting for advanced economies to make the first move. For a successful transition, we must become part of the global team making the changes, just as China did.
First published in the Quint February 8 2025
https://www.thequint.com/opinion/india-slow-turn-towards-viksit-bharat-union-budget
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