India’s Careful Plan for Growth
By THE EDITORIAL BOARDMARCH 6, 2015
Nanendra Modi’s new budget includes an increase in spending on railways This story is included with an NYT Opinion subscription.
Narendra Modi chose incremental pragmatism in proposing his first full budget since becoming India’s prime minister last year. The $288 billion budget did not fulfill the expectations for economic reform that he has fostered since his election. But he offered enough initiatives on spending, taxes and other areas of economic policy to satisfy many investors for now, and to keep alive hopes that he can guide India to greater growth and development.
The country and its more than 1.2 billion people have voracious requirements. Economic growth is expected to accelerate from 7.4 percent this fiscal year to as much as 8.5 percent in the one that starts next month. But to succeed in building roads, railways and other public improvements and elevating millions of people out of poverty, India will have to sustain an annual growth rate of 9 to 10 percent for over a decade, Finance Minister Arun Jaitley, an architect of the budget, said in New York this week.
One budget proposal, to reduce the corporate tax rate to 25 percent from 30 percent, is intended to attract more investment, which is central to Mr. Modi’s strategy. Other measures include a promise to make the tax structure more transparent and a commitment to introduce a new bankruptcy law in Parliament that would give businesses more certainty.
One of the biggest impediments to investment is India’s hodgepodge of laws under which taxes can be collected at state borders, slowing commerce. The government has promised to establish a new goods and services tax by April 2016 that would unify the disparate laws under one VAT-like system. The restructuring is overdue and the deadline shows the government is serious about getting it done. However, the reform requires a constitutional amendment that must be approved by a two-thirds parliamentary majority and at least half the states. Mr. Modi’s Bharatiya Janata Party controls the lower house of Parliament but not the upper house, so it is unclear whether he can make this happen.
Another big challenge is making people pay the taxes they owe. Since only about 35 million Indians, a mere 3 percent or 4 percent of the population, pay taxes, according to Mr. Jaitley, the government has promised to crack down on tax evasion, including by imposing a penalty of up to 10 years in prison for concealing assets overseas and imposing a new 2 percent tax on the “superrich.”
Mr. Modi made a commitment to give more authority to the states and to provide them with 42 percent of tax revenues compared with 32 percent now, which could give them more reason to work with the federal government on economic reform initiatives. There is no guarantee that states will spend this money wisely, so Mr. Modi will have to monitor the process closely.
Mr. Modi has benefited from an improved global economy, caused in part by lower commodity prices that could save India $50 billion this year, allowing him to provide new welfare programs for the poor. The budget includes a new social security plan to subsidize accident and death insurance and pensions, as well as a major increase, of more than $11 billion, in spending on roads, ports and railways.
The economic climate also enabled Mr. Modi to avoid some spending cuts and relax by one year the target, which the government endorsed last year, for reducing the country’s fiscal deficit to 3 percent of gross domestic product. A more serious weakness is the budget’s failure to make significant changes to India’s enormous subsidy programs for food, fuel and fertilizer.
Opportunity and growth have been stifled by an economy that is centrally directed, overburdened by regulation and plagued by inefficient distribution of aid to the poor. For decades, Indian leaders have promised reform without actually effecting change. Now, a growing population of young people desperate for jobs makes that challenge inescapable. Even many Indians who are not Mr. Modi’s allies are embracing these economic goals and hoping the government carries them out.
image from Giigke Public Domain
Thanks Judy !