MUMBAI, India (AP) — India’s new government introduced a reform-minded budget Thursday, telegraphing a contentious overhaul of populist subsidies and vowing to lift economic growth to rates of 7-8 percent by spending billions of dollars on infrastructure.
The budget for the fiscal year ending March 2015 was closely watched as an indicator of whether Prime Minister Narendra Modi’s government will act quickly to will deliver on promises to revive stalled economic growth. The government also announced plans to ease limits on foreign investment in defense and insurance businesses.
Finance Minister Arun Jaitley outlined the 18 trillion rupee ($301 billion) budget, which he said would be a departure from the “mere populism and wasteful expenditure” that has dragged down Asia’s third-largest economy.
India’s economic growth has slowed to less than 5 percent for the last two years after a decade of expanding by an average of 8 percent, which is the minimum the government says is necessary to provide jobs for the 13 million young Indians who enter the workforce each year. Big spending on subsidies has limited the government’s ability to use its budget to make productive investments that could boost the economy’s productivity in the long run.
Jaitley, however, maintained the previous government’s target for a budget deficit of 4.1 percent of gross domestic product and also said it would be “daunting” to meet that goal. He said the deficit might end up at 4.5 percent. In the two subsequent years, he forecast the deficit to fall to 3.6 percent and 3 percent of GDP respectively.
He indicated those reductions would involve overhauling expensive subsidies for food, fuel and fertilizer that cost India’s government some $40 billion a year. He gave no details other than saying the subsidies would be “more targeted.”
In some quarters there was disappointment that the government held back from an immediate and radical slashing of the previous government’s populist policies, which provide a social safety net but also swell the budget deficit.
“There was a sense that this budget would an opportunity for the government to break away from the principles, the world views of the previous government. It did not do that,” said Jahangir Aziz, head of Asian emerging markets for JP Morgan Chase.
Modi’s Hindu nationalist Bharatiya Janata Party swept to power in May after the most decisive election victory India has witnessed in three decades, ousting the long-dominant Congress party. Voters were fed up with Congress’ failure to curb runaway inflation and the wilting of economic growth.
Investors initially welcomed the budget with the Sensex stock index rising 1.6 percent before losing ground and finishing the day down 0.3 percent. Expectations for a pro-growth budget were high and the index hit a series of record highs in the weeks before the budget.
Jaitley said the government could not rely only on spending cuts to reduce the budget deficit and should also work to spur economic growth back to 7-8 percent, which would result in higher tax revenue.
He said that a revival of manufacturing and building of new infrastructure are ways to provide jobs. He announced 500 billion rupees ($8.3 billion) in projects to expand and improve roads, ports and electricity plus tax exemptions to promote investment in small- and medium-sized factories.
Jaitley also announced that the caps on foreign investment in the defense and insurance industries would be raised to 49 percent from 26 percent.
The combination of infrastructure spending and relaxation of foreign investment curbs helped soften the disappointment that the government did not slash food and fuel subsidies in its inaugural budget. That’s likely because a weak start to the annual monsoon season is likely to reduce harvests this year and drive food prices up further, which would make cutting subsidies even more difficult and a burden on the poor.
The targets for reducing the budget deficit also could indicate the Modi government plans to generate revenue by selling shares in state-owned businesses, said Sumesh Sawhney of Jones Day, a law firm that works with investors in India.
“It’s not a big-bang budget, but it is not a disaster either,” Sawhney said.
Associated Press writer Patrick Reevell in New Delhi contributed to this report.