India budget: What can we expect?

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Media captionIndia's rising cost of living coupled with slow economic growth is hitting consumers

After sweeping to power in India's election with a pledge to fix the economy, the first budget of Prime Minister Narendra Modi is going to be keenly watched.

And in the country where Bollywood is one of its greatest exports, one economist is using a film analogy.

"This is the Modi moment," Raj Kothari from Sun Global Investment told Bloomberg. "And the budget will be like a trailer of what the movie is going to be."

Some are calling it a budget of hope. Others say it is the most crucial budget since 1991, when the country opened its socialist economy to free market reforms.

But it comes as Asia's third-largest economy is battling its worst economic slowdown in three decades, weighed down by high inflation and low investments.

So what measures might we see when Finance Minister Arun Jaitley addresses parliament on Thursday?

Boost manufacturing

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One big challenge for India has been job creation. Every year more than 10 million Indians enter the workforce but so far the country has not been creating enough employment to absorb them.

In addition, India imports more than it exports, which has created a wide trade gap. This in turn impacts upon the currency and government finances.

Manufacturing makes up 15% of Indian GDP - much lower than in China, where it is 34%.

The government is expected to announce a roadmap that would give a big push to large-scale manufacturing - perhaps easing rules for foreign firms to invest in Indian defence firms. They are currently restricted to a 26% stake, although this can be higher on a case-by-case basis.

If the limit is raised uniformly that could open the door for the likes of EADS, BAE Systems, Rolls-Royce, Boeing, and a host of component makers, to make investments potentially running into billions of dollars. And that would benefit domestic manufacturers who can partner foreign investors.

"Not much can be expected from the budget as it is a statement of accounts. But if the government issues clarity on how the policies on manufacturing would evolve then that would send a strong message," says Samiran Chakraborty, head of research at Standard Chartered bank.

Improve infrastructure

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Poor infrastructure has been one of the biggest hurdles for the Indian economy. India needs quality roads, uninterrupted electricity and new ports if it wants to grow faster. But projects worth billions of dollars have stalled due to red tape - like rules on land acquisition and environmental clearances.

Experts believe India needs investments of $1 trillion (£584bn) or more for building new infrastructure - and for that it would need to attract foreign investment.

Even though new infrastructure projects enjoy tax benefits, there is ambiguity as to whether modernising and expanding existing projects such as airports, would qualify as new infrastructure. The government may give clarity on this issue to encourage investor confidence.

"The key would be to increase capital expenditure. In previous years, the government cut down on that due to a fall in revenues. If it spends more, then that would also give an indirect push to infrastructure projects," says Madan Sabnavis, chief economist at Care Ratings.

So even if there is no single, big, new project announced, assurances that getting stalled projects off the ground is a top priority would send out a positive signal.

Tax reforms

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A bitter, retrospective tax dispute between Vodafone and the Indian government became global news and kept many foreign investors away. Tax is a complex issue, but one message that investors are looking for is an assurance from the new government that it will respect existing tax laws.

Domestic companies, meanwhile, are eagerly awaiting the implementation of the Goods and Services Tax (GST).

The World Bank believes this could be a game changer that would simplify India's complex array of taxes and levies, and boost its growth trajectory. Businesses say that it would also bring down costs for consumers by 1-2%, which in turn would lead to more consumption.

Pawan Goenka, president of carmaker Mahindra Automotive, says that simpler tax rules would give a big boost to businesses across the board: "The current tax regime doesn't allow us to optimise our other costs. Therefore this doesn't allow us to take the right business decision."

GST has been on the table for a while, but despite industry clamouring for it, it has been delayed due to a lack of consensus between central government and the state governments, who fear it will risk their revenues and autonomy.

This budget cannot bring GST in overnight but the government is expected to give a clear timeline about when it will be implemented.

Cutting subsidies

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Media captionWatch: Yogita Limaye on why reducing subsidies is a sensitive issue in India

India's subsidies bill has been a big burden for the exchequer. Spending on food, fuel, fertiliser and other subsidies made up 15% ($41bn) of India's total budget in 2013-14. The government spends $24bn every year on fuel subsidies alone.

So slashing subsidies is expected to be one of the main themes in the upcoming budget.

This would help narrow India's fiscal deficit - for which the previous government set a target of 4.1% of GDP in the year to March 2015. However, cutting the deficit this year is unlikely as the latest figures suggest the government will overshoot that target.

Soaring oil prices - in part due to violence in Iraq - is making the task even harder. India imports about 70% of its oil and while customers are picking up some of those price increases it makes cutting subsidies harder.

If the government can contain the fiscal deficit it will inevitably mean unpopular measures - something the Indian people should be braced for with both Mr Modi and Mr Jaitley in recent weeks saying tough decisions would have to be taken for the long-term health of the country's finances.

The government is not expected to cut food subsidies - as that is a sensitive subject in India, but it may announce a plan to increase fuel prices.

"The finance minister faces a tough task ahead. If he chooses fiscal discipline then that will hurt growth in the shorter term. It's a strategy that will work in the medium term," says Standard Chartered's Samiran Chakraborty.

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