India's 2015 Budget: Neither 'Big Bang' Nor Bust


The dust appears to have settled around India’s $290 billion 2015 budget, a significant milestone for the Bharatiya Janata Party’s government, marking its first full fiscal year budget since coming to power in India’s general elections last May. More so than usual, this budget reveal was particularly dramatic. Modi’s battle cry last spring, before the general elections, was focused squarely on delivering much-needed development and economic growth. In his first 9 months in office, his pace on economic reform was unsatisfactory for many of his supporters. The 2015 budget was supposed to send a signal to international investors and to government’s critics that “big bang” reforms were on, and that India was truly back. Amid economic growth slowdowns in China, Russia, Brazil, and South Africa, this was perhaps India’s best chance to heave itself at the top of the BRICS grouping as the world’s most promising major emerging economy. So did the budget deliver?

Ultimately, this budget fell short of that magical silver bullet many emerging markets investors were hoping for. However, by the same token, the government did demonstrate a willingness to get its feet wet with reform. The general consensus among most level-headed analysts of the Indian economy is that this budget is a business-friendly approach to government finances that does not entirely leave behind in the dust the many populist programs of the Congress era. As usual, the Indian elephant will not take any sharp turns, lest it tip over entirely. This budget is evolutionary, and not revolutionary. With tax cuts for businesses (a declaration that immediately drove up Indian markets), a modest targeted 0.3 percent raise in the fiscal deficit, expanded public sector investment, and a decentralization of public spending from the central government to India’s states, the 2015 budget is a move toward fiscal creativity by the BJP government. With a comfortable infrastructure spending budget of $11 billion and new social security proposals, the BJP did not entirely sideline welfare considerations.

A major expected feature of this budget that didn’t quite turn out the way many had expected was its focus on fiscal consolidation and deficit reduction. India’s fiscal deficit as a share of its GDP ballooned after the global financial crisis of 2008. The 2015 budget, with an eye on keeping the Indian investment cycle healthy, actually targets a slight increase in the deficit. The budget could have faced harsher criticism on this count had it not established its pro-growth reputation elsewhere, notably with tax cuts for businesses and a simplified Goods and Services Tax (GST), to be implemented by April 2016. India’s corporate tax rate will be slashed from 30 percent to 25 percent. The government is raising income taxes for top earners by a modest amount to accommodate for the cut.

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A feature of this budget that stood out as a uniquely Modi idea is the plan to give Indian state governments spending authority over 42 percent of all tax receipts, encouraging decentralization and greater state initiative in local development. Modi’s rise to fame came primarily due to his economic successes as the chief minister of the western Indian state of Gujarat. That his government would focus on letter states manage more of public spending comes as no surprise. Modi’s government had done away with India’s central Planning Commission, which released Soviet-style Five-Year Plans, last August. It’s faith in centrally planned spending remains low.

The Indian government is forecasting growth at 8 to 8.5 percent over the next year, with a public call for reaching 9 to 10 percent according to Indian Finance Minister Arun Jaitley. This government additionally recognizes that for India to grow, it will need to attract considerable foreign investment. Jaitley, who traveled to New York shortly after the budget reveal, told an audience at Columbia University that “investment available within [India] is very modest.” “Even our banks’ ability to finance that is modest, and therefore we need it from wherever it is available,” he added. While the 2015 budget did not focus on foreign investment caps or easing regulations for foreign investment, the Indian government has announced that it will remove the bureaucratic distinction between Foreign Direct Investment (FDI) and Foreign Institutional Investment (FII), in theory simplifying the ability of Indian companies to receive foreign investment.

There is much to be said about this budget, and while I’ve scratched the surface here, I’d refer readers to several other informed analyses, some of which are more sanguine/critical about the budget (see Ajay ShahAshok MalikMilan Vaishnav, Alyssa Ayres, the Hindustan TimesThe EconomistLive Mint, and the Wall Street Journal.) All said and done, one hopes that the finance minister’s bold statement at the budget reveal this past weekend that “incremental change is not going to take us anywhere” is false. India’s 2015 budget is precisely incremental in its approach to reform, but this doesn’t mean that it’s bad. It’s not the sort of subsidy-slashing, deficit-destroying fiscal consolidation proposal that some had hoped for from the BJP, but that doesn’t mean that it’s a bust.

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