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Modi’s Latest Budget Sets Out His Long-Term Vision for India

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Modi’s Latest Budget Sets Out His Long-Term Vision for India

Investment on infrastructure has been hiked by 35 percent over last year, indicating that this sector is the government’s first-choice job creator.

Modi’s Latest Budget Sets Out His Long-Term Vision for India
Credit: Facebook/ Ministry of Railways, Government of India

Once the source of much fanfare, Indian commentators have become increasingly skeptical of the annual Union budget presented by the Indian finance minister. But in a year that could potentially be the first of the post-pandemic era, the Union budget is a useful indicator of Prime Minister Narendra Modi’s priorities.

The political context behind this year’s budget is compelling: It comes close on the heels of a prolonged standoff with protesting farmers, and in a few weeks, important state elections will be due in agrarian states such as Uttar Pradesh and Punjab. Many had therefore expected copious presents for India’s voluminous and politically active farm sector.

Yet the budget did not give in to those expectations. For months, even as Modi rolled back his contentious farm reform laws, protesting farmers have been clamoring for legal guarantees on the government’s Minimum Support Price (MSP) scheme — a policy under which the government procures crops from farmers at a guaranteed minimum price, regardless of market fluctuations. Those legal guarantees were never conceded. Instead, Finance Minister Nirmala Sitharaman responded by promising 2.37 trillion Indian rupees ($32 billion) over the coming financial year to procure rice and wheat at the MSP rate.

But unlike in past election years, Sitharaman did not roll out a flurry of subsidies to woo the agricultural vote bank. Instead, she listed the Modi government’s key priorities for the next 25 years — leading up to the 100th anniversary of India’s independence — and thereby exuded her confidence in the Modi government’s political durability.

The overwhelming priority set out by Sitharaman within that agenda was a massive investment binge on infrastructure. To that end, Sitharaman allocated a total of 7.5 trillion rupees to capital expenditure overall — more than 35 percent over last year’s budget — including nearly 3.3 trillion rupees for roadways and railways alone.

In some ways, this is a sensible pursuit. For years, India has been in desperate need of a significant infrastructure upgrade. Its potholed roads and outdated railways have deprived smaller towns and villages of connectivity. Travel time can often be significant even for relatively short distances. Train coaches are often squalid and uncomfortable. All of these issues demand massive investment sooner than later.

But unlike its predecessors, the Modi government also appears to see infrastructure as its first-choice job creator. The road to this year’s binge was laid as early as last year, when Sitharaman marked out the infrastructure sector as a key job creator within Modi’s economic vision. “You spend on infrastructure, you create a capital asset whose effect will be on the economy for the next couple of decades, it gives you instant jobs,” the finance minister had explained last February.

That narrative was echoed again only a few days ago by Modi’s principal economic adviser, Sanjeev Sanyal. In response to a question on the lack of job creation in public sector enterprises, Sanyal said: “[There] are areas where the public sector is generating jobs; it may not be government jobs but when you are talking about capital expenditure on infrastructure, that is also a job created by government spending.”

This is a more significant paradigm shift than most people would realize. Over the decades, India had focused on its high-end services sector as a source of social mobility and upliftment. To that end, successive governments invested in creating jobs within public sector enterprises — including many loss-making and inefficient ones — and spending on the higher education sector.

Investment in education produced some gains, especially following the liberalization reforms of the early 1990s, which turned the sons of farmers and rickshaw drivers into scientists and software engineers. Yet, by its very nature, the services sector could not create enough high-value jobs. So, Modi seems to have turned to the Chinese way: spending on swanky infrastructure in the hope that it would improve living standards and boost manufacturing.

But a sole focus on infrastructure as a long-term job creator is insufficient, as China itself has begun to realize. China’s economy is more dependent on investment spending than any other major economy in the world; some 43 percent of China’s GDP comes through investment each year. Close to a fifth of that comes from investment in infrastructure. The need to create jobs has only fueled a vicious cycle of its own: Even as rising wages drag down jobs in manufacturing, the infrastructure sector continues to expand in an attempt to fill that gap.

Yet the mania has proved unsustainable. Unprofitable projects arising out of the perpetual binge helped push China’s government debt to 73 percent of GDP before the pandemic, according to the IMF. Last year, China’s leading real estate giant Evergrande became the world’s most indebted company.

In the age of the internet, many countries are therefore trying to build a knowledge economy instead — to propel sustainable value creation and social mobility in the long-run. That requires significant investment on human capital, including education, healthcare, and the like.

But for years, the Modi government has curiously neglected these sectors in its spending portfolio. This year, the education ministry was allotted a little over 1 trillion rupees — barely 0.5 percent of India’s GDP and less than a third of the investment package for roads and railways. Spending on medical and public health has, in fact, decreased by over 45 percent. The budget documents have defended it by citing “lower requirement for vaccination.”

In the wake of the pandemic, this orientation of priorities is all the more baffling. Owing to prolonged school closures, hundreds of millions of children were either forced out of school or suffered long-lasting losses in learning outcomes. Ballooning healthcare costs and job losses also sent some 230 million Indians back below the poverty line for the first time in years. Meanwhile, the share of the workforce seeking employment in agriculture has steadily increased, for lack of better opportunities.

Modi hopes that investment in infrastructure would have a trickle-down effect — spurring private investment in the cities, and enabling self-employment and small-scale entrepreneurship in the towns and villages. But such a strategy is unlikely to prove sustainable in the long run without a well-educated and skilled workforce, capable of expanding India’s knowledge economy. India needs to balance those priorities better.