Indian Prime Minister Narendra Modi walks in front of a picture of former Indian prime minister Atal Behari Vajpayee after a news conference in New Delhi on July 9.ANINDITO MUKHERJEE/Reuters
As India's technicolour election unfolded on the chaotic streets of the subcontinent, I walked into the cool, hushed confines of a luxury hotel in New Delhi to sit down with a senior Indian executive.
Among India's business class, the Bharatiya Janata Party's candidate for prime minister, Narendra Modi, had an almost otherworldly aura. One senior executive told me one of his friends actually said: "I want to touch him."
Mr. Modi was so revered in part because he was seen to have personally enabled so much economic growth in his home state of Gujarat, where he had been chief minister for more than a decade, at time when politicians were widely associated with taking economic growth for granted – as well as dabbling in corruption.
I asked this executive, who worked in infrastructure investment, what he and other businesspeople expected from Mr. Modi, if and when he came to power.
"We don't expect miracles," he replied.
I remember being struck at the time, particularly because he – as well as impoverished Indians I interviewed in the streets outside – spoke with such fervour about the country's mismanaged economy and rampant corruption.
The BJP itself also used fire and brimstone rhetoric about the need to boost economic development, and the party consequently swept to power with the strongest mandate in nearly 30 years – a majority of 282 seats in the 543 seat Lok Sabha, or lower house. After the victory, Mr. Modi said Indians would need to endure "bitter medicine" as he and his ministers resuscitated the economy.
I was reminded of the businessman's comments again recently when Mr. Modi's finance minister, Arun Jaitley, released what many considered a tepid, incremental budget that, in many ways, failed to live up to many observers' (admittedly) extremely high expectations.
There were no big-ticket reforms. Government spending was left largely intact. Costly but popular diesel subsidies were left alone, despite international criticism, and subsidies for fertilizers were actually increased. The fiscal deficit was left untouched at 4.1 per cent, despite the wide political latitude to expand what serious critics suggest is an artificially low number resulting from "dodgy accounting."
There was also a popular move to decrease the burden of income tax, fuelling the impression by many that the new government was trying not to ruffle Indians with overly harsh budget measures – particularly after they hiked railway fares steeply, tasted Indians' wrath, and promptly (though partially) rolled them back again.
Writing in the Indian publication Mint, consultant Suyash Rai and Milan Vaishnav with the Carnegie Endowment for International Peace wrote that this was an "incremental" budget that plays to Mr. Jaitley's gradualist, inoffensive agenda based on political acceptability. This, they wrote, comes despite a clear electoral mandate that far outstrips that of India's government in the early 1990s, which nevertheless unleashed landmark economic reforms that set India on the path to its economic vibrancy in the early 2000s.
"On controversial reforms, the [BJP-led government] needs to muster the risk-taking appetite and political skills it demonstrated on the campaign to generate a pro-reform movement," they wrote. "Statecraft is about shaping political constituencies rather than waiting for a favourable consensus to emerge. Many good ideas are simply awaiting political impetus for implementation."
Mr. Jaitley's budget, which came out relatively quickly and comes well into the fiscal year, was also vague on retrospective taxation, which has flared into a huge issue in India as the government's tax bureaucrats ensnared large foreign investors such as Vodafone in lengthy court cases.
On foreign direct investment, the government did nothing for the highly protected Indian retail sector, a sensitive sector unlikely to get changed. The government did move to ease restrictions in the insurance and defence sectors, but these were loosened to just 49 per cent – leaving Indian companies firmly in control in a move that has already been criticized by U.S. giant Lockheed Martin.
"The only explanation for these and other puzzles is that finance ministry bureaucrats effectively hijacked the budget," wrote Columbia University economics professor Arvind Panagariya in the Times of India.
"Contrary to claims by many, this is not the best budget possible in 45 days. The tight deadline can scarcely account for capping of FDI in defence at 49 per cent, fixing the deficit unrealistically at 4.1 per cent and non-repeal of retrospective taxation. The suggestion that bad (indeed, very bad) drafting camouflages an otherwise masterly budget is also wide of the mark. Even the cleverest rewriting would not substitute for the missing policy vision."
Of course, given some of the vague language around subsidies and retrospective taxation during the campaign, some of these budget measures were unlikely to surprise. And the government did make progress in a number of areas, particularly in infrastructure – building new airports and thousands of kilometres of highways. The government also announced moves to sell $10.5-billion (U.S.) worth of stakes in state-run companies, and moved to unify India's tax structure, which would make it easier to do business across the country.
Certainly, this budget alone is not enough to fix India's ailing economy, and more measures will need to be taken if the government, as planned, wants to take India's GDP growth from below 5 per cent back up to 7 to 8 per cent in a few years time. The stock market has already sagged from highs hit as Mr. Modi's momentum was up.
But this is still a start. And though foreign investors are unlikely to be overly impressed – ratings agencies, in particular, seemed perturbed – domestic businesspeople aren't expecting miracles quickly, and may just have the confidence to start investing domestically again.