No 'Big Bang', it's a pro-growth and pro-entrepreneurship Budget

With gross domestic product (GDP) growth at a five-year low and the global economic environment definitely on a slowdown trend — which might even sharpen in the coming months — finance minister Nirmala Sitharaman was facing a major credibility challenge when presenting the first Budget of the Modi 2.0 Cabinet. 

Would there be enough in the measures presented to convince domestic and foreign investors that the government was committed to be true to its electoral pledge to boost economy activity and jobs creation getting India into the fabled “$5-trillion economy by 2025”?

This Budget exercise involves even higher stakes as there is in the foreign business community a mix of high expectations for the second Modi term being bolder in terms of reforms than the first one and at the same time some scepticism about the fact that second term’s experiences in different countries have more generally be disappointing. 

Will Modi 2.0 prove to be an exception after having achieved such a decisive mandate? The answer to that question will rest on the kind of decisiveness shown in the ability to enhance revenues creation — and hence, strong productivity improvements for the agricultural sector badly hurt in the last few years, to revive domestic consumption and mediocre export performance and to boost sluggish private investment and job creation.

This Budget had to be expansionary in the context of the priority to re-dynamise growth in a worrisome global economic environment while ensuring that the fiscal deficit would remain within the limits needed to prevent a credit downgrade by rating agencies. The trade-off seems to have been achieved in that respect. The easing of the fiscal burden on the middle class and SMEs should hopefully end up freeing up more liquidity in the economy and thus, create more favorable conditions for investment.

At the same time, it was crucial to allocate enough financial resources to accelerate the country’s infrastructure development — notably in the rural areas but also in urban areas housing — which is a sine qua non for ensuring the eight or nine percent sustainable growth rate that would get India into the five-trillion GDP range. This comes with measures to be welcomed extending the ceiling for foreign direct investment in the aviation, media, and insurance sectors as a start.

While the finance minister mentioned that the government is considering holding an annual global investors’ meeting — bringing together industrialists, sovereign wealth funds and VC funds — the outcome of this kind of an event will, at the end of the day, depend on how convinced the foreign and domestic business community is, that positive framework conditions increasingly exist, creating more predictability, even a greater ease of doing business and allowing companies to expect reasonable enough return on investment. 
 

One message underlying the Budget is that this government wants definitely to position itself as pro-growth and pro-entrepreneurship with the continuation and expansion of measures in favor of start-ups. There was no ‘Big Bang’ in this Budget and there was none to be expected. But what is even more important than ‘headlines impact’ which might be quite illusory in the medium term is how a number of measures adding up to one another and able to create a cumulative growth impact can lay a credible base for a sustainable eight or nine percent growth.

An international context in which multinational corporations are reviewing their global supply chains and in which huge uncertainties will continue to loom over international trade and the overall prospects for the international economy compels India to up its game and strengthen its chances to carve out a much greater role for itself on the global economic map. In fact, the present reshaping of the global economic and geopolitical map offers an unprecedented opportunity for India. The Budget, which was presented is balanced, coherent, and realistic enough to demonstrate that Prime Minister Modi, his finance minister — and, in fact, the whole cabinet are acutely aware of that. But as almost everything in India, much will now depend on execution.    

Claude Smadja is president of Smadja & Smadja, a strategic advisory firm