Budget India: Can Modi 3.0 transform India’s economy? – BBC News

On Tuesday, the coalition government of Indian Prime Minister Narendra Modi will present its first state budget after a narrow election victory.

The retrenched Mr Modi, who is relying for the first time on coalition partners, is expected to reintroduce his spending policies, while maintaining fiscal prudence.

Analysts suggest that the new government may need to focus more on the rural masses, who have not benefited as much as the rich from the country’s rapidly growing GDP.

The fact that this is Modi’s third term will worry him about leaving a lasting legacy and may “tempt” him to do something about economic prosperity for the masses, says Rathin Roy, who a former member of the Prime Minister’s Council of Economic Advisers.

It is one area where his legacy will say that he has clearly failed in the past.

In his 10 years in power, Modi has spent billions of dollars on government-funded infrastructure, sea bridges and roads. He also lowered taxes for large corporations and introduced aid schemes to encourage export-oriented manufacturing.

India’s macro economy is stable and its stock markets are booming.

But so is inequality and rural suffering.

BMW vehicles posted their highest sales ever in the first half of this year despite overall consumption growth being the slowest in two decades.

Wages are down, household savings are down and well-paying jobs are still out of reach for many Indians.

India’s regional inequality is also stark. Most of the country lives in northern and eastern India where per capita incomes are lower than in Nepal, and health, mortality and life expectancy are worse than in Burkina Faso, according to Mr Roy.

Nine out of 10 economists now say chronic unemployment is the biggest challenge facing Modi 3.0. A post-election survey shows seven in 10 Indians support taxing the super-rich and eight in 10 experts believe growth is not inclusive.

As it straddles the agricultural north of India, the fate of its rural majority is far different from that of its urban dwellers.

Muzaffarnagar in the northern state of Uttar Pradesh is a few hours away from the capital of India, Delhi. Apart from the modern highway that cuts through the open fields, it feels like a place that has largely been overtaken by the country’s flashy economic development.

Sushil Pal’s family has been farming the plains of Behra Asa village for generations. It’s hard to work so hard that it doesn’t pay off, he told the BBC.

Mr Pal did not vote for Modi’s party this time even though he supported it in the last two elections. The Prime Minister’s promise to double farm incomes, he says, remains just that – a promise.

“My income has decreased. The cost of inputs and labor have gone up but not for my crops,” Mr Pal said. “They raised the price of sugarcane a little before the elections.

“All the money I make is to pay for my sons’ school and college fees. “One is an engineer but he has been unemployed for two years,” he said.

Leaving his field, the export-oriented furniture collection has seen its production drop by 80% in the past five years as global orders dry up following the post-Covid sales slump .

Rajneesh Tyagi, the owner, said he would have liked to sell locally to ease the tension overseas, but continued rural distress means there is no demand for his products.

He added: “Farm economy has declined and the biggest problem for domestic demand is high debt among farmers and unemployment.” “They don’t have the ability to buy anything”.

Mr Tyagi’s business represents the universe of small businesses that form the backbone of India’s economy. India Ratings, a credit rating agency, estimates that 6.3 million businesses will close between 2015 and 2023, costing 16 million informal jobs.

On the other hand, profits reported by India’s 5,000 listed companies increased by a whopping 187% between 2018 and 2023, boosted in part by tax cuts, according to commentator Vivek Kaul .

Bridging such a divide between the formal and informal sectors of the economy and bringing prosperity to Indian villages will be major challenges for Modi as he begins his third term in office.

His first post-election budget is likely to see a “tilt” towards comfort although not necessarily away from massive spending on infrastructure projects, Goldman Sachs economists said in a note.

A larger-than-expected outflow from the central bank (0.3% of GDP) will help the government boost welfare spending and save capex, with a focus on the rural economy and job creation, says the bank of Wall Street.

Even those who spend money on some of India’s richest people agree with this sentiment.

Rajesh Saluja, CEO and managing director of ASK Private Wealth, said that poverty alleviation is likely to be on the government’s budget agenda and can be done “without upsetting the financial figures”, given strong earnings and savings. tax.

But economists warn that high incomes are no substitute for real innovation-led development. About 800 million Indians already live on free food and some countries spend about 10% of their income on welfare.

The budget will have to lay out a vision of how the government plans to put millions to work and create income.

“The decline in the level of the informal sector has implications for job creation. Therefore, a smart policy mix that allows for a balance between the formal and informal sectors needs to be pursued now,” he said. Sunil Kumar Sinha, chief economist at India Ratings.

India should also promote low-cost, labor-intensive manufacturing in sectors such as textiles and agri-food to meet its growing domestic demand, Mr Roy said.

Economists at India’s largest bank SBI have recommended extending the productivity-related incentives that Modi has given to foreign-facing sectors to small businesses.

“Until now, when we think of production, we think of high-class people. We think of supercomputers. We are thinking of getting Apple to come and make a few iPhones here,” said Mr Roy.

“These are not things that 70% of the population of India eats. We should produce in India what 70% of the population of India wants to use. If I can make 200 rupee ($2.4, £1.8) shirts in this country and not let that foreign demand leak into Bangladesh and Vietnam, it will boost production.”