PM with ambition - Modi's first budget to revitalise economy | Asia Pacific

PM with ambition - Modi's first budget to revitalise economy

PM with ambition - Modi's first budget to revitalise economy

Updated 11 July 2014, 11:35 AEST

India's Prime Minister Narendra Modi has faced his first major test in government with the delivery of an ambitious budget.

Mr Modi's landslide election win in May came with promises of a revitalised economy and one million new jobs a month.

That calls for a doubling of GDP growth by 2017 and fewer restrictions on foreign investment.

Correspondent: Karon Snowdon

Speakers: Devika Mehndiratta, Senior Economist, Asia Pacific, ANZ Singapore; Dr Rajesh Chadha, Senior Fellow, National Council of Applied Economic Research, New Delhi

SNOWDON: India needs lots of jobs, new infrastructure, more investment and a streamlined bureaucracy. It won't all come from one budget, especially from a government just 45 days old.

Right now, Asia's third largest economy is suffering high inflation and a rate of growth that's roughly half what it was two years ago. Delivering his first budget Finance Minister Arun Jaitley set a growth target of at least seven per cent by 2017. He intends to achieve a budget deficit reduction to 4.1 percent of GDP this year, falling to 3 percent in two years time.

Senior Economist with the ANZ Bank in Singapore, Devika Mehndiratta says that's commendable but could be tough to achieve.

MEHNDIRATTA: It is going to be slightly challenging, for instance, I would think that the actual deficit would probably come in more around 4.2, 4.3 percent of GDP, so slightly higher.

SNOWDON: According to the World Bank two-thirds of India's one billion people live on less than two dollars per day.

Measures for the poor include more affordable housing and spending on rural roads. Government subsidies on fuel, food and fertiliser have risen to 16 percent of India's total budget, up from 9 percent a decade ago. This burden on the budget will be tackled in coming years.

Dr Rajesh Chadha , Senior Fellow at the National Council of Applied Economic Research in New Delhi welcomes the fiscal discipline. He says the general direction set for the medium term is a good one.

CHADHA: I am talking of inclusive growth, which means the benefits should reach the poor. They have inherited a very slow growing economy, with lots more to be done for the poor. So I do see promise of this in this budget, because it was difficult to do an immediate revolutionary thing in one year of the first year, but the signals are clear.

SNOWDON: Dr Chadha says subsidy reform could see more government spending in important areas like agricultural research and road, rail and port infrastructure. And that could provide a much-needed boost to manufacturing, to absorb large numbers of people who can no longer find work in farming.

CHADHA: Manufacturing is the only sector which has not reformed. The sheer of manufacturing in our GDP, India's GDP has remained sticky at 17 percent. Semi skilled and unskilled manufacturing is needed here and I do see a bold statement that the manufacturing (sector) would be taken care of.

SNOWDON: The process of introducing a goods and services tax begins this year.

In the hopes of creating more jobs, the caps on foreign direct investment are rising from 26 to 49 percent. Devika Mehndiratta says its a positive step.

MEHNDIRATTA: I think will definitely be viewed as positive by foreign investors, because they've been waiting for it for a very long time. There is already a pretty significant foreign presence and they've been waiting for this gap to be raised, so that they can bring in more money.

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