Jul 07, 2014

    Investors upbeat as Indian budget looms


    INDIA'S new government, led by right-winger Narendra Modi, unveils its maiden budget on Thursday - its first big policy statement on how it intends to overhaul an economy saddled with slow growth and weak public finances.

    Although his government will likely fail to shrink a yawning fiscal deficit and faces rising inflation, the mood of investors and voters remains buoyant as they look for details of his long-term vision.

    Mr Modi, who swept to power with the strongest mandate in 30 years in May, "is a free-enterprise person and this (budget) is his moment to show what he intends," said D. H. Pai Panandiker, head of economic think-tank RPG Foundation.

    "Change can't be overnight but Modi aims to be here for the long distance," Mr Panandiker said.

    Rather than "big bangs" from Thursday's budget statement, economists expect a credible outline of steps to steer India from a subsidy-laden, bureaucratic culture to a more business-friendly investment climate.

    Growth has crashed from near double-digits a few years ago to 4.7 per cent last year - marking the second straight year of sub-5 per cent expansion - hit by high interest rates, falling investment and wage-eroding inflation.

    Mr Modi, who, as leader of Gujarat for the past 13 years steered the western state to 10 per cent annual growth, won power in New Delhi on his "Modinomics" mantra of "minimum government, maximum governance" and a pledge of "good days ahead".

    Since taking power, he has attempted to play down hefty expectations, even as investors drive the share markets to almost weekly record highs.

    The 63-year-old has already warned that "bitter medicine" is needed to get the economy on track and prescribed the first dose last month, raising fares on the ramshackle state railway to help pay for the loss-making network's modernisation.

    Finance Minister Arun Jaitley, a close Modi confidant who will present the budget, is also sounding hawkish, calling for "fiscal discipline" and speaking out against "mindless populism" burdening public finances.

    But reducing subsidies is a tough challenge in a country where two-thirds of the population of 1.25 billion live on under US$2 (S$2.50) a day, according to World Bank figures.

    That fact was underscored when Mr Modi had to partially roll back the rail fare increase in the face of a public outcry.

    "Many reforms could take years to gain traction," said HSBC economist Mahak Choudhary.

    Economists expect Mr Jaitley to start paring back subsidies on fuel - imperative due to rising crude oil prices - and initiate efforts to ease bureaucratic controls stalling investment.

    Other announcements could include a goods and services tax - long sought by businesses - that would replace India's complex patchwork of levies, as well as plans to loosen complicated land-buying rules.

    He is also expected to exploit a bullish market to more than double privatisation revenues to as much as 650 billion rupees (S$13.6 billion) by selling holdings in state firms.