Economist on India’s Budget

The Economist callits it balanced but uninspiring:

Agriculture and rural areas were a central focus of Mr Chidambaram’s speech. He is offering a range of support and incentives, including a doubling of agricultural credit over three years, widespread water schemes, and help for diversification into new farm products and food processing. This echoed the themes of a speech on June 24th by Manmohan Singh, the prime minister, who promised a change in the manner in which this country is run and said that economic growth should advance the cause of distributive justice and recreate new employment opportunities. Politically astute, no doubt, but possibly not the stuff of which a new Asian tiger is made.

On industry, Mr Chidambaram balanced the wishes of reformers and the leftist parties by announcing a new commission to boost both foreign and domestic investment. The key to growth is investment, he said. Public and private, domestic and foreign. So he raised the limits for foreign ownership in two areas where joint-ventures urgently need fresh funds from abroadinsurance (from 26% to 49%) and telecoms (from 49% to 74%). He also raised the limit for civil aviation from 40% to 49%. These increases should help to boost India’s poor record on investment inflows, which fell in 2003-04 from $4.7 billion to $4.5 billion (a tiny fraction of what China takes). Limits, though, are only part of it: foreign investment is mostly restricted by foreign companies’ frustrations with India’s bureaucracy and poor public services and infrastructure.

Reformers will, however, be less than delighted with his pro-leftist attempt to rebuild India’s public sector instead of trying to privatise it. He announced the creation of a Board for Reconstruction of Public-Sector Enterprises that will advise on how to develop (and with luck occasionally sell) government-owned companies; and he pledged government funds for major investments in public-sector power, telecoms, railways, roads, petroleum, coal and civil aviation.

Yet Mr Chidambaram failed to explain how the government plans to make its investments in the public sector any more effective than before. This is not the end of reform in India, nor is it an inspiring start for the new government’s efforts to advance it.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.