By Aftab Ahmed and Ira Dugal
MUMBAI (Reuters) – India’s annual budget announcement was a bigger deal than usual this year: As the first full budget of Prime Minister Narendra Modi’s third term, it will set the tone for how the world’s fifth-largest economy confronts slowing growth and sagging markets.
But the year’s top economic policy event opted mainly for short-term economic relief through middle-class tax cuts, while passing up a chance to go big on reforms needed to reignite rapid growth – once the envy of the world at more than 8%.
The budget also scaled back the government’s emphasis on capital spending and infrastructure, another key driver for India’s growth ambitions since the pandemic.
Without a strategy to regain high growth rates and assure jobs for India’s young population, the budget disappointed analysts and markets, alarmed in recent months by weak earnings growth and an exodus of foreign investors.
“India is aspiring for 8% growth but we don’t have a path to 8% – a growth strategy is not there,” said Madhavi Arora, chief economist at Emkay Global Financial Services.
The government has forecast India’s GDP growth will slip to a four-year low of 6.4% in the current financial year to March 31 and stay close to that level next year as well, compared with 8.2% in 2023-24.
While the latest tax cuts may help urban consumers, who took some steam out of the economy as weak wage growth and high living costs curtailed their spending habits, economists see deeper problems that need to be addressed.
“Eight percent will require far deeper interventions in agricultural markets, human capital and ease of doing business,” said Dhiraj Nim, an economist at ANZ Research.
Modi, who returned to power in July of last year with a weaker-than-expected mandate, has turned to appeasing politically important constituencies in the months since the election, analysts said. His party has reversed agricultural trade policies to favour farmers, offered cash handouts to women and, now, cut taxes for the middle class.
Analysts noted that this is not the first time, however, that Modi and his Bharatiya Janata Party failed to push economic reforms, which also got brushed aside in his previous two terms when the party had won more decisively and had greater political capital.
“In 2019, the BJP got more than 300 seats and had a window (for reforms),” said Amit Ranjan, research fellow at Institute of South Asian Studies (ISAS), National University of Singapore.
“But the government gave in to the needs of electoral politics as the government knows reforms do not immediately benefit the large section of voters.”