The railway budget is a remnant of colonial times. Indian railways are the largest employer in India. With some 25 million passengers every day, it is the mode transport of the masses. Initially, the rail budget was met with scepticism by the media. There were no major announcements of new trains and routes. However within a day or two it became clear just how good a budget or rather vision it contained. Rather than glitzy unrealistic pie in the sky promises, it concentrated on improving efficiency. For example, the Indian railway has locomotives capable of intracity travel with an average speed of 150 kph. However, for various reasons the trains run at 70 kph. Surely, gains can be made with pre existing infrastructure and technology rather than spending billions on bullet trains, which would take years to initialise.
This budget is far removed from making a political statement and can realistically achieve its goals. Yes, by not raising passenger fares there is a degree of populist politics, but this is budgeted for in the savings made by a fall in diesel prices. A total of $137 billion worth of investment has been earmarked for the railways over a 5-year period. A big chunk of that is to be raised by the railway ministry via monetising assets under its control. What is becoming clear is the Modi government wants state owned entities such as Air India and Indian railways to attain sustainable profitability above everything else to stop being a drag on the Indian taxpayer. While the privatisation of Indian railways has been ruled out, the theme was for more private sector participation in providing services in the Indian railways ecosystem. This is a step in the right direction.
Unlike the rail budget the verdict on the union budget was viewed with mixed sentiment. This budget was pro growth. It concentrates on boosting infrastructure and easing the climate for conducting business. The aim is to boost FDI by easing barriers for foreign private entities to invest in Indian companies and start-ups. Rather than direct major tax cuts, the middle classes who voted for Modi were provided incentives (such as healthcare insurance). This should keep a section of the electorate who backed Modi happy and create jobs. However, there was no big bang similar to the one in 1991. There was no bold move for liberalisation and opening up sectors of the economy as many at home and abroad had anticipated. The prime minister’s Make In India slogan will remain just that, an idea. There is also the issue of Mr Jaitley basing a reduction in the fiscal deficit on unrealistic forecasts of growth and inflation. This may not be an issue now, but may come back to haunt this administration if India does face a macroeconomic crisis similar to 2013.
Make no mistake, the disappointment in the budget is due to extremely high (or even unrealistic) expectations. For all its shortcomings this remains a solid growth oriented budget. Maybe it was unrealistic to expect a big bang. In 1991 the IMF forced India’s hand in opening its markets. India is in a strong macroeconomic situation today as a result of falling oil prices (its largest import after gold). Its current account deficit shrinking, inflation falling and the rupee stable. With more rate cuts expected to follow this year S&P have said despite any budget India was a bright spot in 2015.
Keeping these factors in mind it could be the Modi administration decided to ease themselves into reforms rather than attempt anything major in their first year. Lack of numbers in the upper house and an uncooperative opposition has seen Modi forced to take the ordinance route for bills ranging from coal allocation to land acquisition. The government might just be waiting for 2016 when a third of the upper house retires and recent victories in state elections give the ruling coalition a boost.
The stock market in Mumbai was expecting a ground-breaking budget. They have not got that. It remains to be seen if they are patient with Mr Modi. The Sensex, which is overvalued on expectation rather than concrete growth might decline or stay flat for the rest of 2015. One thing is clear; the hopes of those wanting instant gratification have been dashed. Positive signs remain for those wanting solid long-term growth.