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Economy

'Modinomics' needs a budget boost

Staffs speak with customers at a Sai Service Group showroom in Mumbai.

TOKYO -- Indian Prime Minister Narendra Modi's first eight months in office have been mixed for the economy. Metropolitan areas have seen growth surge, but rural regions are lagging behind.

     Many hoped that the Modi era would usher in an economic recovery that created jobs, boosted wages and improved living standards through investment in areas such as education and health care.

     "Modinomics," as the prime minister's economic policy set is dubbed by some, has so far focused on attracting foreign investment. "Make in India" and "Digital India" have become mantras for the prime minister. A number of deregulatory measures to benefit foreign companies, including insurers, defense contractors, the construction sector and medical equipment makers, have been introduced. Modi's government also aims to amend the Land Acquisition Act to make it easier for companies to secure the space for their factories and offices. Prospective land sellers, who are favored under current rules, oppose reforming the act.  

     Businesses and citizens alike support Modi's reform push. Share prices and business sentiment are heading up. The steep fall in crude oil prices, which has lowered import costs and kept inflation in check, also helps. Businesses hope India's central bank will soon cut interest rates. The resultant fall in mortgage rates would stimulate demand for durable goods.

     Consumer spending, which accounts for some 60% of India's gross domestic product, has been patchy. Not all Indians are ready to loosen their purse-strings. Many companies have yet to fully work out their investment plans.

     India's fiscal 2015 budget, which will be announced in February, needs to include measures that give preferential treatment to those investing and an income tax cut.

Urban areas abuzz

Major cities have seen spending rise at impressive rates. Sai Service Group, which operates Maruti Suzuki car dealerships, saw sales in central Mumbai spike 10% from a year earlier during the 2014 autumn festival season. "Sales gathered pace from the summer," said Mukesh Kalmadi, a joint managing director of Sai Service. "Banks are vying with one another to extend car loans."

     At Infiniti Mall, a commercial facility on the outskirts of Mumbai with total sales space of 110,000 sq. meters, some 100 companies, including the world's premier fashion houses, are waiting to set up shop. Mukesh Kumar, vice president of the operator of the mall, Unique Estates Development, is bullish about business prospects. "Sales are expected to jump 20% from a year ago in fiscal 2014," she said. "In fiscal 2015, they should see a rise of 18% to 20%."

     Away from metropolitan areas, the story is different. Including India's vast rural regions and smaller cities, growth is averaging just above 5%. The economy is not growing as fast as in the mid-2000s, when it was above 9%.

     Consumer spending in the October-December quarter of 2010 logged 11.5% growth. Since then, the figure has not surpassed 9%. Consumption increased 5.8% in the July-September quarter last year, outpacing the 5.3% GDP growth. These figures, however, are anemic by Indian standards. Slow income and employment growth, and high lending rates have exerted downward pressure on the economy.

     Other factors have also led to headwinds. An amendment to the Land Acquisition Act under the previous government required businesses to generously compensate owners when buying their space, which along with high interest rates put a damper on capital investment. Gross fixed capital formation, which makes up some 10% of GDP, has been flat as a result.

Budget hopes

Dr. Ajit Ranade, chief economist of conglomerate Aditya Birla Group, estimates the Indian economy will grow more than 6.0% in fiscal 2015 because of lower crude oil prices, improved business sentiment and a better fiscal outlook. Standard & Poor's raised India's credit rating outlook to "stable" from "negative" last September. Ranade's estimate is premised on stronger consumer spending, so, he argued, the government urgently needs to tame inflation and create more jobs.

     "Confidence is watchful," said Abhishek Malhotra, a partner at consulting firm A.T. Kearney. "No salary increase, no apparent increase of employment," means Indian consumers are in no mood to splurge.

     The Indian government is expected to introduce additional reforms into its fiscal 2015 budget. Ahead of last year's general election, the fiscal 2014 budget was met with indifference. This year, there are no elections for the government to hide behind. Priority should be given to the early introduction of a goods and services tax, which is expected to boost the economy and simplify the fiscal regime. More incentives for investment and an income tax cut should also be introduced, according to Malhotra.

     Many observers believe the next budget will be critical in divining the course of the Indian economy.

 

 

 

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