After Narendra Modi's recent landslide election win, the more optimistic investors in India were hoping for big-bang reforms in the first budget of his new term.
But what they got on July 5 was a series of missed opportunities, an unambitious vision for business as usual.
There was some good news. The budget, announced by India's first full-time female finance minister, Nirmala Sitharaman, avoided any sort of populist pump-priming and has the welcome aim of keeping the fiscal deficit for financial year 2019-20 to 3.3% of gross domestic product.
In a move that could open up beneficial investment possibilities, the government also published plans to lower its stakes in state-owned companies to below 51%, to give them greater operational freedom.
However, critics said the budget was short on details about how it would address the macroeconomic headwinds that the country faces, amid the worsening external environment of a global trade war. This will hold back exports just as consumption is slowing and private investment remains inadequate.
Private investment, essential to supporting well-balanced growth, has fallen in recent months. The value of the new projects announced between April and June has fallen by 83%, compared with the quarter from January to March, according to data from the Centre for Monitoring Indian Economy. GDP growth also fell, to 5.8%, in the quarter from January to March, down from 6.6% in the last quarter of 2018.
With its tight fiscal condition, there is only so much the government can do. And there is little space for nudging India's central bank to prune interest rates. So this budget would have been a good opportunity to start on structural reforms.
Even the government's chief economic adviser has highlighted the real difficulties business people face in enforcing contracts and with policy uncertainties, including those relating to tax.
With the strong political mandate the government won in the election, it should have announced its plans to reform archaic agricultural marketing practices and subsumed in its income support program the costly subsidies currently handed out even to wealthy farmers for fertilizer and power. The delayed monsoon is adding to the uncertainties in the rural economy already troubled by depressed farm produce prices.
What we got, instead of such sweeping reforms, were incremental tweaks -- progress but not enough. For instance, the government is turning all 44 labor laws into four labor codes. That will ease the compliance burden for businesses, but that is still short of industry's long-standing demand for much greater freedom to hire and fire workers.
Plans to once again recapitalize the state-owned banking system, which is set to cost 700 billion rupees ($10.2 billion), will not do away with the need for serious reform of credit practices or personnel management, nor rid these lenders of damaging political influence.
A skills shortage that is seriously holding back the Indian economy is yet another big challenge for which no proposals were unveiled.
Things cannot remain the way they have been for decades, as emphasized by the official economic survey. Without reform, India cannot lift itself out of its current range for GDP growth of sub-7%. Sustained 8% real GDP growth is required to reach Modi's target of turning India into a $5 trillion economy by 2024-25.
That means shifting of gears and one of the key gears is private investment. But the only noteworthy action on this front has been some relief on angel tax, levied on startups raising capital at high valuations.
Sitharaman emphasized the need for more foreign direct investment, yet the measures announced -- a promise to raise the FDI cap in aviation and insurance brokerage, and easing local sourcing norms for single-brand retailers -- are not enough. An announcement on expediting bilateral investment treaties which could ensure regulatory certainties and bring in long-term greenfield investments would have been more helpful.
There are other contradictions. In a headline-grabbing move, the finance minister has increased income tax surcharges on the super-rich. As a result, the effective income tax rate on income between 20 million rupees and 50 million rupees will be 39%, while that for income above 50 million rupees will be a whopping 42.7%.
The supporters of the super-rich tax say that this is a good move to reduce inequality of income and wealth and add that many developed countries have higher income tax rates.
This is flawed logic. Increasing effective income tax rates will further induce the super-rich to hide their income or, worse, migrate to tax havens. That will impact the country's savings rate and in turn its ability to invest, as rich people have a higher marginal propensity to save.
Moreover, the tax-paying super-rich should not be penalized for being honest in a country known for poor tax compliance. In any case, there were only 6,351 Indians who declared taxable income above 50 million rupees last year.
In 2015, the then finance minister Arun Jaitley promised to bring down the corporate tax rate to 25% to set India's direct tax regime at par with its Asian peers. However, the tax cut to 25% promised in the 2019 budget would apply only to companies with turnover of up to 4 billion rupees. This will force companies to remain small because if they get big, they will have to face higher taxation, even if that would mean missing on the benefits of economies of scale.
Moreover, this seems like a gimmick as most of the affected companies do not pay much tax and those which really pay -- large corporates -- are not covered. Meanwhile, Asian countries have brought down their effective corporate tax rates to 20%, which is putting India at a disadvantage again.
Similarly, increasing duty on diesel and petrol may cause inflation for both businesses and consumers and make it difficult for the central bank to remain accommodative if inflation goes up. That will run counter to the promotion of both investment and consumption.
Modi wants to turbocharge India into a $5 trillion economy by 2025. That calls for a coordinated effort to address the major concerns of the economy -- private investment and exports in particular. If this budget is his template, success would be very difficult if not impossible.
Ritesh Kumar Singh is chief economist of Indonomics Consulting and a former assistant director of the Finance Commission of India.