India looks for economic magic in new budget

Will India's budget ease trade difficulties?
Will India's budget ease trade difficulties?

India is bracing for its economic Super Bowl.

The government of Prime Minister Narendra Modi is set to reveal its second budget, an event so highly anticipated that TV news channels have doubled their advertising rates around Saturday's presentation.

The budget launch itself will not be scintillating television -- there are no flashy special effects. What you get instead is India's finance minister presenting a long list of fiscal plans and announcements. And yet, Indians have always paid close attention on budget day.

This year, with a reform-minded, single-party government in place, expectations are even higher. The country's stock markets will even hold a special Saturday trading session.

Modi has made ambitious promises: to make India an easier place to do business (the World Bank ranks India 142nd globally), to kick-start a new era of fast growth and to bring the trappings of the developed world to India's towns and cities.

Should the prime minister succeed, India will be in a position to capitalize on its tremendous growth potential. The country is primed for an economic boom, in part because it is starting from such a low base, but also because it has vibrant demographics: two-thirds of Indians are under the age of 30, with their best working years ahead of them.

Can Modi deliver? After failing to impress with last year's document, investors expect the prime minister to deliver a much more ambitious document.

The ghost of 1991

In the Indian media, comparisons are being made with 1991, the year India launched a series of economic reforms that opened up its economy and reversed a dangerous balance of payments crisis.

But if 1991 is the bar, the world may end up being disappointed -- these reforms still have to make it through parliament.

The Modi government may have a majority in the lower house, but it will take immense political will to push serious reforms through the opposition-controlled upper house of parliament.

The reforms

All the talk has been of big reforms. So, what are they?

First of all, there's the Goods and Services Tax. As CNN found out this week, crossing state borders on a goods truck entails reams of paperwork and extreme patience. A uniform tax system would do wonders for efficiency and business. It would also kill state protectionism and unleash national competition.

India needs major investments in infrastructure, health care and education. But to do that, the government needs to figure out a way to boost revenue. India's tax system needs an overhaul. Only around 35 million Indians pay income taxes; China can count on about 300 million taxpayers. Cutting subsidies on fuels like kerosene in favor of cash transfers would help make sure India's poor get the help they need.

Byzantine labor laws in India are a major deterrent to large companies. Most Indian workers continue to work in what is known as the "informal" sector, without legal papers and any form of social security or health care. It may sound counterintuitive, but making it easier to hire and fire workers would make companies more confident to scale up, and give workers the paperwork and job security they need.

And then there's divestment. India's government still controls some of the country's biggest energy providers, which prevents competition and enshrines an inefficient system.

The big changes are always difficult to achieve. India's Finance Ministry is peppered with top academics and economists from around the world. They know what to do. The question is whether politics will get in the way and prevent India from taking off.

Modi -- despite suffering a bloody nose in Delhi's state elections last month -- still has considerable national goodwill and hope riding on his shoulders. Saturday will go some way towards revealing whether he is going to deliver.

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