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In Davos, he talked like a free marketeer. Back in New Delhi, his budget tells a different story.
Like some sort of ancient deity, Narendra Modi appears to take on different avatars depending on his audience. In Davos last month, the Indian prime minister defended globalization and warned against the “power of protectionism.” But the annual budget, unveiled last week, did not suggest the pro-business statesman on display at Davos, but a soak-the-rich protectionist strongman of the sort depressingly familiar in poor countries.
This year’s budget, the last before general elections in 2019, squelches any remaining hopes that Mr. Modi would use his large mandate—India’s first single-party parliamentary majority in 30 years—to push long-pending market-friendly reforms such as uniformly lowering corporate taxes and privatizing state-owned banks.
Instead the budget confirms what has already become apparent. Mr. Modi talks a good game on the international stage, but his re-election plans hinge on a combination of grand gestures toward the poor and traditional Indian squeamishness about anything that may be viewed as favoring the rich.
The budget’s headline promise, dubbed Modicare, will provide government health insurance covering many hospital expenses for 500 million Indians. Though the initial funds allocated for this effort (about $311 million) appear pitiably meager, the idea mirrors the poorly planned and expensive populism that marked the tenure of the left-of-center Congress Party that ruled India for 10 years until 2014.
No Indian politician can bolster his “pro-poor” credentials without also sticking it to the rich. The budget reintroduced a long-term capital-gains tax scrapped 14 years ago. From now on, investors will have to pay a 10% tax on gains from selling shares held longer than 12 months. This comes on top of a transaction tax that had replaced the capital gains tax. Last Friday—the day after the announcement but before the world-wide correction in equity prices—Bombay’s Sensex stock index fell 2.3%, wiping out $70 billion of shareholder wealth.
After more than two decades of trade liberalization, India has also taken a protectionist turn. Faced with the failure of Mr. Modi’s “Make in India” program to boost manufacturing employment, the government has hiked import tariffs to coerce companies to build more mobile phones, auto parts and toys in India. An iPhone X, for instance, will now cost $1,700 in India, about 94% of an average person’s yearly income.
According to Devashish Mitra, a professor of economics at Syracuse University, these tariffs—along with an earlier round of tariff hikes on electronics in December—echo the failed protectionist policies of the past. They ensured that Indians paid high prices for shoddy goods, and created a business culture in which many firms cared more about manipulating duties than satisfying customers. Mr. Mitra says that instead of raising tariffs India should have emulated China by reforming labor laws and maintaining a low-tariff regime on intermediate goods to attract export-oriented global manufacturing firms.
The approach to corporate taxes reflects India’s inability to outgrow its long-standing suspicion of big business. In his budget speech three years ago, Finance Minister Arun Jaitley promised to make India more competitive by lowering corporate taxes to 25% from 30% by 2019.
This year he said the lower tax rate would apply to companies with sales of less than 2.5 billion rupees ($39 million), five times the 500 million rupee threshold applied last year. This excludes the 7,000 largest firms, which account for a large chunk of taxes and have the best shot at competing globally.
Nor has Mr. Jaitley kept his promise of reining in the fiscal deficit. According to a law passed in 2003, the federal government was committed to limit the fiscal deficit to 3% of gross domestic product by 2009. After relaxing his target for the third time in five years, Mr. Jaitley pushed that deadline to 2021. But if India can’t meet its commitments with the economy estimated to grow 6.5% next year, the odds of its suddenly developing the political will to rein in profligacy three years from now appear slim.
Privatization is another missed opportunity. In almost four years, the Modi government has failed to sell a single state-owned enterprise, though it has invited bids for the money-losing state-owned carrier Air India.
In his budget speech, Mr. Jaitley boasted of beating this year’s target for disinvestment, the Indian term for selling stakes in state-owned firms. This reflects accounting sleight-of-hand rather than a commitment to getting government out of business. For instance, it includes state-owned Oil and Natural Gas Corp.’s purchase earlier this year of a 51% stake in state-owned Hindustan Petroleum Corp. for $5.8 billion.
Some analysts argue that the budget could have been worse. At least on paper, Mr. Jaitley relaxed the fiscal deficit target for next year only modestly. Notwithstanding Modicare, the government has not announced anything as populist as the Congress Party’s $17 billion 2008 loan waiver for farmers.
It’s too soon to say whether the government will stick to its revised budget estimates or open the floodgates of populism even wider as elections approach. But one thing is certain: the Davos version of Mr. Modi bears little resemblance to his domestic avatar.
Appeared in the February 9, 2018, print edition as ‘Will the Real Narendra Modi Please Stand Up?.’
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