On 5 July, India's newly-appointed Minister for Finance, Nirmala Sitharaman, announced the country's budget for fiscal year 2019/20, the first since India's May 2019 election. It signaled continued commitment to Prime Minister Narendra Modi's policy agenda, particularly through deepening the previously-announced "Make in India" (MII) scheme seeking to expand India's manufacturing exports.

To support MII, Sitharaman increased duties on imports across multiple sectors including electronics and conventional (non-electric) automobiles and eliminated tariffs on capital goods that support manufacturing. Separately, Sitharaman announced approval for 100% foreign ownership of insurance intermediaries, but proposals to lower foreign-investment limits in aviation, media, and other insurance activities remain at the consultative stage.

Significance

Budgetary focus on MII follows a slowdown in Indian economic growth: in the last quarter of 2018/19 (March), annualized GDP growth softened to 5.8%, its weakest rate since Modi's government first came to power in 2014. The budget appears focused on lowering capital-input costs to support domestic manufacturing production, while aiming to improve the environment for local industry. However, the budget neither included nor was accompanied by moves to address other fundamental business obstacles, and key bureaucratic concerns remain. Given the government's current minority in India's upper house, central-level changes facilitating land acquisition and to reform labor markets are unlikely in the one-year outlook.

Following the government's protectionist stance, contract approvals for projects led by foreign investors is likely to remain slow, particularly in sectors like defense, manufacturing, and electronics. Given the reportedly slow timeline for Indian stakeholder consultations, wider proposed relaxations for FDI are unlikely to be implemented in the one-year outlook.

Significant victories for Modi's party in upcoming state elections in Haryana, Jharkhand, and Maharashtra would indicate strengthening of the government's upper-house representation, potentially enabling it to gain a majority and facilitating land and labor reform beyond the one-year outlook. The government is also seeking to privatize up to 95% of the national airline, Air India, by October 2019. Failure to receive suitable bids (as in 2018) would indicate increased likelihood of the government lowering FDI limits in aviation from the current 49%.

Posted 10 July 2019 by Deepa Kumar, Head of Asia-Pacific Country Risk, S&P Global Market Intelligence