South Asia Monitor: The Indian Budget: What Impact Will It Have? - April 1, 1999

April 1, 1999

The macroeconomic performance of the Indian economy has slipped over the past two years, as evidenced by slower growth in output and exports, as well as a higher fiscal deficit and inflation. A few sectors - agriculture, information technology (IT), consumer goods, media, and pharmaceuticals - have held up. Heavy manufacturing and capital goods, however, are in a downturn. Investor confidence is still weak, reflecting continuing political uncertainty and spillovers from the Asian crisis.

The government's budget focuses heavily on confidence-building measures for the financial sector and on incentives for India's booming industries. The budget is more realistic than last year's and emphasizes modest reform measures that address micro-level constraints and distortions, rather than a sweeping change in policy direction. Although unlikely to jump start growth, the budget introduces several proposals that will help revive the equity market and facilitate restructuring in industry. It avoids the expansionary fiscal policies and the swadeshi proposals of last year, but fails adequately to restrain the fiscal expenditures that contribute to India's large fiscal deficit and to address weak export performance. Although the budget proposals affirm the government's commitment to reform, they reflect the political constraints under which it is operating.