India's budget to set context for vigorous foreign policy (Comment}

More than just a list of taxes and spending, the first budget of Prime Minister Narendra Modi's government is expected to unveil policies that will signal how the new Indian government wants to shape the economy in the years to come and engage with the world.

The fiscal budget, to be presented by Finance Minister Arun Jaitley in Parliament Thursday, is part of the government's action strategy to build a stronger economy and a safe and secure India. The prime minister believes that India is destined to be a global power, but he also understands that the goal will never be met unless India gets its economic act together. The finance minister has said India's policies with regard to the rest of the world will be influenced by economic realities and national priorities. The budget will set the context for foreign policy and the role of diplomacy for the advancement of core economic and strategic interests.

The 2014-15 budget is likely to support a sustainable, affordable and accountable programme to reduce poverty, promote prosperity and enhance stability in the region, pronouncements from the government and sources have indicated. Both the prime minister and finance minister have said the government will invest in the drivers of economic growth, including infrastructure, trade and education to create jobs and opportunities that would lift people out of poverty.

Expectations from the budget are high in view of the years of stagnation. The economy is estimated to have grown by 4.9 percent in 2013-14, a shade lower than the government's earlier projection, but marginally above 4.5 percent logged in fiscal 2013. While the farm sector registered a healthy growth of 4.6 percent, a deep slowdown continued in the mining and manufacturing sectors that suffered from low investment sentiment, weak demand and policy bottleneck. In fact, this is for the first time since 1991-92 that India's manufacturing sector has contracted reflecting the crisis confronting the sector.

"India missed the first industrial revolution. It missed the bus for manufacturing decades ago. It is on the verge of missing the revolution on becoming a hub for low cost manufacturing. This is the last opportunity and we cannot afford to spoil it," said the finance minister, replying to the president's address and giving a clear indication that the budget will put emphasis on manufacturing.

Manufacturing contributes a little over 15 percent of the gross domestic product and with such a low base, economists say, India cannot have growth and create the jobs needed to absorb some 12 million who enter the employment market every year. Hence, the budget should aim at turning India into an alternative manufacturing hub to China, which is seeing an escalation in costs and its relations with neighbours is marked by territorial friction.

But inextricably linked to this are the development of infrastructure and inflow of foreign investment. The country needs a trillion dollar over the 12th Plan period ending March 2017 to overhaul its infrastructure. To attract foreign capital inflows, an environment conducive enough for foreign private sector investment is needed to be created with a fair and simpler taxation system and relaxed foreign direct investment (FDI) norms in certain sectors such as construction and defence. According to the world investment report by the United Nations Conference on Trade and Development (UNCTAD), India's ranking as a favoured destination in FDI dropped from third in 2013 to fourth in 2014. The numerous laws and regulations make it difficult for firms to do business domestically.

It is an abiding irony, as Rajiv Lal of IDFC says, that a country rich in entrepreneurial talent as India is also a notoriously difficult place for doing business. In a recent interview, Nirmala Sitharaman, minister of state for commerce and industries, said the budget will ease conditions for doing business in India. The government has indicated that the budget proposals will signal a shift in focus from consumption to an investment-led growth.

Economists and trade experts say India must adopt domestic policies that would help bring in trade-promoting investment. Most international trade is now intra-firm trade, they say, and India must enter the supply chain of global corporations to make investment the engine of export promotion.

Given such a macro context, the relations between economy and foreign policy is complex but vital. The new government understands that a stronger economy alone will make it a comprehensive national power. At the same time, as former prime minister Manmohan Singh has said, India's relations with the world are increasingly shaped by development priorities, and greater integration with the world economy will benefit the country and enable people to realise their creative potential.

An "internationalist" leader like Modi understands that and hopefully would not reduce the allocation for development partnership projects abroad.

(09.07.2014 - Saroj Mohanty is a writer on economic and strategic affairs for IANS. The views expressed are personal. He can be contacted at [email protected])