To become a $5 trillion economy India needs investments. But where will they come from?

Finance Minister Nirmala Sitharaman’s budget speech on July 5 clearly recognised one key problem facing the Indian economy right now: inadequate investment.

The word investment was mentioned at least 30 times in the first hour of the rather lengthy speech, reflecting its importance. In addition, the Narendra Modi government set a new goal to take the Indian economy to $5 trillion or Rs 343 lakh crore in five years, which makes investment an even more urgent priority.

However, what the government plans to do to boost investments remains vague.

Most of the proposals in the budget speech relate to regulatory changes, such as further opening up of the financial sector to deepen capital markets in the – false – expectation that this will somehow kickstart private investment on its own. It is hard to see how liberalisation of foreign capital inflows into insurance would generate more real domestic investment, for example, but this is apparently what the government believes.

Some other proposed solutions were even more distant: the problem of the non-bank financial sector, which is still reeling from the collapse of IL&FS, is apparently to be dealt by a committee to suggest changes in regulatory structure for such entities.

There are simply no numbers to match the ambitious claims.

But in the final analysis, the budget is about numbers, not statements of grand intent. And this is where it turned out to be extremely lacking, for there are simply no numbers to match the ambitious claims.

No big schemes

There was hardly any increase in public expenditure that would match the claims made on public investment. In the overall fiscal deficit, the share of capital spending is projected to be only 1% of GDP, a decline from the already small level of 1.1% in the previous year. Macroeconomically, that is not a level designed to generate a higher growth path through the crowding in of private investment.

Even the so-called focus areas of this government got short shrift. For instance, roads and transport infrastructure, which are known to have strong linkage effects that generate investment and growth over time, have been focus areas of the Modi regime. But the budget allocations for these sectors were increased only by Rs 4,390 crore or 5.6% over the revised estimate for the previous year. This is barely above the expected inflation rate, so it is likely to mean no real change over the coming year.

The most important category that needs investment revival is that of micro, small and medium enterprises that have suffered massively due to policy mistakes of the past few years. Some urgent measures were required to revive such enterprises. But there was really nothing for them, besides the usual pious statements.

Most of all, investment in India is being held back due to the lack of aggregate demand, so that needs to be fixed in order to revive domestic investment. Big Indian capitalists currently find it more profitable to invest in other countries, while smaller companies either cannot invest because of the difficulties in getting credit or do not want to invest because they do not anticipate a growing market. The government needed to address these issues in the budget if it really wanted to increase investment rates and achieve the glowing future it is projecting.

An attempt to boost consumption was made before the election when the government announced cash transfers to farmers, which would put some more spending power into their hands. But that by itself is simply not enough to address the magnitude of the demand problem, especially if other factors continue to make the viability of farming a concern.

A big public investment push is definitely required, one that would embrace both physical and social infrastructure to solve the major physical and social development deficits that India is known for.

Not only is the central government not doing enough on its own to address this it is also effectively preventing the states from doing so. This is because each successive budget centralises the revenues further, raising more and more revenues from cesses and surcharges that do not have to be shared with state governments. In the current budget, at least 16% of tax revenues are in this form, representing a clear violation of the spirit of fiscal decentralisation.

So Sitharaman’s budget was definitely a disappointment from the point of view of reviving investment. The government seems to think that – just as for agriculture and employment – if it keeps its head in the sand long enough and simply ignores the problems, they will eventually go away on their own.

This article first appeared on Quartz.