India's economy: five things you need to know

New Delhi (AFP) –


Indian Finance Minister Arun Jaitley presented the annual budget on Monday with big giveaways for the rural poor.

Here are five key questions about India's economy:

+ Why has India failed to achieve its huge potential?

India is the world's biggest democracy and one of its biggest markets, but it has struggled to haul its 1.2 billion people out of poverty.

Millions of people in rural areas live on less than $1.25 a day and gross domestic product (GDP) per capita is just $1,540 a year. By some development metrics, India performs worse than poorer neighbours Bangladesh and Pakistan.

India has a flourishing services sector, especially in IT, but this only employs a relatively small number of skilled, educated people.

Manufacturing was a key way for China to lift its vast population out of poverty and Prime Minister Narendra Modi is trying to emulate that with his Make in India campaign.

But India's slow, bureaucratic business climate and poor infrastructure puts off investors.

And unlike China, where the ruling Communist Party makes decisions without debate, infighting in India's parliament paralyses many key reforms.

+ What has Prime Minister Modi offered and has he delivered?

Modi swept to power with a huge mandate in 2014 and promised to bring in sweeping reforms to reduce poverty, revitalise business and attract foreign investment. But many key promises have not materialised.

A land reform plan which would have made it easier for businesses to buy land from farmers is widely considered dead in the water.

And a bill to introduce a Goods and Services Tax (GST), which would simplify a patchwork of existing taxes in India for the first time, is stuck in parliament's upper house, where the ruling party lacks a majority.

Of 30 key reforms tracked by the Center for International and Strategic Studies (CSIS) on its Modi Government Reforms Scorecard, only six have been completed.

Catchy initiatives such as Make in India have succeeded in raising the profile of India abroad, and foreign direct investment rose in 2015.

But many of the underlying reforms necessary for Modi's eye-catching initiatives to have a real chance of success have yet to come to fruition.

+ What has this budget promised?

This budget is aimed squarely at India's farmers, who are suffering after two bad monsoons and with high inflation.

The ruling Bharatiya Janata Party (BJP) seems to be hijacking ideological territory more associated with the left-leaning Congress party as it tries to counter accusations it doesn't do enough to help the poor.

Jaitley has pledged to spend 359 billion rupees ($5.2 billion) on doubling the income of India's estimated 120 million farmers over the next five years through measures including a crop insurance scheme and better access to markets.

The budget also promised massive spending on infrastructure, including for roads, railways and ports.

+ Will it be enough?

A slowdown in the global economy over the past year has hurt India's growth, which is expected to flatline in 2016.

India does not sell much abroad given its size and weak demand means it is selling even less, with exports slumping for 14 months.

This means that bolstering domestic consumption, a major engine of India's economy, is vital to stimulate growth.

This budget should do this -- measures to hike farmer incomes will put more money in many people's pockets, with 68 percent of the 1.25 billion population living in the countryside.

A bumper pay rise for civil servants and a new pension for retired soldiers will see the government pump in billions of dollars and should encourage people to spend more.

And the promised boost in spending on infrastructure should help to attract private investment.

+ What are the implications if these initiatives fail?

India is the world's fastest-growing major economy, consistently outpacing China over the past year, with GDP set to expand by 7.6 percent in 2015-16.

But economists say it should be growing at about 10 percent to bring people out of poverty and create the tens of millions of jobs needed each year to cater to its young, growing population.

The measures for rural India will help to ease the crisis in the countryside.

But if Modi's government cannot pass key reforms such as the GST bill, and if it cannot vastly improve the ease of doing business, it will not attract the investment needed to power its growth.