India is home to well over a billion people, making it the second largest country and second largest potential consumer market in the world. And yet while China has been racing into the 21st century, India has lagged desperately behind. Saddled with immensely complex tax codes and regulations, a court system that no longer functions, and numerous weaknesses and complications, India has struggled to tap her full potential.

Narendra Modi India

With the domestic economy currently ailing amid currency fluctuations and a highly competitive global economy, many believe that Modi’s first budget could be as important as the reforms passed in the early 90’s that weaned the country off of socialism. While Modi stopped short of a massive overhaul of the economy, his budget does appear to be a step in the right direction and if it hints at further reforms to come, India could finally emerge as a world power.

Modi’s Budget Focuses on Modest Reforms

The budget will aim to simplify India’s immensely complex tax system while also providing tax breaks to middle class families. One of the key reforms will be unifying the sales tax across the federal territories. The government is looking to increase taxes on soft drinks and cigarettes.

The minimum level at which people must start paying income taxes was also raised, providing a sort of tax break for the poor. While the initial reforms to the tax code will be modest, the new government is making it clear that these modest reforms will be part of a gradual process to reform and reshape the government.

Foreign investment caps on two key industries, the defense and insurance sectors, would be raised from 26 percent to 49 percent. This will allow more foreign participation and hopefully will spur local companies to be more competitive. Defense contractors have been encouraging a raise in the limit in exchange for sharing technologies when setting up operations in the country. Many believe, however, that the defense sector reforms don’t go far enough.

Reforming the Welfare State Will Be Key

The government will also begin reforming its massive welfare system. For now, the government’s reforms will be rather modest and focus on trying to make the system more efficient rather than a complete overhaul of the massive subsidies that currently eat up huge portions of India’s budget. Indeed, subsidies on fertilizers, which are a huge benefit to poorer farmers, are actually being raised.

Still, Modi’s government has made it clear that the welfare state must eventually be reformed. All of these reforms must be undertaken with a certain fiscal restraint. India is looking to curb its deficit and the government has been told by international ratings agencies that if they don’t get their act together, they’d be downgraded.

India Preparing for Shocks

Even though the reforms in Modi’s budget were relatively modest, the government is already warning people that attempts to modernize the economy will generate shocks. India has long relied on a complex system of subsidies and welfare programs to keeps its massive and restive population at least somewhat placated. The country’s immense democratic system and the weight of a billion plus voters means that the government must tread lightly.

India can simply no longer afford to maintain this welfare system and will be looking to slowly roll back subsidies. For now, however, Modi is backing off any major reforms to the welfare state and will instead try to encourage economic growth through capital investment, encouraging more foreign investment, and other efforts. If nothing else, it’ll be easier to roll back subsidies and populist measures once the economy is growing.

Still, India’s stock markets have been trending upwards and while the budget proposal was modest, it was well-received.