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India's union budget 2012–13: playing it safe

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In Brief

It should hardly have come as a surprise when media pundits described India’s 2012–13 union budget as ‘lacklustre’ and ‘lukewarm’ following its release on 16 March.

For a government that has increasingly found itself in a tight spot, both economically and politically, options were limited.

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The Indian economy’s growth rate slowed to an estimated 6.9 per cent over the past year, down from 8.4 per cent in the preceding two years. As a result, there was a dip in tax revenues and the fiscal deficit considerably overshot its target. At the same time the inflation rate remained near double-digit figures, providing the Reserve Bank of India with little room to cut interest rates to stimulate growth. While stagflation is too ominous a term for an economy growing at such a rate as India’s, the reference must feel appropriate for many Indians whose appetite for pro-liberal economic reforms rests on the ability of these policies to successfully trickle down through society.

There were, of course, political repercussions following India’s slowed economic growth rate; 2011 was a year of huge middle class-backed protests over corruption and price hikes. More recently the ruling Congress party, which heads the government with a motley coalition of regional parties, was dealt a serious setback from the results of major state assembly elections. Even the Congress’ coalition allies sensed the vulnerability of their lead partner and started contemplating their options in the event of a pre-term collapse. With this backdrop, there is little surprise that the finance minister, Pranab Mukherjee, delivered a survivalist, play-it-safe budget. There were no big reforms and no major policy turnarounds. It was a budget of small, tentative steps to help steady the ship — while hoping for the headwinds to pick up so the reform process can proceed.

This budget is the first of several ambitious targets outlined in the Twelfth Five-Year Plan (2012–17). For the Indian economy to live up to the high expectations its recent economic growth has set, there need to be major improvements to infrastructure, especially in the power sector. The quality of governance should also be improved, especially at the rural level, and growth must be made more inclusive through social sector investments. The current budget does not attempt to get a head start on these targets; instead, it chips away at the edges, postponing the major decisions for better times further down the track.

The key objective of the 2012–13 budget, as stated in the budget speech, is ‘fiscal consolidation’: indirect tax rates were raised, with excise rates increasing from 10 to 12 per cent; the tax base was broadened by applying the service tax to many services that were previously exempt; and subsidies were slashed to keep them under 2 per cent of GDP. These efforts, along with a more favourable international economic outlook, are expected to help lower India’s fiscal deficit to 5.1 per cent of GDP. But critics remain sceptical that this will actually work. The government’s credibility is still at risk in any case, as they have not reached the previous years’ targets on most key markers, including inflation, GDP growth and fiscal deficit.

If political survival is the litmus test, then Mukherjee has only just passed. Others have not been so lucky. Railways minister Dinesh Trivedi, of the coalition partner Trinamool Congress, was forced to resign after proposing to hike passenger fares. Railway passenger fares have not been raised in the last eight years, and the sector is begging for more investment to expand its capacity to meet growing commercial and passenger demands. The Trinamool Congress, which recently came to power in West Bengal after ending 35 years of communist rule, could not be seen to support any ‘anti-poor’ measures in a state whose railway network is the mainstay of transport for both the urban and rural population. Such is the political environment in which India’s latest union budget was announced, and whether the budget can deliver on its stated aim of fiscal consolidation will have significant implications for the future of the ruling party — be they positive or negative.

Mandar P. Oak is Associate Professor at the School of Economics, the University of Adelaide.

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