India’s finance minister, Pranab Mukharjee, recently presented the union budget for the 2012-2013 fiscal year in Parliament, amid sky-high inflation, deep fiscal deficits, lagging economic growth, unemployment, and of course, dwindling expectations for subsidies.

Almost 21 years after India opened its markets, the country adopted new industrial polices and moved on to a new economic model.  Unfortunately, India still lacks a strategy for stable economic growth. The term ‘stable economic growth’ generally refers to the economic growth rate of a country; it should not be like a roller-coaster ride. The term ‘even growth rate’ implies a situation where all the sectors in the economy move in a unified fashion.

The Indian government is currently stuck between the ongoing problem of fiscal deficit, and the continued expectations of subsidies by the people. This is because the revenue of the government does not correspond with what it spends.

To get through, taxes are usually increased but this will inevitably only tighten the shackles, because an increase in tax rates usually leads to a decline in consumption and further weakening of economic growth. This has come at a time when global economic conditions are not conducive for any such action that hampers growth.

Budget Highlights

Total expenditure in 2012-13 is projected at INR 14.9 trillion, an increase of 29 percent compared to last year. The major subsidies bill is estimated at INR 1.87 trillion while headline inflation is expected to get moderate in the next few months.

The income tax exemption limit rose from INR 180,000 to INR 200,000, which is at the upper limit of the 20 percent tax slab, which rose from 8 lakh to 10 lakh. Amendments of the Fiscal Responsibility and Budget Management Act (FRBM) as part of the finance bill has been proposed.

Central government subsidies are to be kept under 2 percent of GDP, which implies subsidies may be hammered down in the future. Almost INR 15,900 crore have been provided for capitalization of public sector banks and other financial institutions, while investment under a 12th five-year plan increased up to INR 50,00,000 crore and half of this is expected to come from private sector. Allocations for road transport and the highways ministry was enhanced by 14 percent; the target for agriculture credit was raised to INR 575,000 crore.

The fiscal deficit of the central government is likely to reach 5.9 percent of the GDP for the year ending March 2012 and for the next fiscal year, the finance minister projects it would fall to 5.1 percent.

Certainty of Slow Economic Growth

The only thing that can be done to calm down asymmetric budgets in India, or anywhere else in the world, is to bring austerity, the systematic reduction of spending in order to reduce the burden of interest on borrowings and fiscal deficit. But ironically, fiscal authorities have chosen a different path in these turbulent times that will hamper growth and unemployment among other factors.

When the growth rate of Indian economy was revised to 7 percent from more than 8 percent in 2010-11, this showed that the pace of economic growth has been badly affected, while increase in service tax from 10 percent to 12 percent along with excise tax to 12 percent, it will derail economic growth.

Inflation in India for the last three to four years has become part of life. People rely on subsidies for cooking, gas, diesel, and petrol. Unemployment is also largely dependent on outsourcing and while income levels are relatively stagnant, the signalled increase in indirect taxes will make life even harder to sustain.

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About the author

Muhammed Faraaz
Post-graduate in Economics from India, unfolding complexities and policies. Proponent of Classical Economics.