NEW DELHI (Reuters) - India’s annual budget on Friday fell short of market hopes for tougher fiscal tightening measures.
The government, facing political turmoil, fended off pressure to produce an even more populist plan, yet stopped short of offering meaningful economic reforms that might have cheered investors.
Below is a brief account of Congress-led ruling coalition’s budgets since regaining power in 2009.
Finance Minister Pranab Mukherjee faced a widening fiscal deficit, stubborn inflation and an economic slowdown ahead of the budget. There was also concern regarding the ballooning bill for oil, fertilizers and food subsidies.
The budget pegs gross domestic product (GDP) growth for fiscal year 2012/13 at about 7.6 percent, rebounding from a three-year low of sub-7 percent growth in the 2011/12 fiscal year that ends on March 31.
That was in line with many private economists’ expectations, although some think growth could slow more dramatically as inflation bites and the global economy cools.
Mukherjee, in his speech, said he expected the fiscal deficit to be 5.1 percent of GDP and subsidies to be not more than 2 percent of GDP.
Yet some economists questioned how both targets could be reached, especially when the government estimated that oil prices would average a lofty $115 per barrel and there was no promise to cut fuel subsidies.
This proved to be a very optimistic budget which underestimated the impact from weakness in Europe and the United States, as well as rising inflation at home.
When the budget was announced last year, India’s economy was expected to grow at close to 9 percent in 2011/12. Weighed by food prices, a slowdown in industrial growth and a lack of major reforms, the country now is expected to achieve growth of just 6.9 percent.
The fiscal deficit for the year was pegged at 4.6 percent of gross domestic product (GDP), on the back of an expected $8.1 billion divestment in state-run companies. However, weak equity markets meant India raised less than $3 billion. Fiscal deficit targets have now been revived to 5.9 percent of GDP.
The fiscal year of 2010/11 was marked by rising inflation, prompting a series of rate cuts by the Reserve Bank of India (RBI).
When the government presented its budget in February of that year, it thought the economy would grow at about 8.5 percent. It came pretty close to the mark, with growth coming in at 8.6 percent, “indicating a rapid recovery from the crisis and consolidation”, according to a finance ministry document.
Food inflation declined from 20.2 per cent in February 2010 to less than half at 9.3 per cent in January 2011, while India was perceived to have been spared the worst of the global economic meltdown.
The document said growth across sectors was “robust” across sectors in the first half of the year, with sign of a deceleration in the latter months, a trend which led into the slowdown of 2011/12.
This was the first budget presented after the Congress led United Progressive Alliance government came back to power. While the year began as a difficult one, just after the global financial meltdown, it turned around beginning in the second quarter due to strengthening in services sectors and higher manufacturing output, government reports say.
GDP growth was at 7.2 percent for this fiscal year, compared with 6.7 percent the previous year. The expectation when the budget was presented in July was that the fiscal deficit would grow to 6.8 percent of GDP compared with 6.2 in 2008/09.
India was one of the few countries which registered strong growth in the year after the Lehman crisis, raising expectations that it, along with other emerging economies could be cushioned from the worst of the meltdown.
Indeed, India had visions of an economic growth rate approaching double digits, rivaling China‘s, but the country’s prospects have since dimmed. Friday’s budget offered little to convince markets that those lofty targets could be reached any time soon.
Editing by Emily Kaiser