India’s Cautious Budget and Its Revised GDP

First Published Date : March 22, 2012 ADawnJournal.com

India’s finance minister presented its recent budget without taking any significant steps towards economic reforms and fiscal discipline. However, the budget promises a higher GDP growth of 7.6 percent for the next fiscal year. This is up from current fiscal year’s expected 6.9 percent ending in March, but far below the 8 to 9 percent GDP India experienced for the last decade.

India’s economy went through its slowest pace in three years for the last 3 months of 2011. Many government development plans were abandoned due to the slow pace. However, some sectors are showing signs of recoveries such as electricity, coal, cement, and fertilizer, as mentioned by the finance minister. India spends 2.5 percent of its GDP on subsidies such as food, fuel, fertilizer. India plans to cut subsidy spending to 1.7 percent. Higher oil prices are one of the main causes that make subsidy spending to swell.

Inflation has been one of the main contributing factors for the slowing growth in India. India’s central bank has had to increase interest rate 13 times for the last two years – pushing the borrowing cost 8.5 percent and making it difficult for economic growth.
Structural reforms and fiscal discipline were expected in this budget. However, a government battered by political instability and corruption charges doesn’t have much to do to take any dramatic steps toward big reforms. India runs both budget and account deficits, and this budget aims to make 5.1 percent of GDP next year from 5.9 percent this year.

Many foreign investors became impatient with India’s economy due to its slow growth and political corruption and instability. The new budget addresses very little to invigorate market sentiment to attract foreign investors. According to rating agency Standard and Poor’s, the new budget would be considered “mildly negative”.

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