Highlights From India’s 2013 Budget

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Mar. 5 – India’s Finance Minister Mr. P. Chidambaram recently presented his 2013 Budget to the Indian Parliament in one of the most keenly awaited documents of recent years. The coming year’s Budget has been seen as critical by both Indian and international analysts, as many see 2013 as the year India may regain its impressive growth rates, but also where the Indian government must implement concrete plans to avoid the emergence of long-term fiscal problems.

Speaking to the New York Times, Rajiv Kumar, and an economist with the Center for Policy Research in New Delhi, called the Budget “supercritical.”

Mr. P. Chidambaram clearly reflected the seriousness of the government’s intent to improve investor confidence in its fiscal policy.

“The main thrust of the Budget is to signal the world and everyone else that we are following a prudent fiscal path and that the fiscal deficit will be contained,” said the Finance Minister. “Foreign investment is an imperative.”

Moody’s quickly announced that the Budget was credit positive, noting that “the fiscal 2013 outcome demonstrates the sovereign’s commitment to the budget target,” and noting that such efforts were a “step in the right direction.”

India Ratings remarked that measures in the Budget would “provide fillip to investment activity as well as support to core sectors in the short term.”

Economic analysts predict that if these measures successfully boost investor confidence, substantive economic growth will be seen as early as the end of this year.

The following are the highlights of the 2013 Budget:

  • GDP growth rate projected at 6.1 to 6.7 percent for 2013-14 (compared to the 5.5 percent expected in 2012)
  • Containing the fiscal deficit to 4.8 percent of GDP, and lowering it further to 3.7 percent by 2017
  • Government tax revenue set to rise by 19 percent, non-tax revenue by 32 percent and expenditure rising by just 16 percent
  • Subsidies to be reduced by 11 percent to INR2.2 trillion (US$40.2 billion) from INR2.47 trillion (US$ 45.1 billion). This is a decrease from the present 2.6 percent of GDP to 2 percent of GDP
  • Tax to GDP ratio to increase by 10.9 percent, from the estimated present level of 10.4 percent.

Much of the Indian fiscal estimates, such as low fiscal deficit, robust tax collections and rationalized government expenditures, are based on assumptions of domestic growth and better tax administration. Experts point out that the estimates therefore suffer from high concentration risk. External factors such as below normal monsoon rains, rises in commodity prices (including oil), and uncertain global geopolitical and economic scenarios can also throw the fiscal targets off balance.

Macroeconomic Impact

Interest Rates
With possible relief from tight monetary policy by the Reserve Bank of India (RBI), interest rates are likely to move in the corridor of -1 percent to 1 percent from the current level of 7.75 percent (RBI repo rate).

Inflation
Inflation is seen as a worrying factor, as it is discourages the RBI from cutting interest rates. Efforts announced in the Budget to limit inflation, including inflation-index bonds, have so far been met with skepticism.

Growth
The government projection of 6.4 percent growth appears to be optimistic, but an increase in the growth rate from this year’s 5.5 percent is expected.

The business community has generally received the Budget favorably with President of General Motors India, Lowell Paddock, saying that it “should help growth going forward.” Economists have pointed out that the Budget does not factor in the risks from external factors, but agree that its policies will contribute to faster growth.

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