India’s Union Budget – Balancing Politics and Economics

On February 28th, Indian Finance Minister P. Chidambaram presented the 2013-14 Union Budget of India to Parliament. This massive document spells out the government’s spending priorities for the 2013-14 fiscal year (April 1, 2013 – March 31, 2014). The Union Budget is also accompanied by a survey of economic indicators from the previous year.

Before the Union Budget can go into effect on April 1st, it must first be passed by the Lok Sabha, the lower house of India’s Parliament, during the first of two special budgetary sessions. Amid slowing economic growth, soaring inflation, and a growing fiscal deficit, this year’s budget is a critical test for the government ahead of the 2014 general elections. While many analysts and observers expected a more austere budget, the government seems to have taken a more balanced approach by increasing spending and enacting only modest deficit-reduction measures.

Q1: What are some key highlights of this year’s Union Budget?

A1: The government has projected GDP growth for the upcoming fiscal year to be between 6.1 and 6.7 percent. While this is up from the current fiscal year’s decade-low of 5 percent, it still falls short of the 8-9 percent average achieved in the years prior to the 2008 global financial crisis. The government plans to contain the budget deficit at 4.8 percent of GDP, down from 5.3 percent in the current fiscal year.

Total expenditures for this year’s budget will reach $309 billion, a 16 percent increase from the previous year’s total of $263 billion. Defense spending, the largest portion of the budget, comprises roughly $37 billion, a 4.5 percent increase from last year. The next largest outlay and also the largest year-on-year increase went to the Ministry of Rural Development with a 46 percent increase to $15 billion.

The government also significantly increased investments in health and education, with the Ministry of Health and Family Welfare receiving $6.9 billion, a 40 percent increase from last year. The bulk of the money will go towards India’s National Health Mission, the flagship program designed to expand healthcare delivery in rural and now urban areas. To better equip India’s large and growing workforce with the skills and knowledge necessary to compete in today’s global economy, the Ministry of Human Resources Development will receive $12.1 billion, a 17 percent increase over the previous year.

Despite these spending increases, the government aims to cap subsidies, $18.4 billion in total, at 2 percent of GDP, down from 2.5 percent in the previous year. $1.8 billion of total subsidy expenditures will go towards one of the ruling Congress Party’s major initiatives, the National Food Security Bill. The budget also raises revenue through several modest corporate tax increases as well as a 10 percent increase on incomes exceeding approximately $184,000.

Q2: What are the economic ramifications of the 2013-14 Union Budget?

A2: Given India’s 68 percent debt-to-GDP ratio and Fitch and Standard & Poor’s negative credit rating outlooks on the Indian economy, the budget aims to signal to credit agencies and investors that India is committed to getting its fiscal house in order. Today, S&P deemed India’s new budget “relatively prudent.” It remains to be seen if the budget’s attempts to continue economic reforms, reduce subsidies, and encourage growth will avert a ratings downgrade to “junk bond” status. Moreover, officials at the Reserve Bank of India have stated that maintaining subsidies on food may exacerbate inflationary pressure.

Over the last several years, the Indian business community has been advocating for more pro-growth policies. While there are encouraging signs in the budget, there is still much more that can be done. The U.S.-India Business Council (USIBC) lauded the government’s efforts to reinvigorate investor enthusiasm and spur growth, while Deutsche Bank argued that the budget fell short of necessary confidence-boosting measures. Despite increased spending in a number of areas, business leaders had been hoping for even more initiatives aimed at skills development, research, and higher education to boost employment as well as increased spending on infrastructure and technology projects to spur private investment. With the agricultural and manufacturing sectors each growing below 2 percent last fiscal year, business leaders have also voiced that the government needs to do more to encourage growth in both sectors.

Furthermore, the Union Budget is relying on nearly $7.4 billion from divestment of state-run enterprises. While government receipts from these sales have been lower than expected in recent years, it is a good sign that the government continues to relinquish control of state-run enterprises to the free market.

Q3: What are the social and political ramifications of the 2013-14 Union Budget?

A3: Since 1990 government spending has consistently increased in a pre-election year, and this year’s budget is no different. Although the budget attempts to curb subsidy spending, it does increase funding for major development projects aimed at delivering roads, housing, power, and jobs to India’s rural poor, a key Congress Party constituency. In addition, the Congress-led government’s renewed push for the Food Security Bill has the dual purpose of promoting the welfare of India’s urban and rural poor as well as attempting to shore up votes ahead of next year’s elections.

Prior to the Union Budget’s release, former Finance Minister Yashwant Sinha, a senior leader in the opposition BJP party, remarked that while he and the BJP largely agree with the budget’s emphasis on fiscal consolidation, he is skeptical these budget measures will restore confidence in the Indian economy. He also urged the government to do more to encourage growth, particularly in the energy, infrastructure, and telecommunications sectors.

As the government continues to respond to recent public outcry over women’s security and cultural attitudes towards women the budget includes several initiatives aimed at addressing these issues. This includes the creation of $185 million fund for shelters, compensation, and medical support for victims of rape, public campaigns about violence against women, and a women-only bank.

Q4: What specific reforms are foreign investors hoping to see pass in Parliament’s budget session?

A4: There are several pending bills and initiatives that investors will monitor closely during this year’s budget session. The Insurance Amendment bill would increase the insurance sector’s FDI cap from 26 percent to 49 percent significantly opening up an emerging investment area. While investors would welcome implementation of the long-awaited Goods & Services Tax (GST), aimed at simplifying India’s tax structure and creating a common market across states conducive to investors, it is more likely that Parliament will merely lay out a roadmap to move the initiative forward. After the government alarmed investors last April by unexpectedly attempting to impose a retroactive tax of over $2 billion on UK-based Vodafone’s Indian assets, foreign investors are seeking greater tax and regulatory certainty as the government considers how to streamline various tax and investment regimes.

Nicholas Lombardo, program coordinator and research associate with the Wadhwani Chair in U.S.-India Policy Studies at the Center for Strategic and International Studies(CSIS) in Washington, D.C., Samir Nair is an intern scholar with the Wadhwani Chair at CSIS, and Sameer Punyani is an intern scholar with the Wadhwani Chair at CSIS

Critical Questions is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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