March 18, 2012

Review of Union Budget 2012-2013: Good and bad points

India's Budget 2011: What was promised, what was delivered
Let's look at how the UPA fared post last year's budget, where it made an array of promises to the public

Finance Minister Pranab Mukherjee made some lofty promises during his budget speech on February 28, 2011. For the most part, the government has been unable to keep its word, in part owing to the inability to pass reform in Parliament, but also exacerbated by an economic slowdown and high oil and food prices. Here is a list of projections made in in the 2011 budget and how they have measured up over the year.

Gross Domestic Product 
The finance minister expected the economy to grow by 9 per cent, plus or minus 0.25 per cent in the fiscal year 2011-12.

This estimate were revised down to 8.2 per cent in last July, and further reduced to 7.1 per cent by the prime minister’s Economic Advisory Council. The report by the council states the downward revisions are due to both the euro zone crisis and the uncertain domestic political environment, which have slowed the recovery in infrastructure investment. Additionally, industrial and investment activity declined in the second quarter of last year, further affecting growth.

The 2011 budget forecast inflation for the fiscal year at 5 per cent.

Inflation has stayed at around 10 per cent for the 22 months preceding October 2011. The inflation rate dropped to 9.1 per cent last November and fell further, to 7.5 per cent in December and 6.5 per cent in January before rising marginally to 6.95 per cent in February, according to a report by the prime minister’s advisory council. The sustained inflationary pressure came mainly from high prices of cereals, vegetables, pulses and dairy products.

The finance minister projected the fiscal deficit at 4.6 per cent.

Analysts have revised this estimate to between 5.8 per cent and 6.1 per cent. An HSBC report on India’s macroeconomic indicators pegs the deficit rate at 5.8 per cent and says that the target of 4.8 per cent for the fiscal year 2010 was achieved largely due to the one-off revenue collections from 3G license sales. According to bank Nomura, the central government’s budget deficit will widen to 6.1 per cent due to slower revenue growth and a higher subsidy bill.

The central government projected its total subsidy bill at Rs 1.44 trillion ($28 billion) for 2011-12.

Fertilisers make up about a third of the total of the government’s subsidy bill at Rs 500 billion ($1o billion) but judging by previous years’ records, where subsidy bills have been revised upwards, this year will be no different. According to the Fertiliser Association of India, the bill for the current fiscal is set to cross Rs 700 billion ($10.4 billion). The increased subsidy bill owes to a spike in international prices of inputs and fertiliser prices.

The central government budgeted Rs 605 billion ($12.1 billion) to fund food subsidies. As of last December, the government had released Rs 451 billion or about 75 per cent of its budget allocation for the year toward food subsidies. This check is likely to increase by 50 per cent over the next year if the Food Security Bill, which aims to provide legal entitlement to subsidised grain to 75 per cent of rural and 50 per cent of urban households, according to a report by The Financial Express.

Petroleum subsidies were estimated at Rs 236 billion ($4.2 billion) for 2011-12. Nomura analysts predict that this bill will nearly triple and be billed at Rs 600 billion ($12 billion) owing to the volatility in oil prices worldwide. India imports about 70 per cent of its total consumption of oil; Iran and Saudi Arabia are two of its largest suppliers.

The central government allocated Rs 520 billion ($10.4 billion) to the education sector for 2011-12.

The accountability initiative by the Centre for Policy Research finds that more than a year after the Right to Education Act was passed, although the government’s allocations to education have increased, these have not improved learning outcomes. The Sarva Shiksha Abhiyan, the government’s flagship elementary education program, accounts for 65 per cent of the centre’s education budget. Of this, teachers received the largest portion of funding (44 per cent covers salaries, teaching inputs and training) while children received only 10 per cent, which covers uniforms, text books and bringing the unschooled into formal schooling. Overall, states are not spending their allocated budgets, with the average expenditure hovering at around 77 per cent of budgeted allocations.

The central government targeted revenue of Rs 400 billion (approximately $8 billion) from reducing its stake in public sector companies.

The government has only been able to achieve a fraction of its disinvestment target, earning Rs 130 billion ($2.6 billion) from broadband wireless auctions. The government decided against selling its shares of cash rich enterprises as this would have “reduced investible resources and failed to convince market participants,” who do not give much weight to proceeds from one-off asset sales, reports the prime minister’s advisory council.