By Persis Khambatta, Samir Nair, and Sameer Punyani
Finance Minister P. Chidambaram presented the Union Budget of India to Parliament on February 28, a much-anticipated event for India-watchers around the globe. The budget spells out the government’s spending priorities for the 2013-14 fiscal year – and amid slowing economic growth, soaring inflation, and a persistent fiscal deficit, this year’s budget was a critical test for the UPA government ahead of the 2014 general elections.
In the coming days the CSIS Wadhwani Chair will examine the Union Budget’s impact on various sectors of India’s economy such as defense, energy, and infrastructure in a series of blog posts on the CSIS Asia Policy Blog cogitASIA.
The Union budget is an important lens through which to view India’s current domestic priorities, which in turn influence New Delhi’s ability to project itself beyond its immediate neighborhood.
So what are some of the big takeaways? The government projects between 6.1 and 6.7% GDP growth for the 2013-14 fiscal year, which is a full percentage point above this year’s slower-than-hoped 5% growth. Total expenditure for this year will reach $309 billion USD, and two of the largest outlays will focus on defense and rural development. The government also significantly increased investments in health, education, and human resource development with the goal of better preparing India’s large and growing workforce to compete in the global economy.
Government spending tends to increase in pre-election years, and this year’s 16% increase over last year’s budget continues that trend. This budget attempts to balance the cutting of subsidies with an increase in funding for major development projects aimed at delivering goods and services to India’s rural poor and growing middle class. In addition, the government’s renewed push for a 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.
Of particular note should be Mr. Chidambaram’s numerous mentions of India’s youth – 65% of India is under the age of 35, and provided the right resources, they could serve as a powerful engine of India’s economy in the coming decades. He noted that the overarching goal of the budget is to create opportunities for India’s youth to acquire the education and skills that will get them decent jobs or self-employment.
Coming on the heels of Congress Party President Sonia Gandhi’s earlier statement that the lack of employment opportunities in India fuel disenchantment, violence and crime, it is clear that the Congress party’s messaging in the run-up to general elections will focus on opportunities for India’s youth. This is a welcome, if tardy, recognition of the need to target India’s youth with a higher quality and quantity of educational choices, as well as job opportunities.
Despite a surge in spending, the government also included measures to rein in India’s fiscal deficit. The budget aims to cap subsidies at 2% of GDP, down from 2.5% last year. The government plans to raise revenue through several corporate tax increases as well as a (one-time) income tax hike on the wealthiest Indians, a continued divestment in some public sector undertakings (PSUs), and the sale of telecommunications spectrum. Through these and other efforts, Mr. Chidambaram is targeting a fiscal deficit at or below 4.8%, an expectation many economists consider optimistic.
The government also hoped to send a signal to investors and credit ratings agencies that India is committed to getting its fiscal house in order. Standard & Poor’s termed the budget “relatively prudent,” and the consensus seems to be that India’s economic outlook remains uncertain in light of domestic policy constraints and persistent high inflation. It remains to be seen if attempts to deepen economic reforms, reduce subsidies, and encourage growth will avert a ratings downgrade.
Attracting foreign direct investment (FDI) was also stated as a priority – one of the key features of the budget stated that foreign investments consistent with India’s economic objectives are to be encouraged. This is notable, particularly after last year’s budget left outside investors wanting for more consistency and certainty in India’s tax and investment regimes.
Amid declining FDI inflows, the budget simplified and clarified FDI procedures, introduced tax incentives for investments in manufacturing plants, and envisaged the creation of two new industrial corridors. These measures are consistent with India’s current emphasis on manufacturing and infrastructure development for inclusive economic growth, a point highlighted in a recent CSIS report entitled The Emerging Indian Economy.
In recent years, the business communities in India and abroad have advocated for pro-growth reforms in order to foster a more hospitable environment for India’s entrepreneurs and foreign investors. In this vein, the budget attempts to strike a fine balance between pro-growth spending and fiscal consolidation.
Business leaders had hoped for additional initiatives targeting skills development, research, and higher education in order to boost employment, together with increased spending on technology, agricultural, and manufacturing projects. The agricultural and manufacturing sectors both grew below 2% last year, and the service sector (or any single sector) cannot be relied upon to be the rising tide that will lift the entire Indian economy.
Despite tempered global expectations of India’s growth story, if the country can return to a projected 6%-plus GDP growth rate and provide more economic opportunities to its young citizens, the Congress-led coalition could have some political momentum going into next years’ election.
Ms. Persis Khambatta is a Fellow with the Wadhwani Chair in U.S.-India-Policy Studies at CSIS. Samir Nair and Sameer Punyani are intern scholars with the Wadhwani Chair. To learn more about some of the key drivers of the emerging Indian economy, please see our recent report The Emerging Indian Economy.