Budget News: Impact of Union Budget 2012-13 by CARE Ratings

The Government of India today released the Economic Survey for 2011-12, giving a backdrop of macro-economic challenges and trends for India along with an outlook on growth for the next two years. Although the past year has registered some weakness in the economy, the tone of the Survey sets a rather positive view for the coming years, with economic activity having ‘bottomed out’ and ‘a gradual upswing being imminent’.

Challenges in FY12
On the domestic front managing growth and price stability has been a prime concern in policy formulation. While agriculture and services sector have provided support to overall growth, weakening industrial activity (against monetary tightening causing borrowing costs to rise and investments to fall) has pulled down economic performance.

Simultaneously, the global economic environment has been tenuous through the year, particularly turning adverse post-September 2011, against the Euro-zone crisis, downgrades of sovereign credit rating of euro-zone and other advanced countries (including the US), followed by political unrests, currency wars and the more recent oil crisis.

Macro-economic Performance
The performance of the Indian economy, on the domestic front and external sector is captured in the trends shown in the following table –

Picture in FY12
• GDP Growth estimated at 6.9%
• Growth in Agricultural sector estimated at 2.5%, growth in services robust at 9.4%
• Growth in industrial activity at 4.5% a concern, with contribution of this sector to GDP slipping to 25% (as shown in table 1), a direct fall-out of lower rate of gross fixed capital formation (GFCF). GFCF a proxy for investments was earlier estimated at 31.9% of GDP in FY12 by MOSPI, when compared with 32.5% in FY11
• The rate of both savings and investments has slowed in FY11. It may be expected that these numbers continue to be low in FY12 as well, on account of monetary tightening pursued during the year to control inflationary pressures.

Conclusion: The Survey states that sustainable development would be vital for the Indian economy, with the country actively and constructively partaking in global negotiations. The role of India has expanded in the world economy along with other major emerging market economies.

Revenue: The tax proposals announced this year have the objective of boosting the resource base of the government.

Expenditure Measures: Total plan expenditure allocation has increased by 22.1% over FY12 (RE), with non-plan expenditure showing an increase of 8.7%.

The implicit rate of interest on the government debt is expected to increase marginally from 6.6% in FY12 to 6.7% in FY13. Furthermore, the government’s market borrowings are to grow by `60,000 crore. This could add to the already prevailing liquidity pressures in the system as well as interest rates.

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