Impact Analysis: Macro

Macro Analysis
Presenting his eighth and Indias 82nd annual budget in Parliament, Finance Minister P Chidambaram managed to deliver a realistic budget, though there was no big bang announcement on the reforms front. But, given the subdued global economic scenario, due precaution was taken by keeping the direct tax structure largely unchanged, only announcing a tax credit of Rs 2,000 for every person who has an annual income of up to Rs 5 lakh, but slapped a 10% surcharge on super-rich individuals with taxable income of over Rs 1 crore and corporate, levied a new tax on land and house transfer and raised duties on mobile phones, cigarettes and luxury vehicles. On the fiscal consolidation front, setting fiscal deficit at 5.3% this year and 4.8% for the next fiscal, looked very much achievable. However, despite stating that the ballooning current account deficit is a bigger worry than fiscal deficit, FM did not further raise import duty on gold, even as Economic Survey reinstating that gold and oil were the main contributors to rising CAD. Moreover, the FM also unveiled a bigger-than-expected outlay for the coming fiscal year, despite expectations for cuts from current year levels, which are on track to hit Rs 14.3 lakh crore, or 96% of the Budget target. On the whole, among the Indian Inc, the budget seemed to be a responsible and realistic one. Following are the macro-economic indicators mentioned in the budget document:

GDP Growth: Owing to weakening industrial growth, tight monetary policy followed by the RBI and continued
uncertainty in the global economy, Indian economy is estimated to have registered a growth rate of 5% in current fiscal, following a growth of 6.2% in the previous fiscal. To be more precise, growth slowdown is mainly on account of the slowdown in the industrial sector which is estimated to grow at 3.1%, agriculture sector at 1.8% and services sector at a rate of 6.6% in the current fiscal, all lower than that achieved in the previous year. Apart from the global factors, domestic factors, including the tightening of monetary policy, in order to control inflation and rein in inflationary expectations, resulted in slowing down of investment and growth, particularly in the industrial sector. However, the 11th Plan period had average growth rate of 8%, highest during any Plan period, entirely under the UPA government.

Prices: In a sigh of big relief to the policy-makers, headline inflation measured in terms of wholesale price index
(WPI) for the first nine-month of the current fiscal, averaged 7.55%, significantly lower when compared to 9.44% in the corresponding period in 2011-12. In the last twelve months, inflation has remained in around 7.8%. On the other hand, overall food inflation comprising primary food articles and manufactured food products stood at 9.08% for the

Impact Analysis: Macro

first nine-month of the current fiscal as compared to 7.91% during the corresponding period in 2011-12. Inflation based on the consumer price index (CPI), however, averaged 10% in April-December 2012-13, higher compared to 8.82% in the same period last year. Persistently elevated prices for protein products, the rise in the prices of cereals and vegetables, along with the increase in international prices of fertilizers (non-urea) and the increase in administered prices of diesel have contributed to inflation to differing degrees over time.

Industry and Services: Combination of both global and domestic factors led to deceleration in the industrial output
during the current year, which stood at 0.7% April-December 2012 as compared to 3.7% in the same period of the previous year. Manufacturing, which is the dominant sector in industry, also witnessed deceleration in growth, as did the electricity sector. The contraction in the current year was largely because of decline in capital goods, natural gas, crude petroleum, and fertilizers output. Growth rate of the manufacturing sector was 0.7%, electricity sector at 4.6% and there was a de-growth of 1.9% in mining sector for the first nine-months of the fiscal. However, sharp pick-up in growth rate of overall IIP was witnessed in October month, with manufacturing growth improving to 9.8%, the highest recorded since June, 2011. On the whole, industrial growth going in next financial year, with deceleration in industrial growth bottoming-out, improved business sentiments and investor perception and a partial rebound in industrial activity in other developing countries, may improve.

External Sector: Indias exports decelerating from 40.5% growth recorded in 2010-11, declined further in 2011-12 to
21.3%, though remained in the positive zone. However, going off the track, exports for April-December 2012-13 period, valued at $214.1 billion registered a de-growth of 5.5%. Imports during this period were $361.3 billion, which was marginally lower by 0.7% than the level of $363.9 billion in the corresponding period of 2011-12. The rising trend seen in imports was mainly on the back of rising crude oil prices, along with increase in gold and silver prices. Accordingly, leaving trade deficit at $147.2 billion comparatively higher than $137.3 billion recorded in the April-December 201112.

Money, Banking and Capital Markets: Adoption of a tight monetary policy by the RBI on the back of rising
inflationary pressures, led the central bank to raise policy rates by 375 basis points from 4.75% to 8.5%. With further moderation witnessed in inflation from the peak of 10.9% in April 2010, to an average of 7.6% during April-December 2012, the RBI shifted its policy stance since October wherein, it attempted to balance growth and inflation dynamics

Impact Analysis: Macro

in a calibrated manner. The RBI reduced repo rates by 50 basis points in April, 2012 and again in January 2013 by 25 basis points and reduced CRR and SLR to improve liquidity conditions. Movement of the monetary aggregates indicate that the growth of broad money and credit have been below the indicative levels set by RBI. Revived FII inflows into the country during the year 2012 helped the Indian markets become one of the best performing markets in the world in the year 2012, with total net FII flows to India in 2012 stood at $31.01 billion, largely driven by equity inflows, indicating confidence of such investors in the performance of the Indian economy in general and Indian markets in particular. Further, the reform measures started by the government recently have been received well by the markets.

Central Government Finances: Sharp decline in real GDP growth, mainly in the industrial sector, high levels of
inflation and weak financial markets and persistence of high global crude oil and fertilizer prices led to a widening of the fiscal deficit to 5.7% of GDP in 2011-12 as against 4.8% recorded in the 2010-11. The slippage in relation to the budgeted level of fiscal deficit in 2011-12 was 1.1 percentage points. Inadequate revision of prices of petroleum products and fertilizers was a key factor in the fiscal outcome in 2011-12. Further, the adverse macro-economic developments of the previous fiscal sustained through the first half of the current financial year, mainly due broad-based slowdown seen in GDP growth in 2012-13, that placed at 5% by CSO. However, as part of the mid-course correction, the government pushed harder for reforms. Following Kelkar Committees recommendation, the government unveiled a revised fiscal consolidation roadmap and took a series of measures like revision in prices of diesel, speeding up the process of disinvestment, etc. On the non-debt capital receipts front, there was significant shortfall as of April-December 2012 mainly on account of disinvestment receipts, as only Rs 8,178 crore of the budgeted amount of Rs 30,000 crore has been realized. However, the measures taken as part of mid-course correction helped in improving the expenditure outcome in 201213. Going ahead, based on the outcome in April-December 2012 and the likely outcome for the fourth quarter, the revised estimates place fiscal and revenue deficit at 5.2% of GDP and 3.9% of GDP respectively in 2012-13.

Outlook
On the whole, a flagging economy this year left little room in the Budget for big-bang populist measures. However, finance minister in the backdrop of an economic slowdown and growing concerns over fiscal slippages, presented a Budget balancing both the political requirements of a pre-election-year Budget and of fiscal consolidation and revival of investments. He also provided assurance to Parliament that the government was committed to introducing the goods and services tax (GST) as soon as the Constitution amendment bill in this respect get cleared by the two houses. Going forward, with the global economy continuing to grow at a slow rate, the recovery on the domestic front is also expected to be slow and uncertain. Further, with inflation declining; though on a slow pace deny necessary flexibility to the RBI to undertake rate-cuts. However, deceleration in industrial growth likely bottoming-out, reform measures undertaken recently to improve investment sentiments in the economy as well as to improve the fiscal situation, there are possibility of growth revival in the upcoming fiscal. Further, as per the survey, overall growth rate is expected to be in the range of 6.1-6.7% in 2013-14, based on the assumption that monsoon is normal, the rate of inflation declines further and that the anticipated mild recovery of global growth takes place.