The UPA government played it safe in unveiling its 2012/13 budget on Friday, pledging reforms but setting only modest targets for trimming a ballooning fiscal deficit, disappointing bond market investors.
The Congress party-led government has been battered by a series of setbacks that curtailed its ability to implement reforms and curb populist spending.
"I don't see any populist schemes, but this is not a reformist budget either. It is a status quo budget," A. Prasanna, an economist at ICICI Securities Primary Dealership, said as Finance Minister Pranab Mukherjee read out his speech in parliament.
"I think the political compulsions made them decide that the best way is to play it safe," Prasanna said.
The finance minister set a fiscal deficit target of 5.1 per cent of GDP for the fiscal year that begins in April, down from an expected 5.9 per cent in the current year. This year's figure, however, ended up far above the 4.6 per cent it had originally targeted in its budget a year ago.
Mukherjee said he expected the Indian economy to grow by 7.6 per cent in the next fiscal year, up from an expected 6.9 per cent in the current year but below the 8.4 per cent growth of the previous fiscal year.
"We are disappointed with the budget because it assumes a relatively high, 5.1 per cent deficit in the 2012/13 fiscal year," said Dariusz Kowalczyk, senior economist at Credit Agricole in Hong Kong.
"We also think that growth target is a bit too optimistic while inflation may have a hard time falling as much as they are assuming," he said.
At 12:20 pm, the 10-year benchmark bond yield was at 8.42 per cent, up 9 basis points from before the deficit estimate was released. The benchmark five-year swap rate rose 6 bps to 7.61 per cent and the one-year rate rose 7 bps to 8.22 per cent.
High oil prices have swelled India's subsidy burden to roughly 2.5 per cent of GDP and Mukherjee called for reducing that to less than 2 per cent in the new fiscal year.
"We have to accelerate the pace of reforms and improve supply-side management of the economy," he told a raucous parliament session.
India is plagued by power blackouts and poor roads due to a lack of investment and bureaucratic delays in projects. As a result, the rate of non-inflationary growth has fallen to 7 per cent from 8.5 per cent before the global financial crisis, according to the central bank.
Mukherjee set a target of selling Rs 300 billion worth of stakes in state companies in the next fiscal year, roughly in line with forecasts. India has raised just Rs 139 billion in the current fiscal year from stake sales, far below its budget target of Rs 400 billion.
The government's move on Wednesday to raise railway fares for the first time in eight years sparked an intense backlash from a key coalition ally, further eroding its ability to make politically tough decisions such as raising diesel prices in order to ease its fiscal deficit.
Prime Minister Manmohan Singh's government was already reeling from a dismal showing in recent state elections and more than a year of corruption scandals that have resulted in policy gridlock.
"The government is helpless. They were playing a very cautious role," said Kiran Mazumdar Shaw, who heads India's top-listed biotechnology company, Biocon Ltd.
With federal elections set for 2014, the budget a year from now is expected to be laden with populist spending measures. Friday's budget was thus viewed as a last opportunity for Singh's government to roll back a yawning fiscal gap.
"He seems worried about the stability of the government more than trying to revive the economy. He has lost an opportunity to do so because next year's budget, ahead of the general elections, will not allow him room for hard measures," said Jagdish Shettighar, an economist with the Bharatiya Janata Party (BJP).