Economic Survey

India Economic Survey 2011-12

Growth with Stability

GDP Growth (Actual)

6.7%

Forecast: 8.0-8.5%

Inflation (CPI)

8.9%

Consumer Price Index

Wholesale Inflation (WPI)

8.9%

Wholesale Price Index

Fiscal Deficit

5.9% GDP

Union Budget (Actuals)

Key Theme

Growth with Stability

Key Highlights

GDP growth decelerated sharply to 6.7% from 8.9%, the steepest slowdown in a decade, well below the 8.0-8.5% forecast
Both WPI and CPI inflation remained stubbornly high at 8.9%, reflecting entrenched inflationary expectations
The European sovereign debt crisis intensified, creating fresh global uncertainty and capital flow volatility
The rupee experienced its worst annual depreciation since 1991, falling from Rs 44 to Rs 54 per dollar — a 22% decline
Industrial growth collapsed to 2.9% as monetary tightening, policy paralysis, and global uncertainty choked investment
The current account deficit widened to 4.2% of GDP, approaching dangerous levels that recalled the 1991 crisis
Fiscal deficit overshot the 4.6% target to reach 5.8% of GDP as subsidies ballooned and revenues underperformed
Policy paralysis became the defining narrative: land acquisition bill stalled, FDI in retail blocked, GST deferred
Coal India production stagnated, creating massive power sector fuel shortages and stranded generation capacity
Standard & Poor's placed India's sovereign rating on negative outlook, raising fears of a downgrade to junk status
RBI reversed its tightening stance in April 2012 with the first rate cut in three years

Policy Recommendations

1 Break the policy paralysis by fast-tracking stalled reforms: FDI in retail, land acquisition, mining bill
2 Implement a credible fiscal correction plan centered on subsidy rationalization and expenditure reprioritization
3 Address the current account deficit urgently through gold import restraint and export promotion
4 Protect India's sovereign credit rating through a combination of fiscal action and reform signaling
5 Deregulate diesel prices to bring the petroleum subsidy under control
6 Resume the stalled disinvestment programme to raise non-debt revenue
7 Revive industrial investment through streamlined approvals and resolution of coal supply constraints
8 Strengthen the manufacturing sector through a national manufacturing policy with clear targets
9 Reform the subsidy delivery mechanism through direct cash transfers using the Aadhaar platform
10 Improve the investment climate through transparent and predictable regulatory processes

Survey Predictions vs Budget Outcomes

Comparison between Economic Survey predictions and actual Union Budget allocations

Metric	Survey Prediction	Actual Budget	Deviation
GDP Growth (%)	8.0-8.5	6.7	-1.3 to -1.8% — dramatic miss as investment cycle turned and global headwinds intensified
Fiscal Deficit (% of GDP)	4.6	5.8	+1.2% — subsidy overrun and revenue shortfall blew through the target
Current Account Deficit (% of GDP)	2.5-3.0	4.2	+1.2 to +1.7% — gold and oil imports pushed the deficit to crisis territory
Industrial Growth (%)	7.0-8.0	2.9	-4.1 to -5.1% — the sharpest industrial deceleration since 2008-09
Rupee Depreciation (%)	3-5	22	-17 to -19% — capital outflows and twin deficit fears drove a near-crisis depreciation

Union Budget 2011-12 Summary

Corresponding budget data to read alongside the Economic Survey Actuals

Total Receipts

13.04 lakh crore

Total Expenditure

13.04 lakh crore

Fiscal Deficit

5.16 lakh crore

Revenue Deficit

3.66 lakh crore

View Union Budget 2011-12 in detail

Detailed Analysis

The Economic Survey for 2011-12, the last prepared by Kaushik Basu before his departure to become Chief Economist of the World Bank, was written during what many would come to regard as the nadir of the UPA government's second term. The narrative of "India Shining" that had characterized the 2003-2008 period had given way to a grim litany of challenges: slowing growth, persistent inflation, a widening current account deficit, a cratering rupee, policy paralysis, corruption scandals, and the looming threat of a sovereign rating downgrade. GDP growth had fallen to 6.7 per cent from 8.9 per cent the previous year — the sharpest deceleration in a decade — and the economy was clearly losing momentum. The growth slowdown was driven by a collapse in investment and industrial activity. Manufacturing growth fell to a paltry 2.9 per cent, and mining actually contracted, hampered by the cancellation of licenses following the Supreme Court's intervention in illegal mining in Karnataka and Goa. The investment rate, which had peaked at above 38 per cent of GDP during the boom years, was declining. Corporate confidence surveys showed the lowest readings in years. The reasons were multiple and compounding: the RBI's sustained monetary tightening (the repo rate had risen by 375 basis points between 2010 and 2011) had raised the cost of capital; the regulatory environment had become unpredictable, with retrospective taxation (the Vodafone case), stalled environmental clearances, and coal allocation controversies creating a climate of uncertainty; and the European sovereign debt crisis was sapping global demand and investor confidence. The "policy paralysis" narrative, while arguably overstated, captured a genuine phenomenon. Several major reform initiatives were stuck. The Land Acquisition, Rehabilitation and Resettlement Bill was mired in parliamentary debate, leaving land acquisition for industrial and infrastructure projects in legal and political limbo. FDI in multi-brand retail, which the government had announced in November 2011, was rolled back within two weeks following opposition from coalition partners. The Goods and Services Tax, which had been promised for implementation by April 2010, was indefinitely deferred as states and the Centre could not agree on the design. Coal production by Coal India Limited stagnated at around 430 million tonnes, far below the 500 million tonnes needed to fuel the power plants that had been built on the assumption of adequate coal supply. The external sector had become a full-blown vulnerability. The current account deficit widened to 4.2 per cent of GDP — the highest since liberalization and a level that the Survey described as "potentially unsustainable." Two imports dominated the picture: oil (driven by both rising global crude prices and India's failure to reduce energy intensity) and gold (driven by Indian households' response to negative real interest rates and inflation anxiety). Gold imports alone accounted for over $50 billion, a number that represented a massive drain on the economy's foreign exchange resources without contributing to productive capacity. The rupee's depreciation was the most visible symptom of the gathering storm. The currency fell from Rs 44 per dollar to Rs 54 — a decline of over 22 per cent that was the worst since the 1991 balance-of-payments crisis. The depreciation reflected a toxic combination of widening current account deficit, slowing growth, capital outflows driven by the European crisis, and the loss of investor confidence in India's reform trajectory. The Survey noted that while depreciation would normally support exports and discourage imports, in India's case the pass-through to inflation (through higher imported oil costs) could offset the competitiveness benefits. Inflation remained India's most persistent macroeconomic challenge. Both WPI and CPI came in at 8.9 per cent — well above any definition of price stability. The Survey's analysis suggested that inflation had become more generalized: it was no longer just a food story but had spread to manufacturing and services. Wage inflation in both the organized and unorganized sectors was running high, partly because NREGA had established a floor for rural wages. The Survey discussed the concept of "threshold inflation" — the level above which inflation begins to damage growth — and concluded that India was well above this threshold, implying that bringing inflation down was a precondition for recovering the growth momentum. The fiscal situation was dire. The deficit overshot the budgeted 4.6 per cent of GDP to reach 5.8 per cent. The petroleum subsidy — which had been budgeted at Rs 23,600 crore — came in at Rs 68,500 crore as the government refused to pass through global oil price increases to consumers. Food and fertilizer subsidies also exceeded budget estimates. On the revenue side, both direct and indirect tax collections fell short of targets as the economic slowdown compressed the tax base. The Survey warned that without a credible fiscal correction, India risked a downgrade to sub-investment-grade status — Standard & Poor's had already placed the sovereign rating on negative outlook. The Survey's reform agenda was extensive but its tone was more urgent than analytical. It called for immediate diesel price deregulation, resumption of disinvestment, subsidy restructuring through Aadhaar-linked direct cash transfers, clearance of stalled infrastructure projects, and a transparent natural resource allocation framework. Basu, drawing on his academic work on institutional economics, devoted a section to analyzing why reform was politically difficult in India despite widespread agreement on its necessity — a thoughtful but perhaps overly philosophical treatment given the crisis atmosphere. On the social front, the National Food Security Bill was making its way through the legislative process, promising subsidized grain to two-thirds of India's population. The Survey was ambivalent: it acknowledged the need for food security but worried about the fiscal implications — estimated at Rs 1.25 lakh crore annually — and the distortionary effects on agricultural markets and trade. It preferred a targeted cash transfer approach over physical grain distribution. The European sovereign debt crisis formed a persistent backdrop to the Survey's analysis of global risks. Greece had already required a bailout, and contagion was spreading to Ireland, Portugal, Spain, and Italy. The eurozone's survival was openly questioned in financial markets, and the ECB was forced into unprecedented interventions. For India, the European crisis mattered through multiple channels: Europe was India's largest trading partner, European banks held significant exposures to Indian corporates, and the general climate of risk aversion was reducing capital flows to emerging markets. The Survey estimated that a full-blown European banking crisis could reduce India's GDP growth by 1-2 percentage points through trade and financial linkages. The Anna Hazare anti-corruption movement, which dominated the political discourse during 2011, was referenced indirectly in the Survey's discussion of governance quality. The public anger over corruption — fueled by the 2G scam, the Commonwealth Games scandal, and allegations of irregularities in coal block allocation — had created a political environment in which decision-making at all levels of government had slowed to a crawl. Officials were reluctant to clear projects, sign contracts, or make procurement decisions for fear of being investigated. The Survey flagged this "decision paralysis" as a real cost to the economy, distinct from the direct costs of corruption itself. Looking forward, the Survey projected growth of 7.0-7.5 per cent for 2012-13, which in the context of the previous year's 6.7 per cent suggested that the Survey team saw a modest improvement ahead. In the event, even this reduced projection would prove too optimistic: the economy continued to decelerate, and the next Survey — prepared by a new Chief Economic Adviser — would confront an even more challenging landscape.

Source: Official Economic Survey Document

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Reviving Growth

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