UNDERSTANDING INDIA’s NATIONAL OUTPUT (ME Assignment-1)

SECTION-D_ MADHAV SOREN (ABM14023), JAY MODI (PGP34162) & SHAUBHIK DAS (PGP34182)
WE MADHAV SOREN, JAY MODI & SHAUBHIK DAS HEREBY DECLARE THAT THE REPORT IS OUR JOINT EFFORT & THAT NO PART OF THE REPORT IS COPIED FROM
OTHERS.

1. Data on major receipts, expenditures and various measures of deficit -

Year Tax Direct tax Indirect Non-tax Revenue Capital Total Revenue Capital Total Gross Gross Revenue GDP MP
revenue tax revenue receipts receipts receipts expenditure expenditure expenditure fiscal primary deficit
deficit deficit
1990-91 429.78 69.03 360.75 119.76 549.54 389.97 939.51 735.16 317.82 1052.98 446.32 231.34 185.62 14876.15
1991-92 500.69 101.03 399.66 159.61 660.30 385.28 1045.58 822.92 291.22 1114.14 363.25 97.29 162.61 15033.37
1992-93 540.44 120.75 419.69 200.84 741.28 361.78 1103.06 927.02 299.16 1226.18 401.73 90.98 185.74 15857.55
1993-94 534.49 125.22 409.27 220.04 754.53 554.40 1308.93 1081.69 336.84 1418.53 602.57 235.16 327.16 16610.91
1994-95 674.54 184.09 490.45 236.29 910.83 686.95 1597.78 1221.12 386.27 1607.39 577.03 136.44 310.29 17717.02
1995-96 819.39 222.87 596.52 281.91 1101.30 583.38 1684.68 1398.61 384.14 1782.75 602.43 101.98 297.31 19058.99
1996-97 937.01 253.74 683.26 325.78 1262.79 615.44 1878.23 1589.33 420.74 2010.07 667.33 72.55 326.54 20497.86
1997-98 956.72 271.72 685.00 382.14 1338.86 990.77 2329.63 1803.35 517.18 2320.53 889.37 233.00 464.49 21327.98
1998-99 1046.52 321.20 725.32 448.33 1494.85 1300.64 2795.49 2164.61 628.79 2793.40 1133.49 354.66 669.76 22646.99
1999-00 1282.71 414.36 868.36 532.11 1814.82 1157.07 2971.89 2490.78 489.75 2980.53 1047.16 144.67 675.96 24563.63
2000-01 1366.58 496.51 870.07 559.47 1926.05 1341.84 3267.89 2778.39 477.53 3255.92 1188.16 195.02 852.34 25540.04
2001-02 1335.32 477.03 858.28 677.74 2013.06 1625.00 3638.06 3014.68 608.42 3623.10 1409.55 334.95 1001.62 26802.80
2002-03 1585.44 616.12 969.32 722.90 2308.34 1805.31 4113.65 3387.13 745.35 4132.48 1450.72 272.68 1078.79 27850.13
2003-04 1869.82 765.90 1103.92 768.31 2638.13 2113.33 4751.46 3620.74 1091.29 4712.03 1232.73 -8.15 982.61 30062.54
2004-05 2247.98 959.44 1288.54 811.93 3059.91 2003.91 5063.82 3843.29 1133.31 4982.52 1257.94 -11.40 783.38 32422.09
2005-06 2702.64 1206.92 1495.72 768.13 3470.77 1795.49 5266.26 4393.76 663.62 5057.38 1464.35 138.05 923.00 35432.44
2006-07 3511.82 1697.38 1814.44 832.05 4343.87 1444.82 5788.69 5146.09 687.78 5833.87 1425.73 -76.99 802.22 38714.89
2007-08 4395.47 2315.74 2079.72 1023.17 5418.64 1979.78 7398.42 5944.33 1182.38 7126.71 1269.12 -441.18 525.69 42509.47
2008-09 4433.19 2481.52 1951.69 969.40 5402.59 2998.63 8401.22 7937.98 901.58 8839.56 3369.92 1447.88 2535.39 44163.51
2009-10 4565.36 2716.23 1849.13 1162.75 5728.11 4530.63 10258.74 9118.09 1126.78 10244.87 4184.82 2053.89 3389.98 47908.46
2010-11 5698.68 3135.01 2563.67 2186.02 7884.71 4024.28 11908.99 10407.23 1566.05 11973.28 3735.91 1395.69 2522.52 52823.84
2011-12 6297.64 3433.10 2864.54 1216.72 7514.37 5689.18 13203.55 11457.85 1585.80 13043.65 5159.90 2428.40 3943.48 87363.29
2012-13 7418.77 3965.85 3452.92 1373.54 8792.32 5821.52 14613.83 12435.14 1668.58 14103.72 4901.90 1770.20 3642.82 92130.17
2013-14 8158.54 4558.29 3600.25 1988.70 10147.24 5638.94 15786.18 13717.72 1876.75 15594.47 5028.58 1286.04 3570.48 98013.70
2014-15 9036.15 5005.31 4030.85 1977.66 11013.81 4844.48 15858.29 14669.92 1966.81 16636.73 5107.25 1082.81 3655.19 105276.74
2015-16 9437.65 4492.96 4944.70 2512.60 11950.25 5825.79 17776.04 15377.61 2530.22 17907.83 5327.91 911.32 3427.36 113861.45
2016-17 11013.72 5212.87 5800.85 2728.31 13742.03 6098.86 19840.89 16905.84 2846.10 19751.94 5356.18 549.04 3163.81 121960.06
2017-18 12694.54 6245.64 6448.90 2359.74 15054.28 7517.02 22571.29 19443.05 2734.45 22177.50 5948.49 640.06 4388.77 130108.43
2018-19 14806.49 7328.92 7477.57 2450.89 17257.38 6734.10 23991.47 21417.72 3004.41 24422.13 6242.76 484.81 4160.34
All values are in rupees billion
Relation of GDP and Receipts
The graph shows abnormal increase in GDP after the GDP and Receipts Receipts as % of GDP
year 2009. Two major events are responsible for the 30000.00 25.00
change. One is fiscal stimulus programme and other one 25000.00 20.00
is change of base year to 2011-12. When we compare 20000.00
15.00
15000.00
both the graphs, we can observe that the GDP has 10000.00 10.00
increased at a faster pace but the share of receipts in 5000.00 5.00
GDP has fallen. The biggest observation is that revenue 0.00 0.00

Year
receipts is closely correlated to GDP compared to

2016-17
1990-91
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11
2012-13
2014-15

2007-08
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
2005-06

2009-10
2011-12
2013-14
2015-16
2017-18
capital receipts.

Tax revenue Non-tax revenue Tax revenue Non-tax revenue

Revenue receipts Capital receipts Revenue receipts Capital receipts
GDP MP(Factor of 5) Total receipts

Relation of GDP and Expenditure

Indian union budget has always heavily been GDP and Expenditure Expenditure as % of GDP
burdened with revenue expenditure. The peak of 30000.00 25.00
2009 was due to launch of several government 25000.00 20.00
schemes like NREGA. These schemes required huge 20000.00
15.00
amount of money like only NREGA has cost 15000.00
10000.00 10.00
government 110000 crore rupees until now. We can
5000.00 5.00
see the direct positive correlation between Revenue
0.00 0.00
expenditure and GDP. However, share of revenue

2001-02
1991-92
1993-94
1995-96
1997-98
1999-00

2003-04
2005-06
2007-08
2009-10
2011-12
2013-14
2015-16
2017-18

2005-06
1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04

2007-08
2009-10
2011-12
2013-14
2015-16
2017-18
expenditure in GDP has seen sharp fall in the year
2011.
Revenue exp Capital exp Revenue exp Capital exp
Total exp GDP MP Total exp
GDP and Deficits
After the liberalisation of 1991, Indian GDP and Deficits Deificits as % of GDP
economy was growing at an ideal pace. The 14000.00 10.00
graceful implementation of Fiscal 12000.00
Responsibility and Budget Management 8.00
10000.00
(FRBM) act, 2000 led us to lowest deficit in 8000.00 6.00
year 2007, just before US financial crisis.
6000.00
Indian GDP grew by 3% during this period. 4.00
4000.00
The subprime crisis did not affect India 2.00
2000.00
directly but it resulted in credit, exports and
0.00 0.00
exchange rates. This led to decreased revenue
-2000.00

1991-92
1993-94
1995-96
1997-98
1999-00
2001-02
2003-04
2005-06
2007-08
2009-10
2011-12
2013-14
2015-16
2017-18
in 2010 and greater revenue expenditure. This -2.00
all lead to high-rise in percentage share of
deficit in GDP during year 2011. Gross fiscal deficit Gross primary deficit Gross fiscal deficit Gross primary deficit
Revenue deficit GDP MP(Factor of 10) Revenue deficit

2. Sources of Income and Expenditure and their share in the Union budget
There are two major sources of income and expenditure; one is revenue and other is capital. Most of revenue income comes from tax income, both direct and
indirect. Recovery of loans has the biggest share in capital income. Major part of expenditure is towards revenue expenditure, which is govern by interest
payments, subsidies and defence. The capital expenditure is vital for long-term growth and it constitutes of loans, outlay and capital defence expenditure.

Union Government's Receipts % of total receipts Union Government's Expenditure % of total

50.00% expenditure
40.00%
30.00% 3000.00
20.00%
2000.00
10.00%
0.00%
1000.00
2018-19
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
2016-17
2017-18

0.00
1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99

Non-tax revenue Capital receipts Direct tax Indirect tax Revenue expenditure Revenue Defence expenditure
Income sources and their shares
Year 1991 was the year of liberalisation and we can see the lowest share in income is with direct tax, which currently have biggest part in the income. Before
liberalisation, majority of income was coming from the capital receipts as government was having major share in the industries. Post 1991, government revised
the tax structure to decrease the trade taxes and increase domestic consumption taxes. These all lead to increase in direct tax and decrease in Indirect tax visible
in chart of 1999. The recent monetary policy change of GST has led to higher indirect tax collection in the current year.

1990-91 1999-00 2008-09 2018-19

7% 14% Direct tax

29% 28% 31%
42% 39% 36% Indirect tax
38% 29% Non-tax revenue
10%
13% 18% 12% 23% 31% Capital receipts

Expenditure sources and their shares

1990-91 1999-00 2008-09 2018-19

Revenue Defence
expenditure
Interest payments
6% 13% 6% 17% 8% 14% 6% 13%
15% 11% 14% Subsidies
19%
12% 3%
27% 2% Loans and
24% 36% 40% advances
11% 25% 20%
43% Capital outlay
15%
Capital Defence
expenditure

Before 1990, Indian government was following a protectionist approach so there was no private organisation in most of the sectors. This approach led to higher
capital expenditure, which is clearly visible in pie chart of 1990-91. Post liberalisation government took measures such as reducing subsidies to bring revenue
neutrality in short term. However, the loan during the crisis of IMF has gave a huge burden and it was not neutralised even after taking these measures. During
Asian crisis, government tapped markets for borrowings, which left little funds for the private sector. This led to slower economic growth. Government
launched few expansionary schemes between 2007 and 2009, like National Rural Employment Guarantee Act (NREGA) and sixth pay commission, which led
to increased revenue expenditure. The increase in defence expenditure in 1999 was due to Cargill War and it is noticeable that capital defence expenditure has
remained about six percent all these years. The increasing interest payments is the biggest threat to Indian economy and immediate measures are necessary to
prevent upcoming crisis.

3. Capital and Revenue Accounts Management (for GFD)

The fiscal indicator of Central Government GFD has declined in post-FRBM period (2004-05 to 2017-18) as compared with pre-FRBM period (1992-93 to
2003-04). However, revenue deficit and primary deficit have declined marginally. The interest payments as a ratio of revenue receipts and revenue expenditure
have also recorded substantial reduction in post-FRBM era. However, RDB as a ratio of GFD has increased which shows that revenue expenditure is rising
more rapidly than capital expenditure. In pre-FRBM period, GFD as a percentage of GDP was showing a declining trend. However, due to global financial
crisis of 2008, GFD was higher in some years in post-FRBM period. The expenditure of Central Government, mainly interest payments and total, as percentage
of GDP, declined in post-FRBM period. However, quality of expenditure incurred was not good as capital expenditure declined to 1.9% in post-FRBM period
from 3.2% pre-FRBM period. Interest payments as a ratio of revenue expenditure and revenue receipts though declined in the post-FRBM period but still there
is a need to consider further rationalization of interest payments.

Fiscal Management Parameters

7000.00
6000.00
5000.00
4000.00
3000.00
2000.00
1000.00
0.00
-1000.00
-2000.00

Interest payments Revenue deficit Capital defcit

The above graph shows the exponential increase of interest payments expenditure throughout three decades. The original burden of loan started from year 1991
and it has been increasing since then. The revenue account deficit should always be near zero is the first parameter to judge a budget. The revenue deficit has
grown very rapidly in last decade. The capital deficit has always been in manageable range. However, ideally higher capital deficit is necessary for developing
economies and revenue deficit is not good for any economy. From the above analysis, we can safely conclude that India has not been managing its fiscal deficit
with great care and if this will prevail for longer period than adverse effects can be seen on the economy.
 4. Financing of Deficit

Financing Financing
Financing
Financing Deficit Financing
Gross Financing of GFD -
of GFD - of GFD - of GFD -
Year fiscal of GFD - Draw 8000.00
Market Other Total
deficit External down of 6000.00
borrowings borrowings Internal
finance cash 4000.00
finance
balances 2000.00
1990-91 446.32 31.81 80.01 221.03 113.47 414.51 0.00
1991-92 363.25 54.21 75.10 165.39 68.55 309.04 -2000.00
1992-93 401.73 53.19 36.76 188.66 123.12 348.54
1993-94 602.57 50.74 289.28 152.95 109.60 551.83
1994-95 577.03 35.82 203.26 328.34 9.61 541.21 Gross fiscal deficit
1995-96 602.43 3.18 340.01 161.17 98.07 599.25
Financing of GFD - External finance
1996-97 667.33 29.87 190.93 314.69 131.84 637.46
1997-98 889.37 10.91 562.57 -9.10 878.46 Financing of GFD - Market borrowings
1998-99 1133.49 19.20 689.88 426.50 -2.09 1114.29 Financing of GFD - Other borrowings
1999-00 1047.16 11.80 620.76 405.97 8.64 1035.37
Financing of GFD - Draw down of cash balances
2000-01 1188.16 75.05 734.31 390.77 -11.97 1113.11
2001-02 1409.55 56.01 908.12 460.38 -14.96 1353.54
2002-03 1450.72 -119.34 1041.26 509.97 18.83 1570.06
2003-04 1232.73 -134.88 888.70 518.33 -39.42 1367.61
2004-05 1257.94 147.53 509.40 615.62 -14.61 1110.41
2005-06 1464.35 74.72 1062.41 536.10 -208.88 1389.63 From the chart, it is understandable that government mostly started
2006-07 1425.73 84.72 1148.01 147.82 45.17 1341.01 using market borrowings to finance its fiscal deficits since financial
2007-08 1269.12 93.15 1306.00 141.68 -271.71 1175.97
2008-09
crisis during 2008, which is truly speaking not a very good
3369.92 110.15 2469.75 351.68 438.34 3259.77
2009-10 4184.82 110.38 3943.71 144.60 -13.86 4074.44
indication for the economy. Excess of borrowings through issuing of
2010-11 3735.91 235.56 3263.99 172.06 64.30 3500.35 bonds leads to decrease in private investments, consumption. The
2011-12 5159.90 124.48 4841.11 354.21 -159.90 5035.42 contribution of cash withdrawn from RBI’s revenues has been
2012-13 4901.90 72.01 5074.45 265.56 -510.12 4829.89 minimal. In the recent past, government has been resorting to other
2013-14 5028.58 72.92 4756.26 391.11 -191.71 4955.66 borrowings for financing its debts as well.
2014-15 5107.25 129.33 4576.17 -374.85 777.52 4978.84
2015-16 5327.91 127.48 4149.31 919.42 131.70 5200.43
2016-17 5356.18 179.97 3381.49 1883.68 -88.95 5176.22
2017-18 5948.49 24.18 4098.57 2219.53 -393.79 5924.31
2018-19 6242.76 -25.89 3991.20 1846.78 430.66 6268.65
(In Billion rupees)
5.
All the above financing alternatives affects price level, interest rate, exchange
rate, Balance of Payment, etc. in a different manner. To understand the
relationships, we have done 3 correlation analysis of different variables based
on the availability of adequate data. To understand the effect on interest rates, Data used : 1991-92 – 2017-18
Analysis 1
we have taken into account the average lending rates in the economy; for Financing of Financing of
understanding the effect on price level, we have used CPI and for exchange GFD - Financing of Financing of GFD - Draw
rate, we have used rupee value of Dollar during those years. External GFD - Market GFD - Other down of cash
finance borrowings borrowings balances
It is very much clear from the above analysis that there is - slight negative Lending
correlation between financing through external finance and lending rate, but rates -0.27 -0.68 -0.52 0.27
we cannot conclude anything from this; moderate positive correlation CPI 0.46 0.49
0.92 -0.14
between external finance and CPI and a low positive correlation between US US Dollar
Dollar average value and external finance. It can be said with a little bit of average 0.28 0.51
0.78 -0.14
confidence that as borrowing through external sources increases, the price
level in India also increases, as per historical data.
Secondly, there is a quite strong positive relationship between borrowing from markets (primarily through sovereign bonds) and CPI. This shows as Market
borrowings rise, CPI rises. A similar kind of relationship exists between market borrowings and exchange rate as well. However, the analysis shows that as market
borrowing increases, the lending rates decreases and vice versa. This may be because of the fact that government used the market borrowings for productive
purposes, which was eventually successful in stimulating private investments.
There is moderate correlation between others borrowing and with our parameters (interest rates, price level and exchange rate). On the other hand, the relationship
is very much weak relationship between drawing of cash from RBI with the analysed parameters.

Analysis 2 Data used: 2012-13 - 2017-18 In analysis 2A, it is quite clear that as external financing increases, BoP
A
increases to a moderate degree and vice versa. Also, the data shows a strong
External Balance of Exchange rate
positive relation between BoP and exchange rate. However usually, the
financing payments (US$)
relationship between BOP surplus and exchange rate is usually negative. The
External financing 1
steep rise of oil price and pulling of money from Indian market by the foreign
Balance of
investors might have led to such a situation.
payments 0.6926791 1
Exchange rate
(US$) 0.429435378 0.784267594 1
 B Data used: In analysis 2B, it may be observed that market borrowings have a very strong
2012-13 - 2017-18 positive relation with lending rates. And also, interest rates are displaying a strong
Gross Fixed correlation with investment in the country, which is quite unusual. Normally, the
Market Capital opposite happens. More borrowings cause crowding out effect which actually
borrowings Lending rates Formation reduces private investment. But because we have taken into account the data of only
Market 6 years for the above analysis, it seems like the market fluctuations have played a
borrowings 1 great part. Also, government of India pumped in large amounts of money for
Lending rates 0.816094966 1 carrying out various welfare schemes, which might have affected the results.
Gross Fixed -
Capital Formation 0.765210446 -0.976624737 1
Relationship between
6. (In Billion Rupees.)
State and Central Fiscal
KEY DEFICIT INDICATORS OF THE STATE GOVERNMENTS Central Combined Deficits
Govt. 12000.00
Year Gross Gross Revenue Primary Overall Net RBI Fiscal Combined 10000.00
Fiscal Primary Deficit Revenue Deficit Credit to Deficit of Deficits of 8000.00
Deficit Deficit Deficit States Central Central and 6000.00
(State) (Annual Govt. State 4000.00
Variation) Governments 2000.00
1992-93 208.92 76.81 51.14 -80.96 -18.29 1.76 401.73 524.04 0.00
1993-94 203.64 45.64 38.72 -119.29 3.63 5.91 602.57 709.52

2012-13
1992-93
1994-95
1996-97
1998-99
2000-01
2002-03
2004-05
2006-07
2008-09
2010-11

2014-15
2016-17
2018-19
1994-95 273.08 78.95 67.06 -127.08 -43.46 0.48 577.03 716.39
1995-96 308.70 90.31 86.20 -132.19 -26.80 0.16 602.43 776.71
1996-97 365.61 111.75 168.78 -85.09 72.02 8.98 667.33 872.44
1997-98 434.74 136.75 174.92 -123.07 -18.03 -19.36 889.37 1107.43
Gross Fiscal Deficit (State)
1998-99 732.95 378.54 444.62 90.21 32.68 55.79 1133.49 1570.53
1999-00 900.98 454.58 545.49 99.07 31.25 13.12 1047.16 1848.26
Fiscal Deficit of Central Govt
2000-01 879.22 369.37 553.16 43.31 -23.78 -10.92 1188.16 1998.52 Combined Deficits of Central and State Governments
2001-02 942.61 326.65 603.98 -11.98 35.45 34.51 1409.55 2264.25
2002-03 997.27 306.99 571.79 -118.48 -42.91 -31.00 1450.72 2349.87
2003-04 1206.31 402.35 634.07 -169.89 -5.26 2.93 1232.73 2345.01
2004-05 1077.74 213.53 391.58 -472.63 -102.32 -27.05 1257.94 2347.21 The fiscal deficits of Central government and state
2005-06 900.84 60.60 70.13 -770.11 -339.47 -38.44 1464.35 2395.60 governments (combined) saw a very much steady rise
2006-07 775.09 -156.72 -248.57 -1180.37 -163.24 -11.52 1425.73 2191.28
2007-08 754.55 -243.76 -429.43 -1427.73 -134.10 11.40 1269.12 1991.10
till 2008-09, during the global recession. After 2008-09,
2008-09 1345.89 316.34 -126.72 -1156.27 -89.59 -16.09 3369.92 4671.35 Central and state fiscal deficits rose steeply and has been
2009-10 1888.19 760.12 310.17 -817.90 76.97 1.86 4184.82 6046.68 rising ever since. This may be attributed to an increased
2010-11 1614.61 366.41 -30.51 -1278.71 148.45 25.15 3735.91 5340.32
2011-12 1683.53 315.36 -239.60 -1607.78 163.05 -11.96 5159.90 6849.66 public spending post-recession in the form of fiscal
2012-13 1954.70 449.98 -203.22 -1707.94 230.84 -12.46 4901.90 6843.95 stimulus programme to pump up economic growth and
2013-14 2478.52 789.55 105.63 -1583.34 -180.98 9.86 5028.58 7497.11
2014-15 3271.91 1367.76 457.04 -1447.10 -177.17 24.20 5107.25 8365.63 recover the economy from depression.
2015-16 4206.70 2064.24 53.82 -2088.65 306.16 -30.50 5327.91 9524.10
2016-17 5343.32 2830.29 404.91 -2108.12 135.68 7.90 5356.18 10647.04 Sources of all data: RBI’s Handbook of Statistics on
2017-18 5143.16 2215.69 610.79 -2316.67 -1255.10 4.60 5948.49 11004.25 Indian Economy
2018-19 4865.13 1710.58 -292.19 -3446.74 -400.80 -13.60 6242.76 10997.97