The Indian Economy and Budget 2013

Prof. Kapil Bhopatkar

 Module 1: Basic terminology and key concepts related to economics. Module 2: Indian Economic Review year 20112012.

Module 3. Budget 2012 and 2013

Learning Outcomes
Understanding about key characteristics about the Indian Economy. Identifying key issues ailing the economy and possible suggestions for improving the same. Understanding the Budget and its use in shaping the economy

What is a Union Budget?

The Union Budget is the annual report of India as a country. It contains the government of India's revenue and expenditure for the end of a particular fiscal year, which runs from April 1 to March 31. The Union Budget is the most extensive account of the government's finances, in which revenues from all sources and expenses of all activities undertaken are aggregated. It comprises the revenue budget and the capital budget. It also contains estimates for the next fiscal year.

What is a Revenue Budget?

The revenue budget consists of revenue receipts of the government (revenues from tax and other sources), and its expenditure. Revenue receipts are divided into tax and non-tax revenue. Tax revenues are made up of taxes such as income tax, corporate tax, excise, customs and other duties that the government levies. In non-tax revenue, the government's sources are interest on loans and dividend on investments like PSUs, fees, and other receipts for services that it renders.

 Revenue expenditure is the payment incurred for the normal day-to-day running of government departments and various services that it offers to its citizens. The government also has other expenditure like servicing interest on its borrowings, subsidies, etc. Usually, expenditure that does not result in the creation of assets, and grants given to state governments and other parties are revenue expenditures. The difference between revenue receipts and revenue expenditure is usually negative. This means that the government spends more than it earns. This difference is called the revenue deficit.

Capital Budget
The capital budget is different from the revenue budget as its components are of a long-term nature. The capital budget consists of capital receipts and payments. Capital receipts are government loans raised from the public, government borrowings from the Reserve Bank and treasury bills, loans received from foreign bodies and governments, divestment of equity holding in public sector enterprises, securities against small savings, state provident funds, and special deposits

 Capital payments are capital expenditure on acquisition of assets like land, buildings, machinery, and equipment. Investments in shares, loans and advances granted by the central government to state and union territory governments, government companies, corporations and other parties.

What are Direct Taxes?

These are the taxes that are levied on the income of individuals or organizations. Income tax, corporate tax, inheritance tax are some instances of direct taxation. Income tax is the tax levied on individual income from various sources like salaries, investments, interest etc. Corporate tax is the tax paid by companies or firms on the incomes they earn.

What are indirect Taxes?

Indirect taxes are those paid by consumers when they buy goods and services. These include excise and customs duties. Customs duty is the charge levied when goods are imported into the country, and is paid by the importer or exporter. Excise duty is a levy paid by the manufacturer on items manufactured within the country. Usually, these charges are passed on to the consumer.

Plan and Non Plan Expenditure

There are two components of expenditure - plan and nonplan. Of these, plan expenditures are estimated after discussions between each of the ministries concerned and the Planning Commission. Non-plan revenue expenditure is accounted for by interest payments, subsidies (mainly on food and fertilizers), wage and salary payments to government employees, grants to States and Union Territories governments, pensions, police, economic services in various sectors, other general services such as tax collection, social services, and grants to foreign governments. Non-plan capital expenditure mainly includes defense, loans to public enterprises, loans to States, Union Territories and foreign governments.

Central Plan Outlay

It is the division of monetary resources among the different sectors in the economy and the ministries of the government.

What is Fiscal Policy?

Fiscal policy is a change in government spending or taxing designed to influence economic activity. These changes are designed to control the level of aggregate demand in the economy. Governments usually bring about changes in taxation, volume of spending, and size of the budget deficit or surplus to affect public expenditure.

What is Fiscal Deficit?

This is the gap between the government's total spending and the sum of its revenue receipts and non-debt capital receipts. It represents the total amount of borrowed funds required by the government to completely meet its expenditure.

What is a Finance Bill?

The government proposals for the levy of new taxes, alterations in the present tax structure or continuance of the current tax structure beyond the period approved by Parliament, are laid down before Parliament in this bill. The Parliament approves the Finance Bill for a period of one year at a time, which becomes the Finance Act.

Impact on the economy and stock markets

The Budget impacts the economy, the interest rate and the stock markets. How the finance minister spends and invests money affects the fiscal deficit. The extent of the deficit and the means of financing it influence the money supply and the interest rate in the economy. High interest rates mean higher cost of capital for the industry, lower profits and hence lower stock prices. The fiscal measures undertaken by the government affect public expenditure. For instance, an increase in direct taxes would decrease disposable income, thus reducing demand for goods. This decrease in demand will translate into a decrease in production, therefore affecting economic growth. Similarly, an increase in indirect taxes would also decrease demand. This is because indirect taxes are often partially or completely passed on to consumers in the form of higher prices. Higher prices imply a reduction in demand and this in turn would reduce profit margins of companies, thus slowing down production and growth. Non-plan expenditure like subsidies and defence also affect the economy as limited government resources are used for non-productive purposes.

GDP
Gross domestic product (GDP) is the market value of all officially recognized final goods and services produced within a country in a given period of time. GDP per capita is often considered an indicator of a country's standard of living. GDP = private consumption + gross investment + government spending + (exports imports),

GDP of India 1.84798 Trillion $

India

Pakistan Bangladesh

GDP

India GDP Annual Growth Rate

The Gross Domestic Product (GDP) in India expanded 4.50 percent in the fourth quarter of 2012 over the same quarter of the previous year. GDP Annual Growth Rate in India is reported by the Ministry of Statistics and programme Implementation. Historically, from 1951 until 2012, India GDP Annual Growth Rate averaged 5.85 Percent reaching an all time high of 10.20 Percent in December of 1988 and a record low of -5.20 Percent in December of 1979. In India, the annual growth rate in GDP at factor cost measures the change in the value of the goods and services produced in India, without counting governments involvement. Simply, the GDP value excludes indirect taxes (VAT) paid to the government and includes the original value of products without accounting for government subsidies. This page includes a chart with historical data for India GDP Annual Growth Rate.

Inflation the silent killer

The inflation rate in India was recorded at 6.62 percent in January of 2013. Inflation Rate in India is reported by the Ministry of Commerce and Industry. Historically, from 1969 until 2013, India Inflation Rate averaged 7.8 Percent reaching an all time high of 34.7 Percent in September of 1974 and a record low of -11.3 Percent in May of 1976.

 In India, the wholesale price index (WPI) is the main measure of inflation. The WPI measures the price of a representative basket of wholesale goods. In India, wholesale price index is divided into three groups: Primary Articles (20.1 percent of total weight), Fuel and Power (14.9 percent) and Manufactured Products (65 percent). Food Articles from the Primary Articles Group account for 14.3 percent of the total weight. The most important components of the Manufactured Products Group are Chemicals and Chemical products (12 percent of the total weight); Basic Metals, Alloys and Metal Products (10.8 percent); Machinery and Machine Tools (8.9 percent); Textiles (7.3 percent) and Transport, Equipment and Parts (5.2 percent). This page includes a chart with historical data for India Inflation Rate.

The Year 2011-2012

Economic Review
THE REAL ECONOMY Growth falters in 2011-12 after a sharp recovery in the previous two years After a sharp recovery from the global financial crisis and two successive years of robust growth of 8.4 per cent, GDP growth decelerated sharply to a nine-year low of 6.5 per cent during 2011-12 . The slowdown was reflected in all sectors of the economy but the industrial sector suffered the sharpest deceleration.

 The slowdown in agriculture sector growth was on account of the base effect which dragged down its contribution to GDP growth by half . In the case of industry, the sharp moderation in manufacturing sector growth along with decline in mining and quarrying output offset the improvement in electricity, gas and water supply growth. The industrial sectors weighted percentage contribution to economic growth dropped to single digits, the first time in ten years. The moderation in services sector growth was led by sharp deceleration in construction and trade, hotels, transport and communication. Despite the moderation, the predominance of the services sector remains a unique feature of the overall growth story and the process of structural change in India.

Savings and Investment Rate

Falling saving and investment rates may impact potential growth

 There has been a decline in the average saving rate since 2008-09, led by a sharp decline in public sector saving rate that has not been offset by private savings. The reduction in the average public sector savings rate in the post-global crisis period largely reflects the impact of fiscal stimulus measures as well as the decline in the contribution of nondepartmental enterprises. Average investment rate has also declined in the post-crisis period.

 Preliminary estimates show that the net financial saving of the household sector declined further to 7.8 per cent of GDP at current market prices in 2011-12 from 9.3 per cent in the previous year and 12.2 per cent in 200910 . The moderation in the net financial saving rate of the household sector during the year mainly reflected an absolute decline in small savings and slower growth in households holdings of bank deposits, currency as well as life funds. At the same time, the persistence of inflation at a high average rate of about 9 per cent during 2011-12 further atrophied financial saving, as households attempted to stave off the downward pressure on their real consumption/lifestyle.

 With Real interest rates on bank deposits and instruments such as small savings remaining relatively low on account of the persistent high inflation, and the stock market adversely impacted by global developments, households seemed to have favored investment in valuables, such as gold.

 The trend of falling savings rate, particularly that of public sector savings, needs to be reversed for adequate resources to be available to support a high growth trajectory during the Twelfth Plan.

Agricultural Sector

 Even as the dependence of Indian agriculture on rainfall has reduced over the years, it remains predominantly rain-fed. About 16 per cent of the countrys geographical area is drought prone. Rain-fed agriculture accounts for around 56 per cent of the total cropped area, with 77 per cent of pulses, 66 per cent of oilseeds and 45 per cent of cereals grown under rain-fed conditions.

 The dependence of agriculture on rainfall is manifested by decline in kharif output in 2008-09 and 2009-10, when the south-west monsoon was acutely deficient. Deficient north-east monsoons in the recent past adversely affected the production of rabi crops such as oilseeds, pulses and rice. On the contrary, during 2010-11, when both summer and winter rainfalls were above normal, production of most kharif and rabi crops increased significantly.

 In spite of the record level of food grain stocks, food security concern persists. The food security issues in respect of food grains persist more in terms of likely increased entitlements (under the proposed National Food Security Bill 2011) and lack of storage capacity. However, given the changing food habits a greater emphasis is necessary to augment supply of protein-rich items, vegetable and fruits, where demand-supply gaps are putting a pressure on prices.

 Rising expenditure on high value foods, namely, fruits, vegetables, milk, eggs, meat and fish has reduced the dominance of cereals in the consumption basket, as confirmed by the consumer expenditure survey of 2009-10 conducted by the National Sample Survey Office (NSSO)

 Further, the distribution and delivery mechanism under the existing Targeted Public Distribution System (TPDS) suffers from inefficiency and leakages. The existing storage facilities are already stretched to their limits, often leading to wastage. Thus, scaling up the coverage and entitlement under TPDS would require an overhaul in the entire chain of food management systems. Measures such as augmenting storage capacity and reducing leakages apart from exploring the possibilities of introducing cash transfer, food coupon systems and digitalization of TPDS are expected to help solve the problems facing the sector to a large extent.

 As per the approach paper for the 12th Five Year Plan, achieving at least 4 per cent agricultural growth in the coming years is crucial not only for sustaining overall growth of the economy but also for a more equitable growth. This would require a quantum increase in productivity from the current levels.

IIP

Reasons
Moderation in Domestic and External demand. Hardening of interest rates. Slowdown in consumption expenditure, especially in interest-rate sensitive commodities. Subdued business confidence and global economic uncertainty.

 The slowdown in industrial production was reflected across all sub-sectors in 2011-12, except electricity. In the manufacturing sub-sector, while 6 industry groups showed a decline in production, 6 registered growth in excess of 10.0 per cent. The mining sub-sector declined by 2.0 per cent during 2011-12. This was mainly due to regulatory and environmental issues affecting coal mining and low output of natural gas from the Krishna-Godavari basin. However, electricity sector performed better during 2011-12 recording 8.2 per cent growth supported by higher hydro power generation aided by a normal south-west monsoon.

 An empirical assessment of the impact of monetary policy and global growth on industrial output suggests that a percentage point increase in real weighted average lending rate for industry in the base period results in a decline in IIP growth, on an average, by 0.6 percentage point over a one year horizon. A one percentage point increase in global GDP growth in the base period stimulates domestic IIP growth, on an average, by about 0.7 percentage point over the same horizon. These estimates indicate that both monetary policy actions and global growth dynamics affect the growth of domestic industry.

Structural Bottlenecks

 Contraction in natural gas output and slowdown in coal, fertilizer and crude oil output led to deceleration in growth of core industries to 4.4 per cent during 2011-12 compared with 6.6 per cent in the previous year . There was contraction in fertilizers, natural gas and crude oil and deceleration in steel, refinery products and electricity during April-June 2012.

 Manufacturing growth depends crucially on the inputs provided by core industries, especially, electricity which has a weight of 10.3 per cent in the IIP. An empirical assessment of the dependence of manufacturing growth, inter alia, on electricity availability indicates that a one percentage point increase in annual growth in electricity increases the growth rate of manufacturing by 0.4 percentage point.

However, there was a divergence between the two since June 2010 because even as there was significant deceleration in the growth of manufacturing sector, the growth in electricity continued to remain buoyant due to the substitution of petroleum products, especially diesel, with electricity in other sectors of the economy. This was reflected in the deceleration in the growth of diesel consumption. The increased electricity generation also partly helped in reducing the power deficit in the country from 10.1 per cent in 2009-10 to 8.5 per cent in 2011-12 in spite of increased demand from household segment.

Demand and Supply Gap

For coal, the gap has increased from around 50 million tonnes in 2007-08 to 114 million tonnes in 2011-12. The projected gap by the terminal year of the 12th Five Year Plan (201617) is expected to be 185 million tonnes. The policy of captive mining, which was introduced to augment production, has not helped the sector to the desired extent.

 The coal sector grew by 6.4 per cent in AprilJune 2012. Measures such as import of coal and acquisition of coal assets abroad are expected to help reduce the demand-supply gap. It is important to ensure smooth shipments, port handling and transportation of the coal imports to quickly bridge any supply shortages for the power plants.

End of Session 1

Stagflation