indian economic review

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The Indian Economy and Budget

2013

Prof. Kapil Bhopatkar


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Module 1: Basic terminology and key

concepts related to economics.

Module 2: Indian Economic Review year 2011-

2012.

Module 3. Budget 2012 and 2013


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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


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What is a Union Budget?

The Union Budget is the annual report of India asa country. It contains the government of India'srevenue and expenditure for the end of a

particular fiscal year, which runs from April 1 toMarch 31.

The Union Budget is the most extensive accountof the government's finances, in which revenues

from all sources and expenses of all activitiesundertaken are aggregated. It comprises therevenue budget and the capital budget. It alsocontains estimates for the next fiscal year.


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What is a Revenue Budget?

The revenue budget consists of revenue receiptsof the government (revenues from tax and othersources), and its expenditure. Revenue receiptsare divided into tax and non-tax revenue.

Tax revenues are made up of taxes such as incometax, corporate tax, excise, customs and otherduties that the government levies.

In non-tax revenue, the government's sources areinterest on loans and dividend on investments likePSUs, fees, and other receipts for services that itrenders.


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Revenue expenditure is the payment incurred for thenormal day-to-day running of government departmentsand various services that it offers to its citizens. Thegovernment also has other expenditure like servicing

interest on its borrowings, subsidies, etc.

Usually, expenditure that does not result in the creationof assets, and grants given to state governments andother parties are revenue expenditures. The difference

between revenue receipts and revenue expenditure isusually negative. This means that the governmentspends more than it earns. This difference is called therevenue deficit.


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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 receivedfrom foreign bodies and governments, divestment

of equity holding in public sector enterprises,

securities against small savings, state provident

funds, and special deposits


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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.


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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 orfirms on the incomes they earn.


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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 manufacturedwithin the country. Usually, these charges are

passed on to the consumer.


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Plan and Non Plan Expenditure

There are two components of expenditure - plan and non-plan. Of these, plan expenditures are estimated afterdiscussions between each of the ministries concerned andthe Planning Commission.

Non-plan revenue expenditure is accounted for by interestpayments, subsidies (mainly on food and fertilizers), wageand salary payments to government employees, grants toStates and Union Territories governments, pensions, police,economic services in various sectors, other general servicessuch as tax collection, social services, and grants to foreigngovernments.

Non-plan capital expenditure mainly includes defense, loansto public enterprises, loans to States, Union Territories andforeign governments.


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Central Plan Outlay

It is the division of monetary resources among

the different sectors in the economy and the

ministries of the government.


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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 affectpublic expenditure.


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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.


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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 becomesthe Finance Act.


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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 affectsthe fiscal deficit. The extent of the deficit and the means offinancing it influence the money supply and the interest rate in theeconomy. High interest rates mean higher cost of capital for the

industry, lower profits and hence lower stock prices. The fiscalmeasures undertaken by the government affect public expenditure.For instance, an increase in direct taxes would decrease disposableincome, thus reducing demand for goods. This decrease in demandwill translate into a decrease in production, therefore affectingeconomic growth. Similarly, an increase in indirect taxes would also

decrease demand. This is because indirect taxes are often partially orcompletely passed on to consumers in the form of higher prices.Higher prices imply a reduction in demand and this in turn wouldreduce profit margins of companies, thus slowing down productionand growth. Non-plan expenditure like subsidies and defence alsoaffect the economy as limited government resources are used for

non-productive purposes.


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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. GDPper capita is often

considered an indicator of a country's standard

of living.

GDP =private consumption +grossinvestment+government spending+ (exports

imports),
http://en.wikipedia.org/wiki/Market_valuehttp://en.wikipedia.org/wiki/Market_valuehttp://en.wikipedia.org/wiki/Per_capitahttp://en.wikipedia.org/wiki/Standard_of_livinghttp://en.wikipedia.org/wiki/Standard_of_livinghttp://en.wikipedia.org/wiki/Consumption_(economics)http://en.wikipedia.org/wiki/Gross_private_domestic_investmenthttp://en.wikipedia.org/wiki/Gross_private_domestic_investmenthttp://en.wikipedia.org/wiki/Government_spendinghttp://en.wikipedia.org/wiki/Exporthttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Importhttp://en.wikipedia.org/wiki/Exporthttp://en.wikipedia.org/wiki/Government_spendinghttp://en.wikipedia.org/wiki/Gross_private_domestic_investmenthttp://en.wikipedia.org/wiki/Gross_private_domestic_investmenthttp://en.wikipedia.org/wiki/Consumption_(economics)http://en.wikipedia.org/wiki/Standard_of_livinghttp://en.wikipedia.org/wiki/Standard_of_livinghttp://en.wikipedia.org/wiki/Per_capitahttp://en.wikipedia.org/wiki/Market_valuehttp://en.wikipedia.org/wiki/Market_value


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GDP of India 1.84798 Trillion $

India

Pakistan Bangladesh


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GDP


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India GDP Annual Growth Rate

The Gross Domestic Product (GDP) in India expanded 4.50 percentin the fourth quarter of 2012 over the same quarter of the previousyear. GDP Annual Growth Rate in India is reported by the Ministryof Statistics and programme Implementation.

Historically, from 1951 until 2012, India GDP Annual Growth Rateaveraged 5.85 Percent reaching an all time high of 10.20 Percent inDecember of 1988 and a record low of -5.20 Percent in December of1979. In India, the annual growth rate in GDP at factor costmeasures the change in the value of the goods and services producedin India, without counting governments involvement.

Simply, the GDP value excludes indirect taxes (VAT) paid to thegovernment and includes the original value of products withoutaccounting for government subsidies. This page includes a chartwith historical data for India GDP Annual Growth Rate.


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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 until2013, 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 -11.3Percent in May of 1976.


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In India, the wholesale price index (WPI) is the mainmeasure of inflation. The WPI measures the price of arepresentative basket of wholesale goods. In India,wholesale price index is divided into three groups: PrimaryArticles (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 importantcomponents of the Manufactured Products Group areChemicals and Chemical products (12 percent of the total

weight); Basic Metals, Alloys and Metal Products (10.8percent); 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 datafor India Inflation Rate.


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The Year 2011-2012


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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.


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The slowdown in agriculture sector growth was on accountof the base effect which dragged down its contribution toGDP growth by half .

In the case of industry, the sharp moderation inmanufacturing sector growth along with decline in miningand quarrying output offset the improvement in electricity,gas and water supply growth.

The industrial sectors weighted percentage contribution toeconomic growth dropped to single digits, the first time inten years. The moderation in services sector growth was ledby sharp deceleration in construction and trade, hotels,transport and communication. Despite the moderation, thepredominance of the services sector remains a uniquefeature of the overall growth story and the process ofstructural change in India.


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Savings and Investment Rate

Falling saving and investment rates may

impact potential growth


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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 non-

departmental enterprises.

Average investment rate has also declined in the

post-crisis period.


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Preliminary estimates show that the net financial savingof the household sector declined further to 7.8 per centof GDP at current market prices in 2011-12 from 9.3

per cent in the previous year and 12.2 per cent in 2009-

10 . The moderation in the net financial saving rate of the

household sector during the year mainly reflected anabsolute decline in small savings and slower growth inhouseholds 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 furtheratrophied financial saving, as households attempted tostave off the downward pressure on their realconsumption/lifestyle.


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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 adverselyimpacted by global developments, households

seemed to have favored investment in

valuables, such as gold.


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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 theTwelfth Plan.


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Agricultural Sector


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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 isdrought prone.

Rain-fed agriculture accounts for around 56

per cent of the total cropped area, with 77 percent of pulses, 66 per cent of oilseeds and 45

per cent of cereals grown under rain-fed

conditions.


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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.


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In spite of the record level of food grainstocks, food security concern persists. Thefood security issues in respect of food grains

persist more in terms of likely increasedentitlements (under the proposed NationalFood Security Bill 2011) and lack of storagecapacity. However, given the changing food

habits a greater emphasis is necessary toaugment supply of protein-rich items,vegetable and fruits, where demand-supplygaps are putting a pressure on prices.


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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 theconsumer expenditure survey of 2009-10

conducted by the National Sample Survey

Office (NSSO)


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Further, the distribution and delivery mechanism underthe existing Targeted Public Distribution System(TPDS) suffers from inefficiency and leakages. Theexisting storage facilities are already stretched to theirlimits, often leading to wastage. Thus, scaling up thecoverage and entitlement under TPDS would require anoverhaul in the entire chain of food managementsystems.

Measures such as augmenting storage capacity and

reducing leakages apart from exploring the possibilitiesof introducing cash transfer, food coupon systems anddigitalization of TPDS are expected to help solve the

problems facing the sector to a large extent.


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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 growthof the economy but also for a more equitable

growth. This would require a quantum increase

in productivity from the current levels.


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IIP


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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.


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The slowdown in industrial production was reflectedacross all sub-sectors in 2011-12, except electricity. Inthe manufacturing sub-sector, while 6 industry groupsshowed a decline in production, 6 registered growth inexcess of 10.0 per cent.

The mining sub-sector declined by 2.0 per cent during2011-12. This was mainly due to regulatory andenvironmental issues affecting coal mining and lowoutput of natural gas from the Krishna-Godavari basin.

However, electricity sector performed better during2011-12 recording 8.2 per cent growth supported byhigher hydro power generation aided by a normalsouth-west monsoon.


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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.


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Structural Bottlenecks


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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 2011-12compared with 6.6 per cent in the previous

year .

There was contraction in fertilizers, natural gasand crude oil and deceleration in steel, refinery

products and electricity during April-June

2012.


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Manufacturing growth depends crucially on the inputs provided by coreindustries, especially, electricity which has a weight of 10.3 per cent inthe IIP. An empirical assessment of the dependence of manufacturinggrowth, inter alia, on electricity availability indicates that a one

percentage point increase in annual growth in electricity increases thegrowth rate of manufacturing by 0.4 percentage point.

However, there was a divergence between the two since June 2010because even as there was significant deceleration in the growth ofmanufacturing 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 dieselconsumption. The increased electricity generation also partly helped inreducing the power deficit in the country from 10.1 per cent in 2009-10to 8.5 per cent in 2011-12 in spite of increased demand from householdsegment.


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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 (2016-17) is expected to be 185 million tonnes. The

policy of captive mining, which was

introduced to augment production, has nothelped the sector to the desired extent.


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The coal sector grew by 6.4 per cent in April-

June 2012. Measures such as import of coal

and acquisition of coal assets abroad are

expected to help reduce the demand-supplygap. It is important to ensure smooth

shipments, port handling and transportation of

the coal imports to quickly bridge any supplyshortages for the power plants.


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End of Session 1


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Stagflation

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