Union Budget 2012-13

Medium term goals

Twelfth Five Year Plan to be launched with the aim of faster, sustainable and more inclusive growth

Goals of 2012-13 budget

Focus on domestic demand driven growth recovery; Create conditions for rapid revival of high growth in private investment; Address supply bottlenecks in agriculture, energy and transport sectors, particularly in coal, power, national highways, railways, and civil aviation; Intervene decisively to address the problem of malnutrition especially in the 200 high-burden districts; and Expedite coordinated implementation of decisions being taken to improve delivery systems, governance, and transparency; and address the problem of black money and corruption in public life.

Economic backdrop
Aborted recovery
GDP growth:
2005-8: 9%+ 2008-9: 6.8 2009-10: 8.0 2010-11: 8.6 20111-12: 6.9% Inflation (WPI) 2006-8: < 5% 2008-9: 8.0 2009-10: 3.6 2010-11: 9.4. 2011-12, mostly remained high began declining CAD at 3.6 per cent of GDP for 2011-12 and reduced net capital inflow Q3&4 put pressure on exchange rate. Fiscal slippages in 2011-12

Slow down primarily due to deceleration in industrial growth.

Assumptions
GDP for BE 2012-2013 has been projected at ` 10159884 crore assuming 14% growth over the Advance Estimates of 2011-2012 (8912179 crore) released by CSO. Real GDP growth estimate for 2012-13: 7.6%+/0.25% Inflation forecast ~ 6.4%

Definitions
Revenue deficit = Revenue Exp. Rev. receipts Fiscal deficit (FD)= Total exp -Rev. receipts recovery of loans - Other receipts FD has to be funded thro borrowing Primary deficit (PD) = FD interest payments PD = Total exp (excl. interest) -recovery of loans Other receipts - Rev. receipts Primary surplus = Rev. receipts + recovery of loans + Other receipts Total exp (excl. interest)

Budget at a Glance (in Rs. Crores) 2010-2011 2011-2012 2011-2012 2012-2013 Actuals @ BE RE BE

1 Revenue Receipts 4 Capital Receipts (5+6+7)$ 5 Recoveries of Loans 6 Other Receipts 7 Borrowings and other liabilities 8 Total Receipts (1+4)$ 16 Total Expenditure 20 Revenue Deficit % of GDP 21 Effective Revenue Deficit % of GDP 22 Fiscal Deficit {16-(1+5+6)} % of GDP 23 Primary Deficit (22-11) % of GDP

788471 408857 12420 22846 373591 1197328 1197328 252252 -3.3 164765 -2.1 373591 -4.9 139569 -1.8

789892 467837 15020 40000 412817 1257729 1257729 307270 -3.4 160417 -1.8 412817 -4.6 144831 -1.6

766989 551730 14258 15493 521980

935685 555241 11650 30000 513590

1318720 1490925 1318720 1490925 394951 350424 -4.4 -3.4 257446 185752 -2.9 -1.8 521980 513590 -5.9 -5.1 246362 193831 -2.8 -1.9

REVENUE RECEIPTS

2012-13 % increase % increase BE 2011-12 2011-12 (Rs.Cr.) (BE)/ (RE)/ % increase 2010-11 2010-11 2012-13 BE/ actual actual 2011-12 RE 1077612 373227 195786 186694 194350 124000 17.6 20.5 17.4 11.7 18.7 15.5 13.7 9.7 17.3 12.7 9.0 33.8 19.5 13.9 13.9 22.0 29.0 30.5

1. Tax Revenue Gross Tax Revenue Corporation Tax Taxes on Income Customs Union Excise Duties Service Tax

MAJOR SUBSIDIES
Subsidies 2010-11 2010-11 2011-12 2011-12 2012-13 BE RE BE RE BE

Food
Fertilizers

55578
49981

60600
54976

60573
49998

72823
67199

75000
60974

Petroleum

3108
108667

38366
153942

23640

68481

43850
179824

134211 208503*

*2.34% of GDP Central subsidies target: <2 per cent of GDP in 2012-13.

Why persistent fiscal deficit is bad?

Long term effects of large fiscal deficits : Reduces economic growth, lowers real incomes Persistent deficit leads to increases the risk of financial and economic crises Example: Argentina Fiscal deficits can also lead to inflation

Importance of Primary deficit

PS= Revenue (tax+non-tax)+ other receipts Expenditure (excl. interest) The basic rule: revenue must exceed noninterest outlays. There should be primary surplus. The ratio of debt to GDP is likely to rise if there is a primary deficit

debt Primary deficit debt r growth rate of GDP GDP GDP GDP

To reduce the ratio of debt to GDP there must be either a primary surplus (i.e., revenue must exceed noninterest outlays) or the economy must grow faster than the rate of interest, or both. If only one of those conditions holds, it must be large enough to outweigh the adverse effect of the other.

Indias debt sustainability in early part last decade

Around 2000-1 primary deficit was about 1.5 percent of GDP and the implicit rate of interest on the national debt had exceeded the growth rate of GDP by 3%+ The ratio of the central government debt to GDP was about 60 percent on average.
debt Primary deficit debt r growth rate of GDP GDP GDP GDP

debt 1.5 3 0.6 3.3% GDP

Central govt. debt-GDP Ratio

64.00 62.00 60.00 58.00

56.00
54.00 52.00

Fiscal Reform
Fiscal imbalance was considered the root cause of inflation and difficult BoP position during the end of 1980s. Fiscal consolidation can induce growth. Several international examples. Indias own post-reform experience suggests the same. After initial consolidation following the 1991 reforms, the fiscal reform went into back burner- a casualty of the political situation.

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5
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

Deficit to GDP Ratio (Central+Sate)

Indias debt to GDP ratio

Fiscal Reform - FRBMA

Govt. recognized the need to act on alarming fiscal situation and decided to implement fiscal reform. Fiscal Reforms and Budget Management Act (FRBMA) was enacted on August 26, 2003 and the Act and the rules were notified to come into effect from July 5, 2004.

Fiscal Reform : FRBM Act 2003

Revenue deficit to be reduced by 0.5% or more of GDP every year eliminated by March 31, 2009. Fiscal deficit to reduced by to 0.3 per cent or more of GDP each year and reduced to no more than three per cent of GDP by March 31, 2009.

Revenue Deficit 1990-91 3.3 1995-96 2.5 1996-97 2.4 2002-3 4.4 Enactment of FRBM 2003-4 3.6 2005-6 2.5 2006-7 1.9 2007-8 1.1 2008-9 4.5 2009-10 (Act.) 5.2 2010-11(RE) 3.4 2011-12 (RE) 4.4 2012-13 (BE) 3.4

Year

Fsical Primary Deficit Deficit 2.8 6.6 0 4.2 -0.2 4.1 1.1 5.9 4.5 4 3.3 2.6 6 6.4 5.1 5.9 5.1 0 0.4 -0.2 -0.9 2.6 2.6 2 2.8 1.9

Central govt. debt-GDP Ratio

64.00 62.00 60.00 58.00

Reasons Primary surplus Rising GDP growth Falling interest rate

56.00
54.00 52.00

Fiscal consolidation
Amendments to the FRBM Act Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets. Medium-term Expenditure Framework statement will set forth a three-year rolling target for expenditure indicators. Subsidies to be brought down to 1.75% of GDP over next 3 years