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%

• Slow down primarily due to deceleration in industrial growth.

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

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 2012-2013Actuals @ BE RE BE

1 Revenue Receipts 788471 789892 766989 9356854 Capital Receipts (5+6+7)$ 408857 467837 551730 555241

5 Recoveries of Loans 12420 15020 14258 116506 Other Receipts 22846 40000 15493 300007 Borrowings and other

liabilities373591 412817 521980 513590

8 Total Receipts (1+4)$ 1197328 1257729 1318720 1490925

16 Total Expenditure 1197328 1257729 1318720 149092520 Revenue Deficit 252252 307270 394951 350424

% of GDP -3.3 -3.4 -4.4 -3.421 Effective Revenue Deficit 164765 160417 257446 185752

% of GDP -2.1 -1.8 -2.9 -1.822 Fiscal Deficit {16-(1+5+6)} 373591 412817 521980 513590

% of GDP -4.9 -4.6 -5.9 -5.123 Primary Deficit (22-11) 139569 144831 246362 193831    % of GDP -1.8 -1.6 -2.8 -1.9

REVENUE RECEIPTS

2012-13BE

(Rs.Cr.)

% increase 2011-12

(BE)/2010-11 actual

% increase 2011-12

(RE)/2010-11 actual

% increase 2012-13 BE/2011-12 RE

1. Tax Revenue      Gross Tax Revenue 1077612 17.6 13.7 19.5Corporation Tax 373227 20.5 9.7 13.9Taxes on Income 195786 17.4 17.3 13.9Customs 186694 11.7 12.7 22.0Union Excise Duties 194350 18.7 9.0 29.0Service Tax 124000 15.5 33.8 30.5

MAJOR SUBSIDIES

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

Subsidies 2010-11 2010-11 2011-12 2011-12 2012-13

BE RE BE RE BE

Food 55578 60600 60573 72823 75000

Fertilizers 49981 54976 49998 67199 60974Petroleum 3108 38366 23640 68481 43850

  108667 153942 134211 208503* 179824

*2.34% of GDP

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 non-interest outlays. There should be primary surplus.

• The ratio of debt to GDP is likely to rise if there is a primary deficit

GDP

debtr

GDP

debtGDP of rategrowth

GDP

deficitPrimary

• 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.

India’s 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.

GDP

debtr

GDP

debtGDP of rategrowth

GDP

deficitPrimary

%3.36.035.1 GDP

debt

1999-2000

2000-2001

2002-2002

2003-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

52.00

54.00

56.00

58.00

60.00

62.00

64.00

Central govt. debt-GDP Ratio

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.• India’s 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.

Deficit to GDP Ratio (Central+Sate)

5

6

7

8

9

10

1119

90-9

1

1991

-92

1992

-93

1993

-94

1994

-95

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

India’s 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.

Year Revenue Fsical Primary Deficit Deficit Deficit

1990-91 3.3 2.8 6.61995-96 2.5 0 4.21996-97 2.4 -0.2 4.12002-3 4.4 1.1 5.9

Enactment of FRBM2003-4 3.6 4.5 02005-6 2.5 4 0.42006-7 1.9 3.3 -0.22007-8 1.1 2.6 -0.92008-9 4.5 6 2.6

2009-10 (Act.) 5.2 6.4 2.62010-11(RE) 3.4 5.1 22011-12 (RE) 4.4 5.9 2.82012-13 (BE) 3.4 5.1 1.9

1999-2000

2000-2001

2002-2002

2003-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

52.00

54.00

56.00

58.00

60.00

62.00

64.00

Central govt. debt-GDP Ratio

ReasonsPrimary surplusRising GDP growthFalling interest rate

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