Presentation on Economic Survey Final 2014-15 Final

8/18/2019 Presentation on Economic Survey Final 2014-15 Final

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Key Concepts from

Economic Survey 2014-15

Shankar IAS Academy


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Macro Economic Variables

andTrends


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Capital formation

rate

Per capita NNI


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Sectoral Growth trends


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Sectoral share in GDP


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Sectoral share in employment


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Savings rate has declined significantly from 2007-08

In recent years households save more in physical

assets than in financial assets


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Issues and Priorities

Reform Agenda

1. To create an environment that is conducive for firms to

invest (Fig. 2.1). The recent business cycle downturn has

seen a sharp decline in investment.

2. Inflation uncertainty

The inflation uncertainty of recent years has been

characterized by a surge in inflation and inflation volatility. High

and unstable inflation has made it difficult to make projections

about future profits from investment projects.


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Fall in business confidence

• There has been increasing concern about the difficulties faced

by firms operating in India. In a purely economic sense it is

easy to explain the actions of a government that restrictsfirms in certain ways in order to address market failures.

• However, the Indian landscape features numerous

government interventions that are not connected to market

failures. Therefore, there is immediate need to simplifyprocesses including those relating to tax policy and

administration.

Issues with the Financial System

• The investment downturn has been exacerbated bydifficulties in the availability and cost of finance. In recent

years, with a decline in the savings rate and an enlarged fiscal

deficit, the external capital from outside the firm, available to

the private sector has declined.


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THE REFORM AGENDA

Agriculture

•

The key to investment and productivity growth on the farm is liberalizationof agriculture.

• Creating a conducive environment for a competitive national market for

food.

• The welfare of both consumers and farmers lies in freeing up agricultural

markets in the same way that economic freedom was given to other

producers.

• Market-based economies often provide income support, food stamps, and

cash transfers to farmers and producers for protecting them but without

distorting market signals. Farmers must have the same economic freedom,

to buy and sell their produce, as do other producers.


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Public Finance

• India needs a sharp fiscal correction, a new Fiscal

Responsibility and Budget Management (FRBM) Act withteeth, better accounting practices, and improved budgetarymanagement.

• The tax regime must be simple, predictable, and stable.

This requires a single-rate goods and services tax (GST), asimple direct tax code (DTC), and a transformation of taxadministration.

• Government expenditure reform involves three elements:

shifting subsidy programmes away from price distortions toincome support, a change in the focus of governmentspending towards provision of public goods, and a systemsof accountability through a focus on outcomes.


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Regulation

• Putting in place the legal foundations of a well-

functioning market economy for India. This must be acarefully executed project as it involves legislative,regulatory, and administrative changes.

• Default setting for government intervention in the

economy needs to change from ‘prohibited unlesspermitted’ to ‘permitted unless prohibited’.

• Greater policy stability, higher long-term growth and alegal and regulatory framework that strengthens a

market economy will help revive investment.


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• Tax reforms

• Budget Process reforms


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Public Finance


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Budget

Revenue

Receipts

TaxDirect Tax

Indirect Tax

Non-TaxDividends, Profits,

Govt Interest receipts onloans to state

Fiscal servicesGeneral services

Expenditure

Interest paymentsSubsidies

Defence RevenueExpenditure

Capital

Receipts

Recovery of loans fromstates

PF deposits,PSU disinvestment

Borrowings andother liabilities

Expenditure

Loans to states, PSUsFor economic development

General servicesDefence


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Budget Deficits in India

• Revenue deficit = Revenue Expenditure-Revenue Receipts

• Budget deficit = Total expenditure – Total

Receipts• Fiscal deficit = Total expenditure – (Revenue

Receipts + non-debt creating capital receipts)

• Primary deficit = Fiscal deficit- interestpayments


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The fiscal outcome of the central government in 2013-14, which

was in line with the fiscal consolidation targets set as per the

Medium Term Fiscal Policy Statement (MTFPS), was achieved

despite the macroeconomic challenges of growth slowdown,

elevated levels of global crude oil prices, and slow growth of

investment.

• As FD is customarily monitored as a proportion of the GDP,declining FD may be an outcome of either an increase in

nominal GDP or a decline in absolute FD or both.

•

In the post-crisis period except for 2009-10 and 2011-12,nominal GDP growth was higher than the growth of FD which

helped bring down the FD to 4.6 per cent of GDP in 2013-

14(RE) from 6.5 per cent in 2009-10


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Fiscal Policy 2013-14 had two- fold objectives;

• first to aid growth revival and

• second to reach the FD level targeted for 2013-

14.


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Major Measures Introduced in Budget 2013-14 for

Direct Taxes

Personal Income Tax

•

Budget 2013-14 neither altered the existing tax slabs nor the rates of personal income tax.• However, with a view to providing tax relief to individual taxpayers in the lower income

bracket (income not exceeding Rs.5 lakh), a rebate in form of tax credit equal to the amount

of income tax payable or an amount of Rs. 2000, whichever was less, was provided.

• Further, to generate additional revenue from personal income taxes, Budget 2013-14

imposed a surcharge of 10 per cent in case of total income of a resident person exceeding

rupees one crore.

Corporate Taxes

• The rates of Corporate income tax were also left unchanged. However, like personal income

tax, a revenue augmenting measure was introduced by enhancing the surcharge from 5 per

cent to 10 per cent if total income of a domestic company exceeded Rs.10 crore and for

others from 2 per cent to 5 per cent if the taxable income exceeded Rs.10 crore.• Further a commodities transaction tax (CTT) was introduced at the rate of 0.01 per cent to be

levied on sale of commodity derivatives in respect of commodities, other than agricultural

commodities, traded in a recognized association.


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Major Measures Introduced In Budget 2013-14 For Indirect

Taxes Customs

A. GENERAL

• Duty-free allowance in respect of jewellery for an Indian

passenger who has been residing abroad for over one year or

a person who is transferring his residence to India raised from

Rs.10,000 to Rs.50,000 in case of a gentleman passenger andfrom `20,000 to `1,00,000 in case of a lady passenger.

• Duty-free allowance for crew member of vessel/aircraft raised

from Rs.600 to Rs.1500.


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• B Sector Specific Changes

–

Agriculture – Automobiles

– Metals and Polymers

– Precious metals

• Basic customs duty reduced from 10 per cent to 2 per

cent on pre-forms of precious and semiprecious stones.

Duty on gold increased from 8 per cent to 10 per cent

and on silver from 6 per cent to 10 per cent. Additional

duty of customs (CVD) on gold ores and concentrates

and gold dore bar for use in the manufacture of

standard gold increased from 6 per cent to 8 per cent.


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– Capital Goods and infrastructure

– Aircraft and Ships

– Environment protection

– Textiles

– Health

– MSME sector

– Service sector

• Retrospective exemption

• Review of exemptions

– Amnesty Scheme


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Tax expenditure• The magnitude of tax expenditure or revenue forgone from central

taxes is showing an upward trend in recent years.

• The statutory rates of taxes as notified in the various schedules aredivergent from the actual or effective rates of taxes, which isattributable to tax provisions that allow – (i) deductions or exemptions from the taxpayers’ taxable expenditure,

income, or investment, – (ii) deferral of tax liability, or

– (iii) preferential tax rates.

• In the case of corporate taxpayers, deduction on account ofaccelerated depreciation, deduction for export profits of export-oriented units located in special economic zones (SEZs) and profitsof undertakings in the power and mineral oil and natural gas sectorswere some of the major incentives.

• A tax expenditure statement was laid before the Parliament for thefirst time in 2006-07


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Total Expenditure patterns


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Major Components of Revenue

Expenditure IP-S


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To arrive at Fiscal deficit


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Inflation Scenario in India• Inflation showed signs of receding with average wholesale price index

(WPI) inflation falling to a three-year low of 5.98 per cent during 2013-14.

• Consumer price inflation, though higher than the WPI, has also exhibited

signs of moderation with CPI (new-series) inflation declining from 10.21

per cent during 2012-13 to about 9.49 per cent in 2013-14.

• Food inflation, however, remained stubbornly high during FY 2013-14. As

inflation remained above the comfort level of the Reserve Bank of India

(RBI), the tight monetary policy stance was maintained by the Central

Bank.

• The depreciation of the rupee, following the taper indication by the

Federal Open Market Committee (FOMC) in May 2013, also impacted the

inflation situation.

How?!


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Trends in inflation


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Trends in component of WPI

M t t l i fl ti


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Measure to control inflation

1. Move to market prices2. Improving efficiency of public

programmes and breaking the wage-price

spiral3. Rationalization of government support

to farmers

4. Role of APMC Acts

5. Role of public deficits


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Urjit Patel Committee to Strengthen the Monetary

Policy Framework

• An expert committee headed by Urjit R. Patel,Deputy Governor of the RBI was appointed on 12September 2013 to revise and strengthen themonetary policy framework.

• The main objective of the committee was torecommend what needs to be done to revise and

strengthen the current monetary policyframework with a view to making it transparentand predictable.


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Recommendations of the committee• CPI (combined) should be used as the nominal anchor for a flexible

inflation-targeting (FIT) framework. The choice of CPI as nominalanchor was mainly on account of the fact that the CPI closelyreflects cost of living and has larger influences on inflationaryexpectations than other anchors.

•

Target rate of inflation should be 4 percent with a tolerance band of2 percent to be achieved in a two-year time frame

• The transition path to the target zone should be graduated to bringdown inflation from the current level of around 10 per cent to 8 percent over a period not exceeding 12 months and to 6 per cent over

a period not exceeding the next 24 months.

• Administered prices and interest rates should be eliminated as theyact as impediments to monetary policy transmission andachievement of price stability.


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Trends in CPI

Th j t k i id J l 2013


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The major measures taken in mid-July 2013 were as

follows

• Marginal standing facility (MSF) rates were hiked by 200 bps to 10.25 per

cent

• Daily MSF borrowing was restricted to 0.5 per cent of the net demand and

time liability (NDTL) of respective banks as against the earlier practice of

unlimited access against excess statutory liquidity ratio (SLR) holdings.

• Minimum daily cash reserve ratio (CRR) requirement for banks was hiked

from 70 per cent to 90 per cent of the requirement.

• Weekly auctions of cash management bills (CMB) were also conducted to

drain out liquidity from money markets.


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Residex

• NHB- capture prices of residential buildings in

urban areas; Launched in 2007; Covers 20

cities; Quarterly release


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Financial Intermediation


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Financial Intermediation

Financial markets form an important part of theIndian economy. Their performance in 2013-14

reflected the slowdown in the real economy with

most intermediaries growing at a slower rate as

compared to previous years. Moreover, there

were growing concerns about asset quality in

the banking sector.


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Bank Credit


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Sectoral deployment of credit


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S i i i i k b h dd h


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Some recent initiatives taken by the government to address the

rising NPAs include:

Banks will now be required to classify Special Mention

Accounts (SMA) into three sub-categories:1. SMA-0: Principal or interest not overdue but showing incipient signs of stress

2. SMA-1: Principal or interest overdue by 31-60 days

3. SMA-2: Principal or interest overdue by 61-90 days

The other main proposals in the framework are:

1. Centralized reporting and dissemination of information on large credit.2. Early formation of a lenders’ committee with timelines to agree to a plan forresolution.

3. Incentives for lenders to agree collectively and quickly to a plan. There is betterregulatory treatment of stressed assets if a resolution plan is under way, oraccelerated provisioning if no agreement can be reached.

4. Improvement in current restructuring process: independent evaluation of large

value restructurings is mandated, with a focus on viable plans and a fair sharing oflosses (and future possible upside) between promoters and creditors.

5. More expensive future borrowing for borrowers who do not cooperate with lendersin resolution.

6. More liberal regulatory treatment of asset sales

Committee on Comprehensive Financial Services for


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Committee on Comprehensive Financial Services for

Small Businesses and Low-Income Households

The RBI set up the Committee on Comprehensive Financial Services for Small

Businesses and Low-Income Households (CCFS) in September 2013 under the

Chairmanship of Dr Nachiket Mor. The Committee’s Report was released on 7

January 2014. At its core, the Committee’s recommendations

Some of the key recommendations of the CCFS include:• Universal Electronic Bank Account

• Licensing

• Developing risk-based supervision

• Reorienting the focus

• Consolidating NBFC definitions

• On priority sector lending

All financial firms regulated by the RBI be required to have an internal process

to assess suitability of products prior to advising clients with regard to them.


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New Banking Licenses in the Private Sector

• The RBI released ‘Guidelines for Licenses of NewBanks in the Private Sector’ on 22 February 2013.

• A High Level Advisory Committee under theChairmanship of Dr Bimal Jalan, former Governor

RBI, was set up for screening applications.• Based on this, an internal scrutiny of the

applications was done and the RBI, on 2 April2014, granted ‘in-principle’ approval to two

applicants, namely IDFC Limited and BandhanFinancial Services Private Limited, to set up banksunder the Guidelines


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Capital market Performance

• Indian benchmark indices BSE Sensex and NSENifty gained 18.8 and 18.0 per cent in fiscalyear 2013-14.

•Among the select world indices the SPX indexregistered the highest percentage change of29.6 per cent during the calendar year 2013.

• Sensex and Nifty meanwhile observed apercentage change of 9.0 and 6.8 per centrespectively for the same period.


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Capital Market

• The STT has been reduced for equity futures from0.017 per cent to 0.01 per cent in 2013-14.

• Commodities transaction tax (CTT)

• Following the K. M. Chandrasekhar Committeerecommendations, SEBI has notified new FPIregulations on 7 January 2014

• FPI, QFI, RFPI

• The FII debt limits have now been enhanced toUS$ 81 billion (corporate bond US$ 51 billion andG-Secs US$ 30 billion) from the earlier US$ 66billion.


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Steps to develop corporate bond market

• Strengthening legal framework

• Relaxation of investment guidelines

• Introduction of new products

• Development of securitized debt market

• Rationalization of withholding tax (WHT) on FIIs for G-Secs andcorporate bonds.

• Relaxation of investment norms of insurance / pension funds

• Encouragement of public issuance of corporate bonds for raisingTier II capital by banks

• Insurance companies and mutual funds allowed to participate asmarket makers in credit default swap (CDS) market

• Setting up of central counter party (CCP) and creation of tradeguarantee fund for trading in corporate bonds


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• International Finance Corporation [IFC(W)], a

member of the World Bank Group, launched a

US$1 billion offshore bond programme—the

largest of its kind in the offshore rupee market—

to strengthen India’s capital markets.

• Under the programme, the IFC will issue rupee-

linked bonds and use the proceeds to financeprivate-sector investment in the country.


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Financial Sector Legislative Reforms Commission

• Set up on 24 March 2011

• Legislative aspects

• To lay the roadmap for the establishment of

new agencies like the Resolution Corporation(RC), Public Debt Management Agency(PDMA), Financial Sector Appellate Tribunal(FSAT), and Financial Data ManagementCentre (FDMC).

• Non-legislative aspects


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Financial Stability Board

• The Financial Stability Board (FSB) was

established in 2009 under the aegis of the G20bringing together the national authorities,standard-setting bodies, and internationalfinancial institutions to address vulnerabilities

and to develop and implement strong regulatory,supervisory, and other policies in the interest offinancial stability.

• India is an active Member of the FSB.


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Forex reserves


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Exchange Rate

• The annual average exchange rate of the rupee went upfrom ` 45.56 per US dollar in 2010-11 to ` 47.92 per USdollar in 2011-12 and further to ‘54.41 per US dollar in2012-13.

• It rose to reach an average of ` 60.50 per US dollar in 2013-

14. The intra-year levels of depreciation have been sharperin some months; but exhibit two-way movements withinthe broad rising trend.

• While the depreciation could in part be explained by thelevels of CAD and its financing by net capital flows, the

movement in monthly average exchange rates in the latterhalf of 2013-14 also reflects the levels of intervention bythe RBI to shore up its reserves, which had been rundownin the initial parts of the year.


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External debt in India- An Analysis

• India’s external debt stock at end March 2013 stood at US$404.9 billion recording an increase of US$ 44.1 billion (12.2

per cent) over the end March 2012 level of US$ 360.8 billion.

• long-term debt increased by 9.1 per cent to US$ 308.2 billion

at end March 2013 from US$ 282.6 billion at end March 2012,• The rise in external debt is largely composed of long-term

debt, particularly NRI deposits. A sharp increase in NRI

deposits reflected the fresh FCNR (B) deposits mobilized

under the swap scheme during September-November 2013• Short-term debt increased by 23.7 percent to US$ 96.7 billion

from US$ 78.2 billion at end March 2012, reflecting elevated

levels of imports


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International Trade


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India Trade Scenario

• India’s merchandise trade has been growing

world exports from 0.7 per cent and world

imports 0.8 per cent respectively in 2000 to

1.7 per cent and 2.5 per cent respectively in2013.


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Export performance of India

• The share of the emerging and developing economies(EDEs) in world merchandise exports has increasedfrom 25.4 per cent in 2000 to 42.3 per cent in 2012.Nearly 60 per cent of this increase is on account of the

BRICS (Brazil, Russia, India, China, and South Africa)countries whose share increased from 7.6 per cent to10.1 per cent.

• Within BRICS, the largest increase is in China’s share,

followed by Russia, India, and Brazil. The share of thefour newly industrialized Asian economies (NIAEs) hasfallen by 1 percentage point.

Commodity Composition of India’s Exports


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Commodity Composition of India s Exports

One

interesting

feature of

the sectoral

performance

of exports

is that many

labour-

intensiveexport

sectors have

performed

relatively

well in 2013-

14. Textileexports grew

by 14.6 per

cent in 2013-

14.


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Import performance of India

• Import growth decelerated sharply from 32.3per cent in 2011-12 to 0.3 per cent in 2012-13

and fell to a negative -8.3 per cent in 2013-14,

owing to fall in non-oil imports by 12.8 percent.

• Value of capital goods imports fell sharply in

both 2012-13 and 2013-14

Commodity composition of India’s imports


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Commodity composition of India s imports


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• The sharp fall in imports and moderate export

growth in 2013-14 resulted in a sharp fall in

India’s trade deficit by 27.8 per cent.

• In absolute terms, trade deficit fell to US$

137.5 billion from US$ 190.3 billion during

2012-13.• The top three trading partners of India are

China, the USA, and the UAE, with the top slot

shifting between the three.


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• India had bilateral trade surplus with four

countries, namely the USA, UAE, Singapore,and Hong Kong, in 2013-14 with high increase

in the export-import ratio with the USA.

• India has high and rising bilateral trade deficit

with China, which however fell by 6.6 per cent

in 2013-14.


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Services trade

• In commercial services trade, India was thesixth largest exporter with 3.4 per cent share

of world exports and seventh largest importer

with 3.0 per cent share of world imports in2012.


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Some Select Recent Trade Policy Measures


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Some Select Recent Trade Policy Measures

Budget related • Duty on specified machinery for manufacture of

leather and leather goods including footwearreduced to 5 per cent from 7.5 per cent.

• Duty on pre-forms, precious and semi-preciousstones reduced to 2 per cent from 10 per cent.

• Export duty on de-oiled rice bran oil cakewithdrawn.

• Concessions to aircraft maintenance, repair, andoverhaul (MRO) industry.


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Export Performance of Top Indian States


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Inverted duty structure:


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Inverted duty structure:

• An inverted duty structure is making Indian manufactured goodsuncompetitive against finished product imports in the domestic market asfinished goods are taxed at lower rates than raw materials or intermediate

products. This discourages domestic value addition. This inversion is notsolely because of basic customs duty but also other additional duties.

Export promotion schemes:

• There are multiple and overlapping export promotion schemes with manyfocus markets and focus products with items and markets getting added

each year in the foreign trade policy. There is need to rationalize theexport promotion schemes to a bare minimum which can also reducetransaction costs and trade litigations.

SEZs

• A clear signal needs to be given for Indian SEZs as fresh investments are

slowing down in recent years and the green field SEZs have not reallytaken off full swing.


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Trade facilitation:

• Greater trade facilitation by removing the delays and high

costs on account of procedural and documentation factors,besides infrastructure bottlenecks is another majorchallenge.

• As per the World Bank and International FinanceCorporation (IFC) publication Doing Business 2014, India

ranks 134 in ease of doing business with Singapore at firstplace and China at 96.

Intertwining of domestic and external-sector policy:

• While a stable agri export policy is needed, any domestic

shortage or excess affects exports. Similarly externalshortages/ excesses affect the domestic sector. So asmooth intertwining of domestic and external-sectorpolicies particularly for agriculture is needed.


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HUMAN DEVELOPMENT

D l t i di t


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Development indicators

HDI• According to HDR 2013, India with an HDI of 0.554 in

2012 has slipped down a few notches with its overallglobal ranking at 136 (out of the 186 countries) as

against 134 (out of 187 countries) as per HDR 2012.Poverty

• According to TC, with the poverty line at all India levelat monthly per capita expenditure (MPCE) of ` 816 for

rural areas and Rs.1000 for urban areas in 2011-12, thepoverty ratio in the country has declined from 37.2 percent in 2004-05 to 21.9 per cent in 2011-12.


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• Inequality –

Gini index for India 0.33 – Quintile income ratio (4.1) was lesser than countries

like US, Swiss, China, Malaysia and South Africa

– Level of inequality lesser in India compared to othercountries

• Social Service expenditure

Total central government expenditure on socialservices including rural development (Plan and non-Plan)and the Pradhan Mantri Gram Sadak Yojana (PMGSY) fellfrom 18.00 per cent in 2010-11 to 15.79 per cent in 2011-12and 15.12 per cent in 2012-13(RE). It picked up to 16.70 percent in 2013-14(BE)


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Documents

Presentation on Economic Survey Final 2014-15 Final