Union Budget 2013-14: Focuses on Economic Growth, Middle Class To Pay More

Finance minister P. Chidambaram presented the Union Budget for 2013-14 in the Parliament on February 28. It was Chidambaram's eighth annual budget, the second highest by anyone in India after a record ten by former Prime Minister Morarji Desai. Overall, it was 82nd Union Budget in the Indian history, including interim and special-situation budgetary proposals, since the first one of independent India was presented by then finance minister R.K. Shanmukham Chetty on November 26, 1947.

Individually, Chidambaram presented the Union Budget for the eighth time, the second-highest by any finance minister. The maximum number of 10 budgets have been presented by Morarji Desai, while Pranab Mukherjee (currently President of the country), Yashwant Sinha, Y.B. Chavan and C.D. Deshmukh have presented seven budgets each in the past.

Plan Outlay

The finance minister has proposed a 29.4 percent hike in the plan expenditure for the union budget 2013-14. The plan expenditure for the next fiscal will be about Rs.5.53 lakh crore, the finance minister said.

The budget expenditure is Rs.16,65,297 crore and the plan expenditure is Rs.5,55,322 crore," Chidambaram said, adding that the plan expenditure in 12th Five-Year Plan was revised to Rs.14,30,825 crore or 96 percent of budgeted expenditure.

Growth Rate

India’s economic growth, as per official estimates, decelerated to 5 percent and 6.2 percent in the past two years, from 8.6 percent and 9.1 percent in the two years preceding them. Chidambaram said the Indian economy was today constrained by three factors: high fiscal deficit, slow growth and high inflation.

The finance minister said a whopping Rs.16.65 lakh crore (Rs.16.65 trillion or nearly $300 billion) would be spent under plan expenditure during 2013-14, which will be 30 percent higher than the outlay for this fiscal.

Fiscal Deficit

While doing a shade better than the targeted fiscal deficit of 5.3 percent of Gross Domestic Product (GDP) at 5.2 percent for the current fiscal, the finance minister has stuck to his target of 4.8 percent of GDP for 2013-14, even while stepping up defense allocation by 14 percent over the revised estimates in the current fiscal.

Similar hikes have been proposed in various sectors. although it is clear that he managed to create a cushion through compression in spending during the current financial year. Expenditure under several key heads, including roads and rural housing actually fell in the current fiscal compared to the previous year.

Tax Rates

The 2013-14 Budget proposed a tax cut of Rs.2,000 for people earning an annual income of between Rs.200,000 and Rs.500,000 and said anything beyond that was not possible given the current circumstances. The finance minister said any hike in the exemption limit for direct tax that is paid by individuals would take millions out of the tax net and was neither a desirable proposition, nor feasible. Accordingly, he proposed a Rs.2,000 tax credit for those in the first slab. This measure will benefit 1.8 crore (18 million) tax payers," he said, adding that this would entail an outgo of Rs.3,600 crore ($650 million) to the exchequer.

The finance minister sought to kick-start the engines of growth by providing incentives for productive investment, stepping up expenditure in social sectors to invigorate the economy in the longer term and giving a token tax break at the lowest slab rate to offset the inflationary burden on the middle class.

The Budget proposed to levy a surcharge of 10 percent on individuals whose annual taxable incomes exceed Rs.1 crore. The surcharge will be levied for the 2013-14 financial year. The finance minister said there are only 42,800 individuals in the country who will be liable to pay the surcharge.

To provide for the various increased allocations, the finance minister moved to tap the well-heeled by way of a one-year surcharge of 10 percent on the ‘super rich’ section of tax payers – all 42,800 of them, that is — along with duties on imported or domestic luxury vehicles such as SUVs, mobile phones (priced over Rs. 2,000), and what has been the tax horse of most Finance Ministers —cigarettes. With other minor tinkering of duties, including Tax Deducted at Source (TDS) on sale of property worth Rs. 50 lakh, the net additional tax revenue in the kitty works out to Rs. 18,000 crore.

However, given the challenges that he faced by way of low growth, high inflation, the widening fiscal and current account deficits coupled with lower than targeted revenue collection during 2012-13, Chidambaram may have disappointed taxpayers looking for some major breaks. But he did provide a tax break of Rs. 2,000 to individual tax payers with taxable income of up to Rs. 5 lakh. This itself is estimated to benefit 1.8 crore tax payers and work out to a revenue sacrifice of Rs. 3,600 crore. Likewise, first-time buyers of affordable homes will get an additional deduction of interest of Rs. 1 lakh for home loans up to Rs. 25 lakh, which will be over and above the current Rs. 1.5 lakh deduction allowed for self-occupied dwellings.

Defense Allocation

The government has marginally increased its defense spending by 5.31 percent than 2012-13. The defense budget for 2013-14 starting April 1 will be Rs 2,03,672 crore, an increase of Rs 1,93,407 crore more from the 2012-13 budget.

The revised budget after the mid-fiscal cut was Rs 1,78,504 crore in December 2012. The hike is 14.10 percent, much lower than last year’s 17.6 percent hike. Also the share of defense spending in the GDP will be reduced from 1.9 percent for the year ending March 31 to 1.79 percent of the GDP. The share of defense spending in the overall expenditure will be 10 percent of government expenses, a decrease of 11 percent this year.

Finance Minister P. Chidambaram said that India plans to spend up to 2.03 trillion rupees ($37.7 billion) on defense next year, up from a revised 1.78 trillion rupees this year.

The finance minister said 867.41 billion rupees will be spent to buy defense equipment in the next fiscal year, up from this year's about 695.79 billion rupees. The government had originally planned to spend 795.78 billion rupees on purchasing defense equipment this year.

Despite the cut in this year's defense budget, India will become the world's fourth-largest defense spender by 2020, behind the United States, China and Russia, and surpassing France, Japan and the United Kingdom. It is predicted that India's defense spending will reach $65.4 billion in 2020.

Boost to Agriculture

Finance Minister P Chidambaram hiked the agriculture budget by 22 percent, increased farm credit limit to small and marginal farmers from Rs 5,75,000 crore to Rs 7,00,000 crore in 2013-14 and announced setting up “nutri-farms” pilot project.

The sector got a major boost, in line with the UPA’s ambitious food security Bill (which got an allocation of Rs 10,000 crore) and the next general election, as sufficient sops have been announced for farmers in the Budget.

Also for the first time perhaps, the government set aside separate funds - Rs 500 crore - to start a program on crop diversification.

Education Sector

The Union Budget set aside a budget of Rs 79,451 crore for the entire education sector, including literacy and higher and technical education. This represents a meagre Rs 5,395 crore increase over the budget estimate of Rs 74,056 crore for the Ministry of HRD in the last financial year. The hike constitutes 7.2 percent over 2012-13, whereas last year the increase for the education sector budget was a handsome 18.6 percent. Expenditure on education as a proportion of the GDP has increased from 2.59 percent in 2007-08 to 3.31 percent in 2012-13.

The Plan Budget is Rs 65,869 crore which is Rs 4,442 crore more than Rs 61,427 crore in last fiscal. It will certainly ask for more money with the Right to Education Act (RTE) in mind.

The budget for school education is Rs 49,659 crore which is only 8 percent more than last year. The allocation for the Sarva Shiksha Abhiyan (SSA) is up from Rs 25,500 crore last fiscal to Rs 27, 258 this year an increase of Rs 1,758 crore which is very low considering SSA is the main vehicle to implement the RTE Act. Midday Meal Scheme has been allocated Rs 13,125 crore as against Rs 11,937 crore last year, an increase of Rs 1,260 crore.

Skill Development of Youth

The 2013-14 Budget has allocated Rs.1,000 crore to develop job-oriented skills among youth. Assuming that 10 lakh (one million) youth can be motivated in one year, skill trained youth will give enormous boost in employment and productivity," Chidambaram said, while presenting the federal 2013-14 budget to the Lok Sabha, the lower house of parliament.

The finance minister allocated Rs.1,000 crore (Rs.10 billion) for the "ambition", saying that it would be a "trigger for skill development in the country".

Infrastructure

Infrastructure got a major thrust in the 2013-14 budget with Finance Minister P. Chidambaram announcing a slew of measures to boost sector's growth, like raising Rs 50,000 crore through taxfree bonds and setting up of major ports.

In some other decisions which would boost the infrastructure development in the country, the government also said that it would set up a road regulatory authority in the financial year 2013-14 to address financial stress, construction risk and contract management in the road sector and start work on two more industrial corridors between Bangalore and Chennai and Bangalore and Mumbai.

"The power transmission system from Srinagar to Leh will be constructed at the cost of Rs 1,840 crore, Rs 226 crore provided in current budget," Chidambaram said in his budgetary proposals for next fiscal.

In a move that is also strategic for the region, the proposed 220 kV line from Srinagar to Leh, to be implemented by Power Grid Corp, will pass through Kargil, Drass, Khalsi and is aimed at enhancing the reliability of power supply.

Highlights

* Fiscal deficit for 2013-14 pegged at 4.8 percent of GDP and 5.2 percent in 2012-13

* Plan expenditure pegged at Rs. 5,55,322 crore and Non-Plan at Rs. 11,09,975 crore

* New taxes to collect Rs. 18,000 crore for government

* Voluntary Compliance Encouragement Scheme launched for Recovering service tax dues

* Rs 14,000 crore earmarked for capital infusion in public Sector banks in 2013-14

* Refinance capacity of SIDBI raised to Rs. 10,000 crore

* TUF Scheme for textile sector to continue in 12th Plan With an investment of Rs. 1.51 lakh crore

* No change in income tax slabs

* Relief of Rs. 2,000 for tax payers in tax bracket of Rs2-5 lakh

* Ten percent surcharge on persons with taxable income of over Rs. 1 crore

* Tobacco products, SUVs and mobile phones to cost more

* Income limit under Rajiv Gandhi Equity Savings Scheme Raised to 12 lakh from Rs. 10 lakh

* First home loan of up to Rs. 25 lakh to get extra Interest deduction of up to Rs. 1 lakh

* Duty free limit of gold import increased to Rs. 50,000 For male passengers and Rs. 1 lakh for female passengers

* India’s first women’s bank to be set up by October

* Concessional six percent interest on loans to weavers

* Commodity transaction tax of 0.01 percent proposed on non-agri futures traded on commodity bourses

* Securities transaction tax brought down to 0.01 percent

* No change in basic customs duty; normal excise and Service tax rates unchanged at 12 percent

* Handmade carpets and textile floor coverings of coir or jute exempted from excise duty

* Excise duty on SUVs increased to 30 percent from 27 percent

* Chidambaram says India to become $5 trillion economy, And among top five in the world by 2025

* Rashtriya Swasthya Bima Yojana benefit extended to Rickshaw pullers, auto and taxi drivers, among others

* ‘Nirbhaya Fund’ of Rs. 1,000 crore to empower women and Provide safety in the wake of Delhi gang rape incident

*Rs 9,000 crore earmarked as first installment of balance of CST compensation to states

* Defense allocation at Rs. 203,672 crore, education Rs. 65,867 crore and rural development ministry Rs. 80,194 crore

* Rs 10,000 crore earmarked for national food security toward incremental cost

* Farm credit target set at Rs. 7 lakh crore as against Rs. 5.75 lakh crore in 2012-13

* Direct benefit transfer scheme to be rolled out in the entire country during tenure of UPA government

Assessment

At first glance, the budget may appear harmless to the middle-class. In fact, it might even appear friendly what with all those improvements in housing loan deductions and stock market investments. But make no mistake, this budget will bite the average citizen in more ways than one.

Just take the seemingly innocuous proposal to impose service tax on all air-conditioned restaurants. With most decent restaurants — we are not talking of the up-market ones here — climate-controlled, eating out will become at least another 12 percent more expensive. Remember that restaurants are in the process of revising their price-lists even now with rising prices of food commodities.

Cellular phones are now a necessity and smart phones are increasingly becoming so as they help you do your daily business on the go. As much as 97 percent of all telephone connections in the country are cellular. Yet, smart phones (or phones that cost more than Rs.2,000) will now become pricier with the sharp rise in excise duty to 6 percent from 1 percent. In addition to driving business to the grey market, this proposal will also undo the efforts to push people into using their mobiles extensively for transactions.

It can be said that it must not be forgotten that the finance minister appears to have placed enormous trust in the growth figures going northward in the coming months, and with that he hopes the revenues will follow. After all, by not changing the income tax slabs or too significantly altering the indirect tax proposals which previously existed, Chidambaram hopes to mop just under Rs18,000 crore from his new tax proposals.

However, since that is far less than what the Government needs to meet its expenditure, the Minister is banking heavily on upward economic growth to trigger revenue generation. But growth has dipped from a high of nine percent only a few years ago to around five percent now. While the Minister hopes for a turnaround to six percent and above, there remains a big ‘if'.

Economic Survey 2012-13: Reflects India's Grim Reality, Cautions Against Growing Taxes

Finance Minister P. Chidambaram presented the pre-Budget Economic Survey for 2012-13 to Parliament on February 27. The Survey reflects the grim reality that India is facing a severe slowdown and must act fast to spur investment, restart stalled projects, cut interest rates and contain its fiscal deficit.

Growth Rate

The Survey made it clear that this fiscal’s five per cent growth, the slowest in the past decade, could no longer be blamed on external factors alone, and the government will have to act on the domestic front to come out of the slump.

The Economic Survey, while projecting an optimistic growth rate of 6.1-6.7 percent for 2013-14, stated that to contain the fiscal deficit the government should widen the tax base and cap subsidies, particularly through better targeting and plugging leakages. It also claimed the downturn was more or less over, and that the economy was looking up. Claiming that the downturn was “more or less over” and that the economy was looking up, the Survey projected a cautiously optimistic growth rate of 6.1-6.7 percent while conceding that the Gross Domestic Product (GDP) growth for the current fiscal was likely to slip to the decade’s low of five per cent — compared to the estimates by the Central Statistical Organisation (CSO) of 6.2 percent for 2011-12 and 9.3 percent the year before.

Fiscal Deficit

The Survey had pegged the fiscal deficit at 5.1 percent for the GDP for 2012-13, which the finance minister later revised to 5.3 in view of the rising expenditure and subdued revenue collection. For the new fiscal, the finance minister has committed to bring it down to 4.8 per- cent.

The 2012-13 Survey notes that the government needs to contain the fiscal deficit especially by shrinking wasteful and discretionary subsidies. The Survey said: "Controlling the expenditure on subsidies will be crucial. The domestic prices of petroleum products, particularly diesel and LPG need to be raised in line with their prices prevailing in the international market.

In addition, delays in getting permissions for projects need to be curbed so that investment can pick up. Implementation of GST, if approved, would create an integrated market and bring more producers in the tax net. Also, the direct benefit transfer scheme recently rolled out on the AADHAAR platform will target subsidies better.

Agriculture Reforms

Economic Survey states that with agriculture growth rate falling short of the four per cent target in the past five years, the country’s annual economic report card (the first since the beginning of the 12th Five-Year Plan period), calls for increase in yields and reforms like a suitable sustainable strategy to maximize agricultural income and make it a viable option.

The farm sector achieved 3.6 percent growth during the 11th Five year Plan (2007-12) – higher than growth of 2.5 and 2.4 percent during ninth and 10th Five-Year Plans but lower than expectations of 4 percent growth target.

Therefore, in the face of stiff challenge of feeding its growing population, the Survey has sought urgent reforms to boost crop yield and private investment in infrastructure to motivate farmers.

Economic Survey for 2012-13 has emphasized putting in place a strategy for farm development in the eastern and northeastern regions amid saturation in crop yields in Green Revolution belt, especially in the States of Punjab and Haryana.

Tax Rate

In what may bring cheer to the well-heeled in the wake of a raging pre-Budget debate over squeezing more out of the super-rich class, the Survey suggested the government’s efforts to raise additional revenue should be through widening of the tax base and not by increasing the rates. The Survey stated: “It is much better to achieve a higher tax-GDP ratio by broadening the base which is taxed rather than increasing marginal tax rates significantly — higher and higher tax rates impinge more and more on incentives to undertake taxable activity, while encouraging tax evasion.”

Several experts, including PMEAC Chairman C. Rangarajan, have pitched for higher rates of taxes on super-rich. The Survey, prepared by a group of economist led by Chief Economic Advisor Raghuram Rajan, said it is better to achieve fiscal consolidation partly through a higher tax-GDP ratio than merely through reduction in expenditure as it would only hurt development spending.

The Tax-GDP ratio touched a peak of 11.9 percent in 2007-08, but declined to 9.6 percent in 2009-10. It was 9.9 percent in 2011-12. “Raising the tax-GDP ratio to above the 11 percent level is critical for sustaining the process of fiscal consolidation in the long run,” it said.

Gross tax revenue in April-December 2012 has grown by 15 percent to over Rs. 6.81 lakh crore. However, the growth in tax collection was “significantly” short of the growth envisaged in Budget. The tax collection until December 2012, was 63.2 percent of Budget estimates, lower than the last five-year average of 69 percent.

Rate of Inflation

Predicting that headline inflation may fall to 6.2–6.6 percent by next month, the Survey stated that elevated food inflation would continue to remain an area of concern as it inched towards double digits in December 2012. While 2012, the inflation was driven by protein items, this year it has been due to increase in prices of cereals such as wheat, rice and maize.

Inflation which is one of the major areas of concern for the United Progressive Alliance (UPA) Government, has remained in the range of above seven per cent since December 2009, while to add to its woes food inflation, too, has remained on the higher side during the same period, and according to the Economic Survey for 2012-13, easy money policy of major developed and developing nations may further aggravate inflationary expectations in India.

The survey further added that inflation has remained muted in the current financial year and declined to a three year low of 6.62 percent in January 2013. The average wholesale prices-based inflation in 2012 (April-December) moderated to 7.55 percent from 8.94 percent in the corresponding period of 2011-12.

Industrial Production

With the spurt in factory output last October turning out to be an aberration in the wake of sharp downturns in the months after, the latest Economic Survey has sought to describe the industrial production scenario as a ‘mixed picture’ of sluggishness bottoming out as well as continuing for a little longer period.

What came as a surprise to the government while India Inc. maintained a ‘we said so’ stance to clamor for easing of interest rates, was that industrial growth, as measured by the Index of Industrial Production (IIP), witnessed a smart recovery with a robust 8.3 per cent expansion in October, 2012.

Despite the downward bias, the Survey has highlighted at least two factors which point to some optimism on the industrial front.

First is the data on frequency distribution of products/product groups within the IIP basket which indicates that the number of products with negative growth has declined from 182 in the fourth quarter of 2011-12 to 160 in October-November 2012.

The second positive factor is the Reserve Bank of India’s ‘Business expectation index’, which showed moderately positive growth during the third quarter of the current fiscal after posting persistent negative growth for the previous six quarters. Since the RBI business index tracks IIP growth fairly closely, the change in trend suggests a possible bottoming out of IIP growth moderation.

Foreign Direct Investment

According to the Economic Survey, Foreign Direct Investment (FDI) in India slumped by 43.3 percent at $15.85 billion in April-November period of the current financial year as compared to $27.93 billion in the corresponding period previous year. The overseas investment flows in top five services declined by 9.7 percent at $8.19 billion during the period under review.

The Survey stated that overall FDI inflows increased by 33.6 percent in 2011-12. Overseas investment inflows in services surged by 57.62 percent in the financial year ended March 31, 2012.

The document presented a day ahead of the Union Budget 2013-14 pointed out that the government has taken many policy initiatives to liberalize FDI policy for services sector. This includes increasing FDI limit from 49 percent to 74 percent in teleports and DTH and cable networks, permitting FDI up to 74 percent in mobile TV, up to 49 percent in scheduled and non-scheduled air transport services and up to 50 percent in multi-brand retail trading.

The Survey stated that the government has also amended the existing policy on FDI in single brand product retail trading.

Health Sector

The country’s spending on health remains abysmally low with the Survey revealing that the spending on health, as compared to the spending on the rest of social services, has actually been declining in the country. Raising alarm over the decline, the survey has called for increased focus on health and education if India's demographic dividend is to be used to its advantage. Between 2011 and 2016, as many as 63.5 million workers, mainly aged between 20 and 35 years, will join India's pool. For this segment to be productively engaged, spending on health and education must remain consistent, the survey says.

But the ground situation paints to a sorry picture. The combined central and state expenditure on social services as a proportion of total expenditure increased from 22.4 per cent in 2007-08 to 25.1 per cent in 2012-13 and the spending on education among all the social services also increased over this period from 43.9 to 46.6 per cent.

However, the combined general spending (federal and states) on health has fallen over the past five years from 21.5 per cent to 19.2 per cent.

Petroleum Subsidies

The 2012-13 Survey has called for addressing the key issues of petroleum subsidies, clarity on gas pricing policy, petroleum price distortion and concerns over various disputes pertaining to the New Exploration Licensing Policy (NELP). It stated that addressing the key fiscal risk of petroleum subsidies is critical in better fiscal marksmanship.

It stated further that the overall subsidy bill of the government, it said, was likely to overshoot the target of Rs.1.79 lakh crore this financial year due to higher crude oil prices. The government had put the petroleum products subsidy at Rs.43,580 crore, food subsidy at Rs.75,000 crore and fertilizer subsidy at Rs.60,974 crore, taking the total subsidy bill to Rs.1,79,554 crore for 2012-13.

Employment Rate

The 2012-13 Economic Survey stated that the employment rate between June 2011 and June 2012 went up by approximately 7 lakh led mainly by the IT and BPO sector which accounted for almost half of the increase. It stated that upward trend in employment since July 2009 continues despite the economic slowdown.

A sector wise analysis shows that the textiles sector including apparels saw 1.70 lakh job additions, followed by transport sector (0.45 lakh), metals (0.26 lakh), gems and jewelry (0.19 lakh) and automobiles (0.11 lakh) in June 2012 over June 2011.

The survey said that employment in handloom/power loom and leather sectors has marginally declined during this period.

It said that there has been a sustained and consecutive increase in employment in both the public and private sectors covered at overall level during the last eleven quarters with a total addition of 30.73 lakh employment during this recovery period.

According to the Survey, India is on the brink of a demographic revolution with the proportion of working-age population between 15 and 59 years likely to increase from approximately 58 per cent in 2001 to more than 64 per cent by 2021. Moreover around 63.5 million new entrants to the working age group between 2011 and 2016, the bulk of whom will be in the relatively younger age group of 20-35 years.

The Survey added that the annual growth rate of employment in the private sector in 2011 was 5.6 per cent whereas that in the public sector was negative.

Economic Survey 2011-12: Inflation Pegged at 6.5 Per Cent, Maintained GDP Growth at 6.9 Per Cent

Finance Minister Pranab Mukherjee presented the Economy Survey 2011-12– a report card of the Indian economic scenario for current fiscal– in the Lok Sabha (lower house of the Parliament) on March 15.
Inflation Rate
The Survey pegged inflation at 6.5-7 percent by end of March and projected a further moderation in the next fiscal. Inflation in the current fiscal has largely been driven by high food prices. It had slipped to a low of 6.6 percent in January, but rebounded to almost 7 percent in February. The survey, however, said that fiscal consolidation was the only way to keep inflation down.
The survey said that monetary measures by the Reserve Bank of India (RBI) and its impact on curbing inflation needed to be studied further to improve efficiency of such actions in the future. Incidentally, the RBI in its mid-quarter review of the monetary policy left key rates unchanged, citing upside risks to inflation.
Growth Rate
The Economic Survey has maintained Gross Domestic Product (GDP) growth at 6.9 per cent. The growth in the financial year 2012-13 growth is expected to come in at 7.6 per cent and the financial year 2013-14 growth is pegged at 8.6 per cent.
Indian along with Indonesia showed strong growth despite a global economic slowdown in the final quarter of 2011, according to the International Monetary Fund (IMF).
IMF in its latest provisional report has said the GDP growth of G20 – a grouping of leading economies of the world – slowed to 0.7 per cent in the October-December quarter, compared with 0.9 per cent in the third quarter.
In the United States, GDP growth increased to 0.7 per cent in the fourth quarter, compared with 0.5 per cent in third quarter.
The IMF stated that in India and Indonesia growth increased strongly, but slowed in China to 2 per cent, compared with 2. 3 per cent in the third quarter.
In Japan, economic growth decreased to (-)0.2 per cent, following the strong rebound (+1. 7 per cent) in third quarter.
The Survey states that GDP fell by (-)0.3 per cent in both the European Union and the euro area in the fourth quarter of 2011, the first fall since the second quarter of 2009.
Fiscal Deficit
The Survey states that the fiscal outcome in 2011-12 is likely to be affected by the macroeconomic setting which indicates sharp slowdown in industry and rising costs affecting profits. In the first nine months of the current fiscal, gross tax revenue has grown by 12.2 per cent as against the budget estimate target of 17.3 per cent, it said.
On the other hand, as against a target of 4.9 per cent for the whole year, growth in total expenditure in the first nine months of 2011-12 was 13.9 per cent, which comprised 15.4 per cent growth in non-Plan expenditure and 10.8 per cent growth in Plan expenditure, the survey added.
Per Capita Income
According to the Survey, the per capita income of India stood at $ 1,527 in 2011. The Survey says that this is perhaps the most visible challenge. Nevertheless, India has a diverse set of factors, domestic as well as external that could drive growth well into the future.
The Survey further says that between 1980 and 2010, India achieved a growth of 6.2 per cent, while the world as a whole registered a growth rate of 3.3 per cent. As a result, India’s share in global GDP more than doubled from 2.5 per cent in 1980 to 5.5 per cent in 2010.
Consequently, India’s rank in per capita GDP showed an improvement from 117 in 1990 to 101 in 2000 and further to 94 in 2009. China, however, improved its rank from 127 to 74 during the same period.
Highlights
* India's economic growth estimated at 6.9 per cent in the current fiscal; growth momentum to pick up in next two fiscals to 7.6 per cent 2012-13 and 8.6 per cent in 2013-14.
* RBI expected to lower policy interest rates, as inflationary pressures expected to ease in coming months; A low interest rate regime to encourage investment activity and push forward economic growth.
* Steps required for deepening of domestic financial markets, especially corporate bond market and attracting longer-term inflows from abroad; Efforts at attracting dedicated infrastructure funds have begun.
* The growth rate of investment in the economy is estimated to have declined significantly; borrowing costs up due to a sharp increase in interest rates.
* High borrowing costs and increase in other costs affecting profitability and internal accruals.
* Slowdown in Indian economy largely due to global factors, as also because of domestic factors like tightening of monetary policy, high inflation and slower investment and industrial activities.
* Inflation high, but showing clear signs of slowdown by the year-end; Whole-sale food inflation down to 1.6 per cent in January 2012 from 20.2 per cent in February 2010.
* India remains one of the fastest growing economies of the world; Country's sovereign credit rating rose by a substantial 2.98 per cent 2007-12
* Farm sector growth pegged at 2.5 percent for 2011-12.
* Services sector to grow at 9.4 percent.
* Services sector share in GDP to go up to 59 percent in the fiscal ending March 31.
* Industrial growth pegged at 4-5 percent, expected to improve as economic recovery resumes.
* Inflation on Wholesale Price Index (WPI) was high but showed clear slow down by the year-end. This is likely to spur investment activities leading to positive impact on growth.
* WPI food inflation dropped from 20.2 percent in February 2010 to 1.6 percent in January 2012.
* Calibrated steps initiated to rein-in inflation on top priority.
* India remains among the fastest growing economies of the world.
* Fiscal consolidation on track - savings and capital formation expected to rise.
* Exports grew by 40.5 percent in the first half of this fiscal and imports grew by 30.4 percent.
* Foreign trade performance to remain a key driver of growth.
* Forex reserves enhanced - covering nearly the entire external debt stock.
* Central spending on social services goes up to 18.5 percent this fiscal from 13.4 percent in 2006-07.

China Reiterates Decision To Retain Autonomy in Currency Policy

Four days before US and China high level officials meet for the highest level China-US Strategic and Economic Dialogue, China once again reiterated its decision to retain autonomy in making own decision on currency policy. China also hinted that China and the United States have reached a 'quiet communication' consensus over the RMB issue.

China's Assistant Finance Minister Zhu Guangyao sent out a clear message about the direction of the Chinese currency Renminbi (RMB) reform direction and time frame. He also reduced observers and outsiders' expectation about the discussion of RMB exchange rate in the coming week's second round of Sino-US Strategic and Economic Dialogue to be held in Beijing. Zhu Guangyao has provided a realistic market view about the possibility of the appreciation of RMB situation in the days to come.

Currency Reform Measure
Citing Chinese national leaders' earlier remarks of upgrading China's currency exchange mechanism to 'acts of national sovereignty level', China's Assistant Finance Minister Zhu Guangyao told the press that 'China's specific reform measure has to be based on the change and development in the overall world economic situation. The Chinese Government will take independent coordination to consider and to push forward currency reform measure.'

'What I want to specifically emphasize is that China will not advance its currency reform in particularly when China is under external pressure. External pressure and noise will do nothing but slow our currency reform process.' Minister Zhu's statements echoed China's Prime Minister Wen Jiabao's warning two months ago when the latter said that putting pressure on China and forcing China to revaluate and appreciate RMB would be counter-productive.

The second round of China-US Strategic and Economic Dialogue will be held in Bejing beginning 24 May. US Secretary of State Hillary Clinton and the US Secretary of Treasury Timothy Geithner will lead the US delegation to this year's high level bilateral dialogue with China. China will be represented by China's Vice Prime Minister Wang Qishan and China's State Councilor Dai Bingguo.

From the beginning of this year until today, a series of trade and strategic issues exacerbated tensions between China and the United States. The coming Dialogue should provide an opportunity for both nations to address these tension issues.

Based on China's Assistant Finance Minister Zhu Guangyao 's introduction, this Second China-US Strategic and Economic Dialogue, co-chaired by Wang Qishan and Timothy Geithner, will discuss the European sovereign debt crisis and its impact on the world economy in order to promote sustainable international fiscal policy; to build an open investment environment; to promote open trade in order to further deepen the reform of international financial institutions; among other related issues.

There are indications to show that at this Second China-US Strategic and Economic Dialogue, in the light of both countries' concern about the present European sovereign debt crisis and the worsening investment climate for Chinese enterprises in Europe, China's RMB issue will not be considered by both countries as a major issue as focus of attention at the Dialogue. At this moment, what we understand is that as far as China's currency exchange rate is concerned, the consensus between China and the US is to deal with this delicate issue in a low profile manner.

China-US Sensitive Issues To Adopt 'Quiet Communication' Strategy
Minister Zhu Guangyao also confirmed that although the RMB exchange rate would be one of the agenda in the Second China-US Strategic and Economic Dialogue, he also said that 'as the overall Sino-US economic relationship, the RMB exchange rate issue is only one of the issues. He said: 'This (exchange rate) is only one of the issues among the many issues in China-US bilateral economic issues. On sensitive bi-lateral economic issues, China and the United States should maintain 'quiet' communication.'

He also said: 'For sensitive issue such as the currency exchange rate, we hope both countries can keep the agreed upon spirit of 'quiet' strategy to engage in communication and dialogue. This should allow the views from both sides to be able to express fully so as to allow both countries to have deeper understanding on the same issue. This should help to push forward and promote the bilateral cooperation in macroeconomic policies between the two countries.'

All along, on resistance of foreign intervention on China's RMB exchange rate, the Chinese Government's policy has adopted the policy to deal with the issue in accordance with the 'autonomy, gradual and controllable' principle. However, from the US perspective, after the US Treasury suffered political pressure coming from the Congress to pressure China on appreciation of RMB, the US Treasury has delayed in submitting its semi-annual currency report to the US Congress since last month. As such, to the United States, the RMB exchange issue is still an outstanding issue for the US Government. However, market analysts have predicted that even without pressure coming from foreign countries, China's RMB will have a minor adjustment to appreciate from between 3 percent to 5 percent this year.

In Europe, the recent Euro crisis caused by the national debt crisis in Greece has led to many observers to opine that China may delay the measure to allow its RMB decoupling with US dollar. Substantial depreciation of the euro this year has led to the RMB exchange rate against the euro to appreciate more than 15 percent. To the Chinese enterprises that rely heavily on the current RMB exchange rate to maintain their market competitiveness, such development in Europe has resulted in significant export costing pressure to China's enterprises. As such since Europe is China's largest export market, the economic growth prospect of the European Union has also caused grave concern to the Chinese government officials.

European Sovereign Debt Crisis
Zhu Guangyao said: 'I hope that the main currency used as major monetary reserve can maintain a basic stability.' Zhu's remarks further implied that the dollar peg of the RMB exchange rate is unlikely to change.

As for the measure to cope with the European sovereign debt crisis, Zhu Guangyao pointed out that: 'Countries including China and the United States should strengthen coordination of macroeconomic policies. Both nations should make the G20 mechanism to become the main platform to play the actual role of governance on world economy. This can strengthen the international community's capacity to respond to this kind of economic crisis and challenge.'

Fiscal Deficit-GDP Ratio
Under the larger backdrop of possible expansion of sovereign debt crisis, Zhu Guangyao acknowledged that China is concerned about the growing US federal budget deficit.

He said: 'We hope that the US fiscal deficit-Gross Domestic Product (GDP) ratio can gradually be reduced in its economic recovery process to attain a sustainable level.'

China is now the largest holder of the US Treasury bonds. According to the US Treasury Department's international capital flows report released on 17 May, for the month of March the China's holdings of US Treasury bonds has increased US$17.7 billion dollars (approximately $24.5 billion), making the total China's holding of US Treasury bonds reaching $895.2 billion dollars. This was the first time China purchased US Treasury bonds since September 2009.

Pakistani Economy in IMF Perspective

Because of piling up of loans taken by Pakistan in the past, liability of debt servicing has increased manifolds for Pakistan nowadays, because of which, a major chunk of new external loans is consumed in debt servicing of external loans. This results in decreasing trend of real, foreign aid for Pakistan.

Growth Rate
At present, debt to be paid by Pakistan has increased manifolds, and Pakistan has to spend a lot of its foreign exchange in payment of loan installments and interest on it and debt servicing has become a serious issue for Pakistan. According to a recent policy statement by Finance Ministry, released in parliament, the total value of Pakistan's debt is 58.1 percent of its Gross Domestic Product (GDP). According to Fiscal Responsibility and Debt Limitation Act, the total value of Pakistan's debt, shouldn't exceed 60 percent of its GDP, in any case. Presently, the value of internal and external debt of Pakistan is close to the highest level. This is an alarming situation. The government should take effective measures for increase in tax revenue, in order to decrease its dependency on external debt.

It has further been mentioned in the statement of Finance Ministry, that value of debt has reached 8100 billion rupees, in the fist quarter of 2009-10, and a loan of 495 billion was taken in this period. Reasons of this are, delay in release of coalition support fund by the United States, marked devaluation of Pakistani rupee and decrease to lowest level of tax GDP ratio. Pakistan's debt has increased rapidly, during the last two years.

Debt Burden
According to report of the International Monetary Fund (IMF), Pakistan's debt will further increase in next five years. In order to lessen pressure on local currency due to increasing debt of Pakistan and bleak situation of balance of external payments, it is being apprehended that Pakistan's economy will entangle again in the vicious circle of loans, when new loans will be needed for payment of service charges of previous loans. But according to some economic experts, Pakistan's debt is still within bearable level as per GDP ratio.

According to IMF figures, Pakistan's external debt will touch 57.1 billion dollar mark, by the end of this year. There will be an increase of 12.3 percent (7 billion dollars) in next year and external debt will reach the value of 64 billion dollars, while in 2015-16, volume of our external debt will be 72.6 billion dollars. Increase in Pakistan's debt is mainly due to increasing deficits of fiscal and current payments.

The Government is compelled to take more internal and external loans to fill these gaps. Between 2000 and 2007, average deficits of fiscal and current payments were 3.8 percent and 0.7 percent respectively, and external debt was reduced to 28.1 percent of GDP, but value of external debt was 40 billion dollars and foreign exchange reserves were 16.4 billion dollars, but in 20007-08 the external debt increased to 30.4 percent of GDP.

Foreign Exchange Reserves
There was a sharp increase in oil and commodity prices during 2008.Foreign investment shrunk and foreign exchange reserves started eroding and in a few months reduced to 4 billion dollars, while rupee was devalued more than 25 percent. Fiscal and current payment deficits started increasing sharply. Previous government, due to vested interests, didn't pass on the increase in oil and commodity prices to the consumers and stability of economy was put at stake. In order to stabilize the economy, government took 7.6 billion dollar loan from IMF in July 2009.

There was sharp increase in external debt during the last two years and an increase of 20 billion is expected in next five years. According to IMF observation, Pakistan will not face any difficulty in payment of service charges of external debt. In 2010-11, external debt will be 34.1 percent of GDP, after that it will start falling and will reduce to just 31 percent in 2015-16.

Yearly increase in external debt, basically, is due to availability of scheduled loans of IMF and payments. External debt will start stabilizing, when government will pay the standby loan of IMF. Pakistan will not spend more that 2 billion dollars per year in next five years, on service charges of these IMF loans, because loans taken from other sources are long term and on concessional rates. If exports are frozen and economy doesn't show significant growth, then external debt can cross the bearable limits.

Minimizing Fiscal Deficit
Our basic problem is that, from day one, we are spending more than our income. Neither did our rulers take any serious measures to increase the revenue of government, nor did they formulate any strategy to control non developmental expense. Incumbent government is towing the same line, as the previous government.

Neither has it been able to impose tax on agriculture nor has it been able to convince the resourceful and powerful businessmen and industrialists to pay taxes honestly. Instead government cuts the development expense to minimize the fiscal deficit, resulting in negative impact on efforts for development of social and economic infrastructure and increase in poverty and unemployment.

It is important that government should review its income and expense policies on emergency basis and bring in the tax net, all sectors of economy, abolishing all tax exemptions and nondevelopmental expense should also be reduced. If exports are frozen, government fails to control the slowing economy and private investment doesn't take place in economic sectors, then there will always be a chance of external debt crossing the tolerable limits.

Pranab Mukherjee's General Budget

There are many a thing in the general budget presented by Finance Minister Pranab Mukherjee on 26 February, as were expected by economists. At the same time, there are other areas where despite having taken harsh decisions, softness has been employed in the budget proposals.
There was a general opinion that the government may withdraw stimulus packages. Even the Economic Survey, 2009-10 had hinted at the same. Yet, avoiding withdrawal of the package immediately, there is a proposal to withdraw these packages gradually and slowly. This made the industrialist community heave a sigh of relief.

The economic survey portrays the growth rate for this fiscal year at 8.7 percent. Yet the finance minister, going far ahead of it, has thrown many encouraging hints maintaining that the achievement of 10 percent growth rate is not much beyond our reach. Even during the new fiscal year, the growth rate is expected to be at 9 percent. The budget proposes to enhance allocations for the National Rural Employment Guarantee Act (NREGA) and Rajiv Awas Yojana, heavily. Continuance of one percent subsidy on the rate of interest for the home loans for yet another year carries good news for both homebuyers and the builders. It would certainly help the reality sector to come out of the grip of recession.

Education Sector
By allotting Rs.310.36 billion for school education, the government has taken a step toward reform in primary and secondary education providing free education. Yet, there is no hint whatever at reining in the institutions of higher learnings and private technical and training institutions which charge exorbitant fees. Reining in these institutions to bring down their fee structure is extremely necessary to enable the common man to aspire for high education.
By increasing the allocation by 75 percent for urban development it has been pegged Rs.54 billion. Though, a mention has been made to improve infrastructure in urban and rural sectors and a huge amount of Rs.1.735 trillion has been earmarked yet, the government appears to be inclined more toward urban development. The government has stressed the need of paying attention to public expenditure and providing resources yet, there is no mention whatsoever of any concrete measure for the same.

Step Toward Privatization
The announcement of earning Rs.250 billion through disinvestments, is yet another step toward privatization. Yet, one wonders how the government would deal with issues like employment of those working in this sector and other issues. Empirically speaking, earlier experience of the government in this regard has not been much successful. Yet the decision to provide services to the economically weaker sections of the society is an appropriate one.
It is only for conjecture how far would the initiatives taken toward power and energy sector be successful and effective, because despite best efforts of the government in this sector, there has been no worthwhile improvement and the progress has been rather slow. The finance minister also made a mention of initiation of measures to check inflation and price rise. Yet, until concrete results of such announcement are visible, it is difficult to appreciate them.

Revamping of Income Tax Slabs
The most significant and entirely unexpected decision in the budget is the revamping of income tax slabs, which aims at providing relief to the middle class. Under the new slab, structure, those earning up to Rs.500,000 a year would pay income tax at the rate of 10 percent, earlier it was 20 percent. The decision would provide relief to 60 percent of taxpayers. However, the common man has been further burdened by the increases in the prices of diesel and petrol.

It would have its impact on public transport and freight section. This would nullify the measures the government's efforts in chocking price rise and may further escalate prices of essential commodities and consumer goods. It was however, already expected by the people. On the whole, the budget proposals, if not laudable, contain some good decisions, which were not being expected of the government.

Highlights of Budget

* Taxes on big cars and SUVs increased 2 percent to 22 percent
* Basic duty of 5percent on crude oil restored
* Tax on cigarettes, cigars and chewing tobacco up
* Rs 26,000 crore revenue loss due to cut in direct taxes
* Partial roll back of reduction in central excise duty
* IT returns forms for individual tax payers to be further simplified
* Expenditure in 2010-11 estimated at 11,l8,749 crore
* Fiscal deficit estimated at 5.5 percent in 2010-11; 1 percent improvement over 2009-10
* 46 percent of plan allocations in 2010-11 will be for infra
* Implementation of direct tax code from April 2011
* FDI flows in April-Dec 2009 $20.9 billion
* National Social Security Fund created for workers in unorganized sector
* National Clean Energy Fund to be established
* Exclusive skill development program for textile sector
* Banking facilities to be provided to all habitations with a population of 2,000 and more
* New fertilizer policy from April 2010
* Toy balloons, water filters, refrigerators, mobile equipment, set top boxes, CDs cheaper

Economic Survey (2008-09)

The pre-budget Economic Survey for 2008-09 presented in the Parliament India’s economic growth may accelerate to about seven per cent this year provided there is a normal monsoon and the government undertakes sweeping reforms like abolition of fuel subsidies and expansion of infrastructure.
Growth Rate and Inflation
The speed at which the country’s economy would return to a high growth trajectory in the short term also depends on a revival of the global economy, particularly the US economy, the survey stated. India should be back on the path of 8.5 percent to 9 percent growth per annum provided policy and institutional bottlenecks are removed, it added.
The survey, prepared by the finance ministry, also said inflation was no longer a worry and called for an urgent return to the targeted fiscal deficit of three percent. The deficit grew to 6.2 percent in 2008-09 as the Government unleashed stimulus spending to insulate the economy against the global meltdown. The survey also called for offloading equity in public sector undertakings, reform of fertilizer and food subsidies and auction of third-generation cellular phone spectrum.
The survey said the government should take advantage of the recent low price in oil costs to deregulate petrol and diesel prices. It also urged it improve the investment climate including hiking the foreign investment cap in insurance to 49 percent from 26 percent. Foreign Direct Investment (FDI) in multibrand retail should be allowed, starting with food retailing, and price controls on sugar and fertilizers should be removed, the survey noted.
Manufacturing: The survey said the size of the Indian market and the unmet demand for industrial products provides reasonable hope that demand would not be a constraining factor. There is also a reasonable consensus that given the market situation, industry is unlikely to face a price deflation, it said.
It said manufacturing posted 2.4 percent growth in the last fiscal against 8.5 percent in the year-ago period. The pace of slowdown accelerated in the second half of 2008-09 with the sudden worsening of the global financial markets and a bleak economic outlook. With jobs getting lost by the thousands as a fallout of the downturn, the survey asked the government to review labour laws for pushing growth in employee-intensive sectors.
Exports: The Government should slash customs duties, streamline export promotion schemes and pay special attention to infrastructure to overcome the contracting exports on account of the ongoing recession faced by India’s major trading partners, the survey stated.
The survey stated that besides short-term relief measures and stimulus packages, some fundamental policy changes are also needed for the merchandise trade sector.
The survey called for “weeding out unnecessary customs duty exemptions” and rationalising the tax structure, including specific duties, in a calibrated manner, taking into account the specific duty levels prevailing in the trading partner countries.
Fiscal Deficit: The government should also assess the possibility of entirely eliminating fiscal deficit, but with flexibility that it could be widened at a time of economic slowdown, the survey suggested. It urged the government to review the possibility of zero fiscal deficit as part of Fiscal Responsibility and Budget Management (FRBM) II.
Tax Reductions: Noting the country’s tax system continues to be complex, the survey asked the government to undertake further reforms including implementation of a uniform tax structure. It said the introduction of a Goods and Services Tax (GST) would be opportune for deepening the reforms process already underway. GST is scheduled to be implemented from April 1, 2010.
Public Sector Undertakings: Some of the suggestions in this year’s Survey are extremely sensible, such as subsidising kerosene only for non-LPG and non-electricity rural homes, ending leakage of subsidies, introducing a new income-tax code or phasing out a plethora of transaction taxes, surcharges and cesses.
The advice to rein in the burgeoning deficit and put the government back on the path of fiscal responsibility is laudable. To do this, the Survey suggests the government can get Rs 25,000 crores annually through disinvestments: offloading 10 per cent from unlisted PSUs after getting them listed, and auctioning off loss-making PSUs. It has also advised the Government to decontrol oil, fertiliser and drug prices in order to further stimulate the economy.
The biggest items of reform are the disinvestment proposals in the Survey. It suggests selling 5-10 per cent equity in identified profit-making non-Navratna PSUs, listing of all unlisted PSUs and selling of a minimum of 10 per cent equity to the public, auctioning of all loss-making PSUs that cannot be revived, and negative bidding in PSUs with zero net worth in the form of debt write-offs.
Assessment
The survey is critical of the way the oil price hike was handled, but it supports the politically sensitive issue of freeing the petrol and diesel prices from government control. It means consumers will pay global rates of oil and government subsidy will cease. The housewife will get only six to eight cylinders of subsidised cooking gas in a year and for the rest she will pay the market price. The sudden hike in the petrol and diesel prices on Wednesday has already shocked consumers and more such shocks are possible in future should the oil prices shoot up again.
Timely implementation of the projects is, therefore, essential to maintain their financial viability. Then there are policy and regulatory gaps, inadequate availability of long-term finance and inadequate capacity of the private sector. As part of the solution, the survey has called for establishing a regulatory authority for the transport sector covering the highways, railways, ports and airports.
The recommendations may not be fully reflected in the budget. Yet, its survey of the macroeconomy and its analysis indicate the direction in which government policy would be moving.
Highlights of Economic Survey
* Unleash reforms - phase out cesses, surcharges and transaction taxes (such as commodities transaction tax, securities transaction tax and Fringe Benefit Tax)
* Introduce new Income Tax Code that results in neutral corporate tax regime
* 7-7.5 percent growth possible in 2009-10
* Allow 49 percent FDI in defence and insurance; permit FDI in multi-format retail starting with food
* Proposes another round of fiscal stimulus including tax cuts and increase in expenditure
* Decontrol petrol and diesel prices; end Government monopoly in railways,
* coal and nuclear energy
* Lift all bans on future contracts to restore price discovery; decontrol sugar and fertiliser
* Revitalise disinvestment programme to generate Rs 25,000 crore annually, list all PSUs and auction those beyond revival
* Economic growth decelerated in 2008-09 to 6.7 per cent from nine per cent in 2007-08
* Fiscal deficit in 2008-09 shot up to over 6 per cent from 2.7 per cent in 2007-08
* Survey indicates FRBM-II to get back to path of fiscal consolidation
* Complete the process of selling 5-10 per cent equity in identified profit-making non-’Navratna’ PSUs
* List all unlisted PSUs and sell a minimum 10 per cent equity to public.
* Auction all loss-making PSUs that cannot be revived
* In PSUs with zero networth, allow negative bidding in the form of debt write-off
* Auction 3G spectrum
* The auctioned spectrum must be freely tradable, with capital gains on spectrum to be taxed under the Income Tax Act
* Rationalise Dividend Distribution Tax to ensure full single taxation of returns to capital in the hands of the receiver
* Reform petroleum (LPG, Kerosene), fertiliser and food subsidies to reduce leakages and ensure targeting
* Limit LPG subsidy to a maximum of 6-8 cylinders per annum per household
* Phase out kerosene supply-subsidy by ensuring that every rural household has a solar cooker and solar lantern
* Review customs duty exemptions and move to a uniform duty structure to eliminate inverted duties
* Implement GST from April 1, 2010
* Rapid operationalisation of UID Authority within 3 months
* Agriculture growth fell sharply to 1.6 per cent in 2008-09 from 4.9 per cent
* Exports grew at 3.4 per cent to 168 billion dollar in 2008-09 from 163 billion dollar in previous fiscal
* Imports grew at 14.3 per cent to $287.75 bn from $251.65 bn
* Trade balance deteriorated to $119.05 bn from $88.52 bn.