Indian Economy, 5th edition (88 page)

THE ECONOMY TODAY: 2013-14

Global financial crisis has taken its toll on the Indian economy in a great way. As per the latest
World Oultlook
released by the
World Bank
, situation looks a little bit improving. In the case of India, the financial year 2012-13 has been completed and the new year., i.e., 2013-14 has already commenced, the fiscal situation of the economy has shown
symptoms of revival
– as has been announced by the Finance Minister, the Chief Economic Advisor to the MoF, the RBI, the Prime Minister’s Economic Advisory Council – almost all who matter in the case of India are optimistic – and so is the business and industry. The present fiscal situation of the economy is being highlighted here briefly.
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Non-Tax Revenue

According to the latest
Economic Survey 2012-13
, non-tax revenues grew at a compound annual rate of
7.6
per cent in the 10 years ending 2009-10. The spurt in 2010-11 owed to higher-than-budgeted realisation from the proceeds of auction of telecom 3G/broadband wireless access spectrum. As against the estimated revenue of Rs. 1,25,435 crore in 2011-12 (BE), the realisation fell marginally short at Rs. 1,24,307 crore notwithstanding the fact that the
auctions of telecom spectrum
and Phase III FM Radio which were to bring in Rs. 14,600 crore could not take place.

Budget 2012-13 estimated a growth of
32.0
per cent over 2011-12 in non-tax revenue (mainly on account of estimated receipts of Rs. 40,000 crore from the telecom spectrum auction). As the 2G telecom spectrum auction elicited
lukewarm response
on account of the high reserve price in the current year, the government has revised the reserve price downwards. As such, the proceeds from this component are as yet an important risk to the actual fiscal outcome for 2012-13. The other main component is
dividends
and
profits
from PSUs which also remained sluggish.

Non-Debt Capital Receipts

Recoveries of loans and disinvestment are the two key receipts of the non-debt capital variety which have remained subdued through the past two years – as per the latest
Economic Survey 2012-13.
As against Rs. 16,897 crore in 2011-12, Budget 2012-13 had placed recoveries of loans at Rs. 11,650 crore. The
12th Finance Commission’s
recommendation against loan intermediation from the centre to states, coupled with the fact that such recoveries of loan have become a minor source in the receipts side has resulted in
disinvestment
assuming greater importance.

As against Rs. 40,000 crore budgeted under disinvestment in 2011-12, actual receipts were Rs. 15,622 crore on account of the subdued financial market conditions. The Budget for 2012-13 has estimated that Rs. 30,000 crore would accrue in 2012- 3. In April-December 2012, receipts under this head were Rs. 8,178 crore.

The government has taken several steps to expedite the process of disinvestment. The Cabinet Committee on Economic Affairs has approved disinvestment in some of the big profit-making PSUs recently together a proposal of Exchange-Traded Fund (ETF) for the stocks of the listed PSUs.

Expenditure Trends

Given the large unmet minimum needs of development, and factoring in the resource availability, the annual budgets estimate the expenditure to be incurred for the year with due consideration to the level of fiscal deficit that is required under the FRBM mandate. Rapid reduction in expenditure as part of fiscal consolidation is constrained by the level of committed expenditure on interest payments, defence, civil service pay and pensions, etc., which appropriate large part of the revenue receipts on the one hand, and the need to step up development expenditure that is so critical for raising the level of welfare of the masses on the other.

Thus, the annual budget has to maintain a
delicate balance
between the need to reduce the expenditure that is perceived as non-developmental, given the structural rigidities in the key expenditure components and the needs for raising the levels of development expenditure for inclusive growth. It is in this context successive budgets have focused on ‘reprioritisation of expenditure’.

In the post-FRBM period, prior to the global crisis, total expenditure as a proportion of GDP was brought down from
15.4
per cent in 2004-05 to
13.6
per cent in 2006-07. Following the global crisis and the fiscal stimulus that followed, this proportion rose in excess of
15.7
per cent in 2008-09 and
15.8
per cent in 2009-10. Notwithstanding the significant fiscal consolidation achieved in 2010-11 when the stimulus measures were partially rolled back, total expenditure as a proportion of GDP was placed at
15.4
per cent, which was possible due to the one off nature of surge in non-tax revenues from ‘3G/BWA telecom spectrum auction/proceeds’ as well as high levels of nominal GDP.

Subsidies

The Budget for 2011-12 had estimated total subsidies expenditure to be contained at
14.0
per cent of GDP, but as there was an overshooting on account of the high global oil prices and the insufficient pass through to domestic oil and fertilizer prices. The overshooting of expenditure on subsidies was also because of the accounting changes which placed all subsidies ‘above the line’. The Budget for 2012-13 estimated growth in total expenditure at
13.1
per cent over 2011-12 and sought to restrict expenditure on subsidies to
2 per cent of GDP
(as against a provision of Rs. 23,640 crore in 2011-12 for oil subsidies, the Budget for 2012-13 provisioned an amount of Rs. 43,580 crore assuming a certain level of global crude oil price).

In the event, the Indian basket crude oil was $107.52 per bbl (April-December) in 2012 and even with the pass through effected in the course of the year, under-recoveries of OMCs surged and were estimated at Rs. 1,24,854 crore during April-December 2012-13. As the bulk of the under-recoveries is accounted for by two subsidised products, viz.
diesel
and
LPG
, the government raised diesel prices by Rs. 5 per litre and capped the subsidised cylinders at
six
per connection per year in September 2012. With continued rise in prices, on
January 17, 2013
the government further permitted OMCs to raise
diesel prices
in small measures periodically. However, in order to protect household budgets, it simultaneously raised the annual LPG cap from
six to nine
cylinders per connection.

The high level of global crude oil prices also has a significant bearing on the level of
fertilizer
subsidies because it is not only a key input as feedstock, but also because there is inadequate pass through in urea (the major domestic fertilizer) prices. Subsidy on fertilizers had increased substantially from Rs. 32,490 crore in 2007-08 to reach Rs.60,974 crore in 2012-13 (RE). The government has been calibrating pricing policies to address the issue of burgeoning fertilizer subsidies. One of the important decisions taken was to fix per tonne subsidy on key non-nitrogenous fertilizers, thereby limiting the increase in subsidy outgo to the extent of increase in consumption.

Another major subsidy outgo in recent years, growing at an annual average rate of 25.4 per cent in the last five years ending 2011-12, is on account of
food
. While the targeted public distribution system (TPDS) accounts for the bulk of the food subsidy outgo, there are other welfare schemes under which food subsidy is provided. A part of the subsidy outgo also owes to the carrying cost of the
buffer stock
, which has mounted in recent years. In terms of the merits of subsidisation, priority needs to be accorded to food subsidy in view of the under-consumption of basic food by the poor and the extent of malnutrition in the country. The government has sought to correct this through the National Food Security Act, though concerns have been expressed that this will lead to a higher subsidy outgo. However, it is a part of the challenge of
prioritisation
to provide for this basic minimum need even as other items of expenditure are minimized. Further, there is need for better targeting of subsidies and for reducing leakages involved in their delivery.

Direct Benefit Transfer (DBT)

The DBT plan was introduced on
January 1, 2013
with seven schemes in 20 districts. India has embarked on a DBT scheme in selected districts wherein it has been envisaged that benefits such as scholarships, pensions, and MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) wages will be ‘directly credited’ to the bank or post office accounts of identified beneficiaries. The DBT scheme
will not substitute
entirely for delivery of public services for now. It will replace neither food and kerosene subsidies under the TPDS nor fertilizer subsidies. The DBT is
designed
to –

(i)
improve targeting,

(ii)
reduce corruption,

(iii)
eliminate waste,

(iv)
control expenditure, and

(v)
facilitate reforms.

Electronic transfer of benefits is a simple design change and transfers that are already taking place through paper and cash mode will now be done through electronic transfers. This has been enabled by rapid roll out of
Aadhar
(Unique Identity) now covering 200 million people and rapidly growing to cover 600 million (nearly half of our population), with the
National Population Register (NPR)
covering the other half of the populace. The DBT in tandem with such unique identification will ensure that the benefits reach the target groups faster and minimize ‘inclusion’ and ‘exclusion’ errors as well as ‘corruption’ that are associated with manual processes.

Interest Payments

The cumulative impact of the level of deficit and debt is reflected in the interest payments outgo. As a proportion of GDP, interest payments fell in the post FRBM period and have continued to be low at around
3.1
per cent in recent years notwithstanding the rise in fiscal deficit. A part of this owed to lower growth in interest payments visà-vis nominal GDP. As against an average annual growth of
12.7
per cent in interest payments in the last five years ending 2011-12, annual average nominal GDP growth was
15.9
per cent.

It would be instructive to note that the base for interest payments is the cumulative debt in the previous year plus the incremental assumption of debt in the current year. The average
cost of borrowing
thus measured is placed at
7.9
per cent in 2011-12 and was budgeted to remain at the same level in 2012-13.

Pay Allowances and Pension

Pay and allowances constituted
0.9
per cent of GDP in 2007-8, rising to 1.4 per cent of GDP in 2009-10 on account of the implementation of the award of the
Sixth Central Pay Commission
. For 2011-12 it was at
1.1
per cent of GDP – but some moderation has been there and is estimated to be at
1.0
per cent for the 2012-13 (RE).

Similarly, pension constituted
0.5
per cent of GDP in 2007-8 and rose to 0.9 per cent in 2009-10; it is placed at
0.6
per cent in 2011-12 and 2012-13. A longer time trend analysis reveals that growth in pensions was very modest prior to 2004-05 and subsequently picked up due to the impact of the contributory scheme (i.e., the New Pension Scheme) introduced for fresh entrants to government service in addition to the outgo under the earlier pension scheme with undefined contribution. In tandem with pay and allowances, pensions also grew sharply in 2008-09 and 2009-10, reflecting the impact of the Sixth Pay Commission.

States’ Finances

While there has been some stress in central government finances in recent years, the finances of states are in
fine fettle
. The combined gross fiscal deficit of states did not exceed
3.0
per cent of GDP even in the years of global crisis. After reaching a level of
1.5
per cent of GDP in 2007-8, the fiscal deficit of states rose to 2.9 per cent in 2009-10 but has moderated to
2.1-2.3
per cent subsequently.

As a proportion of GDP,
tax receipts
moderated in 2008-09 and 2009-10 and together with stable non-tax receipts helped in fiscal consolidation notwithstanding a small rise in 2011-12. With the exception of 2009-10, the combined position of states in terms of
revenue deficit
has been one of
surplus
.

Besides, what is noteworthy is that there has been an improvement in the
quality of expenditure
with a rise in capital expenditure to GDP ratio and development expenditure. However, as with many other economic indicators, there are large inter-state variations in the attainments in terms of fiscal outcome.

One concern arising from state finances is that there is incomplete information on extra-budget activities and quasi-fiscal activities. The
RBI’s Study of State Budgets 2012-13
has indicated that notwithstanding the information gap, fiscal transparency at state government levels has increased. One of the main problems with states’ finances is in the financial health of the
power distribution
companies, which continue to accumulate huge losses [estimated at Rs. 1,90,000 crore at end-March 2011] – mainly on account of:

(i)
Non-revision of tariffs,

(ii)
Subsidy arrears,

(iii)
High aggregate and technical losses, and

(iv)
the high cost of buying short-term power.

Thus, continued reform initiatives are critical for maintaining sound finances of the states – recently
(mid-April 2013),
the GoI approved a loan component to the loss-making state electricity boards (SEBs) for the ‘restructuring and reforms’ of their power sectors.