Indian budget

A Budget Deficit And its Implication in Indian Economy

India budget is presented in parliament on a date fixed by president. Part A of budget deals with general economic survey of country while part B relates to taxation proposals.

Our financial Minister is required to submit the budget in parliament usually on the last day of February so that the Lok Sabah has one month to review and modify the budget proposal.

If by April 1, the beginning of the country's fiscal year, the parliament discuss on the budget is completed, then only the budget as proposed by the finance minister come into effect.

Budget Division

Ø The chief economic advisor assists the concerned department officer in the process.

Ø Work under department of economic affairs.

Ø Under the supervision of joint secretary

Ø Supplementary and excess demand of state and union terrotries under the president rule.

Ø All issues relating to public debt market loan of the central government and the fixation of terms & conditions of lending.

Ø The matters related to National Savings Organisation and Small Savings Schemes, Powers, Duties and Condition of Service of the Comptroller and Auditor General of India, Accounting procedures and Classification, dealing with issues relating to National Defence Funds, railways Convention Committee and Central Road Fund.

Two Sides of Budget

Ø The internal and external budgetary Resources (IEBR).

Ø The revenues are asserting from different central taxes is the primary function of the department of revenue.

Ø Estimate of tax receipts by CBDT & CBEC in mid January based on collection figure up to 31st December.

Ø Estimate of dividends paid by the PSU s on the government share holdings.

Ø Capital receipts on account of the disinvestment.

External receipts on account borrowing from international agencies like World Bank, ADB etc to various ministries.

Ø Resources of the PSU including their operating surplus and the borrowings by them also constitute an important component of the gross budgetary resources.

Ø Estimate of earnings of PSUs done with chairman of PSUs and joint secretary MOF in august to september.

Expenditure Side

Ø Based on the inputs of different ministries revised estimate (RE) and additional fund for non plan expenditure is prepared because of over spending and under spending.

Ø Estimate of Planned expenditure for next year (Review meeting, Planning commission + ministries ->MoF) September-October

Suggestions of stakeholders

DoEA + Trade Unions + Industry Chambers + Economists + Parliamentary committee

Finance Minister and his team

Finance Minister with his team decides whether some new taxes should be levied to collect more tax, how to widen tax net in order to earn more revenue.

GDP assessment

Ø Department of Expenditure and the Department of Economic Affairs sit to decide GDP assessment for next year. Generally a nominal growth in GDP is projected.

The Budget speech of FM

Around 15th of February, some of the budget documents are almost ready and goes for printing to a press located in North Block itself. Security Agencies cordons off the press and entry is almost prohibited.

The D Day : FM delivers Budget Speech in Parliament

On 28th of February, the Finance Minister delivers Budget speech in Lok Sabha. After which Budget documents are made available. These are also put on the website.

In 2008 being a leap year, this time Budget was presented to Parliament on 29th February.

Information from budget and announcements

Ø Growth in Per capita Income in real term & savings rate, investment rate & their absolute figure

Ø Growth in bank credit,M3 expansion rate and inflation figure

Ø Report card of govt. flagship program

Ø Five year plan performance-

Ø Increase in GBS and central plan

Infrastructure

Ø Education SSA, Mid day Meal, scholorship

Ø Health sector

Polio, ICDS, HIV/AIDS,

NHRM (Drinking water & Sanitation)

Ø Employment-NREGS,SGSY,

Ø Urbanisation-JNNURM

Ø NER specific fund/region specific fund/policy

Agriculture

Ø Farm creditexpansion rate & provision for interest rate

Ø Special grant Waiver for agriculture indebtedness

Ø Provision for Particular crop

Ø Plantation

Ø Accelerated Irrigation Benefits Programme

Ø Watershed scheme

Agriculture cont.

Water resource management

Ground water recharge

Training for farmer

Fertilizer subsidy

Agriculture insurance

Grants and guarantees to Nabard

Rural infrastructure development fund(RIDF)

Rural road

Rural houses

Village electrification

Telecommunication

Social Security

Health/debilty/death insurance to BPL families

Jobs and income avenues

Capital formation

Increase/decrease in GDCF,FDI,FII etc

CPSEs investment

Infrastructure (Power)

Genration increase/decrease and proposed expansion

Coal -policy major/direction and report card

National Highways development and maintainence

Road cum rail Bridges

Funding for such development such PPP or etc

Industry

Petroleum & Natural Gas

Policy and progress

Textiles-Grant for handlooms, textile parks

Bank credit to SMEs

Service sector- Policy and support to Foreign trade, Tourism

Financial sector

Banking - Policy, disinvetment, dilution of equity.

Regional Rural Banks (RRBs)

Housing loans- Policy, support

Insurance- policy, support

Capital Market-Policy, Guideline

Tax proposal

Growth in tax revenue, direct tax, indirect tax

Indirect Tax proposals-custom duties rate hike/reduction

ANNUAL FINANCIAL STATEMENT

CONSOLIDATED FUND

CONTINGENCY FUND

PUBLIC ACCOUNTS

REVENUE RECEIPT/EXPENDITURE

CAPITAL RECEIPT / EXPENDITURE

CENTRAL PLAN

PLAN EXPENDITURE

NON PLAN EXPENDITURE

FINANCE BILL

TAX REVENUE

DIRECT/ INDIRECT TAX

NON TAX REVENUE

Expenditure By Functional Head

Budget 2008-2009

Rs. In Billions

Actual

2006-07

2007-08

2008-09

Revenue receipt

4343.9

4864.2

5250.98

6029.35

Tax Revenue

(net to centre)

3511.8

4038.7

4317.73

5071.5

Non tax Revenue

832.1

825.5

933.25

957.85

Capital receipt(5+6+7)

1490

1941

1842.75

1479.49

Recoveries of loan

58.9

44.97

Other receipt

5.3

416.5

361.25

101.65

Borrow & other liab.

1425.7

150.5

1436.53

1332.87

Total receipt

5833.9

6805.2

7093.73

7508.87

Non plan expenditure

4135.3

4754.2

5018.49

5074.38

On revenue a/c(payment)

3721.9

3835.5

4129.75

4483.52

Internal payment

1502.7

1590

1719.71

1908.07

on capital a/c

413.4

918.8

888.74

591.46

Plan expenses

1698.6

2051

2075.24

2433.86

On revenue a/c

1424.2

1743.5

1756.11

2097.67

On capital a/c

274.4

307.5

319.13

336.19

Total expenditure

5833.9

6805.2

7093.73

7508.84

Revenue expenditure

5146.1

5579

5885.86

6581.19

Capital expenditure

687.8

1226.2

1207.87

927.65

Revenue deficit

802.2

714.8

634.88

551.84

as per of GDP

1.9

-1.5

1.4

7.4

Fiscal deficit

1425.7

1509.5

1436.53

1332.87

as per of GDP

3.5

3.3

3.1

2.5

Primary deficit

-77

-80.3

283.18

-575.2

as per of GDP

0.2

0.6

1.1

Table slippage in FRBM targets:

Sl.no

Targets

2007-08

2008-9

Target

Physical Deficit

2009-10

2010-11

Budget 2005-06

2.1

Budget 2006-07

2.4

Budget 2007-08

2.3

Budget 2008-09

2.1

1.5

Revenue Deficit

Budget 2005-06

2.1

Budget 2006-07

2.1

Budget 2007-08

2.5

Budget 2008-09

2.4

Tax/GDP

Budget 2005-06

11.6

Budget 2006-07

10.5

10.8

Budget 2007-08

10.8

11.3

11.7

Budget 2008-09

11.5

12.5

Debit/GDP

Budget 2005-06

68.3

Budget 2006-07

63.4

62.1

Budget 2007-08

60.4

57.6

Budget 2008-09

60.8

58.6

54.7

51.3

IMPLICATIONS FOR THE MARKET

Auto (Positive)

Customs duty on steel melting and aluminum melting scrap reduced from 5% to 0%

Reduction in excise duties in select segments of automobiles

Excise duty has been reduced on: Small cars from 16% to 12%, Hybrid cars from 24% to 14%, Electric cars from 8% to nil

Ø Buses and other vehicle for transport of more than 13 persons from 16% to 12%

Ø Two-wheelers and passenger three-wheelers (upto 7 persons) from 16% to 12%

Auto Sector

Banking (Neutral)

Ø Banks and regional rural banks (RRBs) to offer debt waiver on all agricultural loans disbursed up to March 2007 and due until the end of December 2007. The total value of relief to be offered to farmers is estimated at Rs 60,000 cr.

Ø Advise commercial banks including RRBs, to add at least 250 rural household accounts every year at each of their rural and semi-urban branches

Ø Allow individuals such as retired bank officers, ex-servicemen etc to be appointed as business facilitator or business correspondent or credit counselor

Ø BCTT being withdrawn with effect from April 1, 2009

Ø The cost of adding more rural households in their rural branches may increase the operating cost for the PSU banks

Metal (Neutral)

Ø Custom duty on iron or steel melting scrap cut from 5% to Nil

Ø Reduction in customs duty of aluminium scrap has been reduced from 5% to Nil

Oil & Gas (Negative)

Ad valorem part of the excise duty on unbranded petrol and unbranded diesel being abolished and replaced by an equivalent specific duty of Rs.1.35 per litre. There will be only a specific duty of Rs.14.35 per litre on unbranded petrol and Rs.4.60 per litre on unbranded diesel; there will be no impact on retail prices

Ø Customs duty on crude and unrefined sulphur has been reduced from 5% to 2%

Ø Customs duty on phosphoric acid has been unified at 5% irrespective of its use

Ø Customs duty exemption presently available on naphtha for manufacture of specified polymers has been withdrawn

Ø Polymer industry will be negatively impacted

Ø Polymer is used in a host of downstream sectors such as plastics and paints which will face margin pressures

Power (Positive)

Exemption from additional duty of customs of 4% levied has been withdrawn from power generation projects (other than mega power projects), transmission, sub-transmission, distribution projects and goods for high voltage transmission projects.

Ø Fourth UMPP at Tilaiya to be awarded shortly; Chhattisgarh, Karnataka, Maharashtra, Orissa and Tamil Nadu urged to bring five more UMPPs to the bidding stage by extending the required support.

Ø Rajiv Gandhi Grameen Vidyutikaran Yojana to be continued during the Eleventh Plan period with a capital subsidy of Rs.28,000 crore; allocation of Rs.5,500 crore for 2008-09

Ø Only negative factor- Removal of exemption of additional duty of customs of 4% from power generation projects

Real Estate (Neutral)

Ø Proposal to enhance the subsidy for new houses under Indira Awas Yojana from Rs.25,000 to Rs.35,000

Ø 5-year tax holiday for 2/3/4 star hotels in UNESCO declared 'World Heritage Sites‘

Ø Extending 5-year tax holiday for setting up hospitals in non-urban cities.

Ø No relief on service tax on rentals will continue to increase pricing pressure.

Capital/Engineering Goods (Positive)

Growth in capital goods is still very high at 20.2 %, indicating that industry continues to make huge capital investments and has a positive outlook about the future

Ø Rs.800 cr allocated for the Accelerated Power Development and Reforms Project in 2008-09

Ø Thrust on power reforms augurs well for the sector

Cement (Negative)

Ø Excise Duty on clinker increased to Rs 450/MT from Rs 350/MT

Excise Duty on bulk cement at Rs 400/MT or 14% in proportion to the estimated value of the cement, whichever is higher

Telecom Sector (Positive)

Ø General rate of excise duty (CENVAT) has been reduced from 16% to 14%

Ø Excise duty has been fully exempted on Wireless data modem cards. CVD shall also be exempted on imported cards

Ø Customs duty on specified parts of set-top boxes has been reduced from 7.5% to Nil

Ø Reduction in the customs duty on convergence products from 10% to 5%

Ø Excise duty has been reduced from 16% to 8% on specified convergence products

Fiscal Policy Overview

The Union Budget 2008-09 was presented in the backdrop of impressive growth in the Indian economy which clocked about 9 per cent of average growth in the last four years.

Ø The Union Budget 2008-09 was presented in the backdrop of impressive growth in the Indian economy which clocked about 19 per cent of average growth in the last four years.

Ø Riding on the path of fiscal consolidation, the Union Budget 2008-09 was presented with fiscal deficit estimated at 2.5 per cent of Gross Domestic Product and revenue deficit at 1 per cent of Gross Domestic Product

Ø The global financial crisis in the second half of the financial year which heralded recessionary trends the world over also impacted the Indian economy causing the focus of fiscal policy to be shifted to providing growth stimulus.

The Country is facing difficult economic situation, the cause of which is not emanating from within its boundaries. However, left unattended, the impact of this crisis is going to affect us in medium to long term.

The Interim Budget 2009-2010 is being presented in the backdrop of uncertainties prevailing in the world economy. The impact of this is seen in the moderation of the recent trend in growth of the Indian economy in 2008-09 which at 7.1 per cent still however makes India the second fastest growing economy in the World.

The Phillips curve:

The Phillips curve is a historical inverse relationship between the rate of unemployment and the rate of inflation in an economy. The lower the unemployment in an economy, the higher the rate of increase in nominal wages in the short run. It has been observed that there is no relationship between inflation and unemployment in the long run. The Relationship between Unemployment and the Rate of Change of Money.

The Relationship between Unemployment and the Rate of Change of Money Wages describes an inverse relationship between money wage changes and unemployment in the economy over the period examined. Similar patterns were found in other countries and made explicit the link between inflation and unemployment: when inflation was high, unemployment was low, and vice-versa.

Many economists in the advanced industrial countries believed that these results showed that there was a permanently stable relationship between inflation and unemployment. One implication of this for government policy was that governments could control unemployment and inflation with different policies. They could tolerate a reasonably high rate of inflation as this would lead to lower unemployment - there would be a trade-off between inflation and unemployment. For example, monetary policy and/or fiscal policy (i.e., deficit spending) could be used to stimulate the economy, raising gross domestic product and lowering the unemployment rate. Moving along the Phillips curve, would lead to a higher inflation rate, the cost of enjoying lower unemployment rates.

In 1960s, a leftward movement along the Phillips curve described the path of the U.S. economy. This move was not a matter of deciding to achieve low unemployment as much as an unplanned side-effect of the Vietnam War.

Stagflation:

Stagflation is an economic situation in which inflation and economic stagnation occur simultaneously and remain unchecked for a significant period of time. The concept is noticeable partly because, in postwar macroeconomic theory, inflation and recession were regarded as mutually exclusive, and also because stagflation has generally proven to be difficult and costly to eradicate once it gets started. Economists offer two principal explanations for why stagflation occurs.

First, stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable.

Second, both stagnation and inflation can result from inappropriate macroeconomic policies. For example, central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets, together, these factors can cause stagflation.

Rise in Fiscal Deficit - a necessary evil

With the Finance Minister committing significant investments in physical and social infrastructure, the target for Fiscal Deficit has increased to 6.8% of GDP as against8.2% in the previous year. In absolute terms, Fiscal Deficit is set to increase by about 33% over Year 09 to Rs.4.01trn.We had expected little change to the Fiscal Deficit (%) in our pre-budget note, citing the need for continued investments. In our opinion, the level of Fiscal Deficit, though high, is not at an alarming level. He has indicated a target to bring down the fiscal deficit to about 14% by Year 2012.

1. The FM has budgeted for receipts of Rs.350bn from the sale of 3G telecom licenses and this may prove to be optimistic.

2. On the other hand, the FM has taken credit for only Rs.11.25bn as proceeds from disinvestment. This amount can be higher than budgeted.

3. The FM has also proposed setting up of an expert group to look into the petroleum subsidies and any further developments on the same may lead to are duction in the subsidy burden for the fiscal.

Tax reforms

On the indirect tax side, the budget has clearly stated the intention of the FM to implement the Goods and Services Tax from April 2010. The Centre and the States are expected to legislate, levy and administer the Central GST and State GST, respectively. We view this reform measure positively and believe that, it will lead to improved operational efficiencies for companies. The FM has indicated that, an agreement has been reached on the basic structure of GST with the states; we will closely watch the progress of the implementation of this reform. On direct taxes front, the FM has hinted at making structural changes to the laws to make the same much simpler. Towards this goal, a new Direct Taxes Code is proposed to be tabled within the next 45 days.

All capital expenditure, other than expenditure on land, goodwill and financial instruments are proposed to be fully allowable as deduction.

DIRECT TAXES

There have been no changes in the corporate tax rate.A section of the market was expecting a reduction in the same. Moreover, there has been no reduction even in the surcharge.

Increase in MAT - a negative

On the other hand, the budget has increased the rate of Minimum Alternate Tax (MAT) from 10% to 15%. Companies have to pay MAT on the Book profits as against the profits derived under the Income Tax Act, if the taxable income is less than 30% of the book profits. This will have an impact on the profits of the companies which are currently paying tax at lower rates. Thus, apart from others, companies in the infrastructure segment which were claiming deduction u/s 80 or companies in the exports sector which were claiming export benefits may be impacted negatively.

Most companies were recovering the FBT on ESOPs from the employees. However, with this new provision, tax will be necessarily recovered by the employer as it is now a perquisite in the hands of the employee.

INDIRECT TAXES

Budget has not made any across the board changes in the indirect tax rates. A few need-based changes have been made. As far as excise duties are concerned, there was an expectation that a part of there ductions in excise duties effected over the past six months will be reversed. However, the FM has refrained from increasing duties across-the-board with a view to maintain consumption levels. As an exception, products in the 14% duty slab will now attract 8% excise duty, with few exemptions. Also, there is no change in the peak customs duty, which remains at 20%. Are duction in the import duties would have made imports cheaper, increasing competition for the domestic industry, which is likely recovering from the recent economic slump. Service tax rates have been maintained and the scope of the same has been expanded by bringing a few services under the tax net.

Conclusion:

The budget in India is prepared by every new session and many rules and regulation are prepared to keep a control over fiscal deficit but due to corruption, forgery, etc

You may also find these documents helpful