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Economic Survey chap 3 2011 12

Economic Survey chap 3 2011 12

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Published by Vikas Sharma

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Published by: Vikas Sharma on Mar 15, 2012
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Fiscal Developmentsand Public Finance
apid fiscal consolidation was effected in 2010-11 with fiscal deficit dropping to4.8 per cent of gross domestic product (GDP) from 6.5 per cent of GDP in 2009-10.The Budget for 2011-12 estimated a further reduction to 4.6 per cent of GDP to beachieved through a 16 per cent growth in tax revenue, disinvestment receipts of 
40,000 crore and moderation in growth in expenditure to 4.9 per cent. Economicdevelopments in the current fiscal have panned out very differently than wasenvisaged at the time of budget formulation. With a sharp deceleration in real GDP growth, particularly in the industry sector and continued high levels of prices in keycommodities, a slippage is likely in the deficit targets envisaged at the time of BudgetEstimates. However, with states performing better in overall terms, the combineddeficit of the centre and states appears to be on firmer footing, which augurs well forstrengthening medium-term macroeconomic prospects. The medium-term outlook is firmly on the consolidation path; albeit with a likely longer tail in terms of timehorizon.
3.2The macroeconomic environment has beenunder stress since 2008-09 when the globaleconomic and financial crisis unfolded,necessitating rapid calibration of policies. Fiscalexpansion followed in 2008-09 and 2009-10 did yieldmacroeconomic dividends in the form of a sharprecovery in 2009-10, which stabilized in 2010-11 atthe same 8.4 per cent level of growth. EconomicSurvey 2010-11 had succinctly indicated thepreponderantly structural nature of the fiscal deficitin India and underscored the need for sustainedfiscal consolidation to support medium-term growthprospects. Given this nature, the resumption of fiscalconsolidation in 2010-11 as envisaged in the Budgetfor 2010-11 was apposite and fairly ambitious. Theoutcome for 2010-11 exceeded this primarily onaccount of the larger-than-estimated growth innominal GDP and substantial gains in terms of non-tax revenues and higher than anticipated taxrevenues. Higher tax refunds in the current financialyear implies that growth of last year was overstated.The higher than budgeted non-tax revenue in 2010-11 was appropriated by the higher expenditureoutgo through supplementary demand for grants.Thus, substantial part of the better fiscal outcome(as proportion of the GDP) owed to higher nominalGDP in 2010-11.3.3The macroeconomic situation at the time oformulation of Budget 2011-12 looked positive, eventhough there was some concern about industrialslowdown. However, the persistence of inflationarypressures and consequent demand slowdown hadtheir impact on public finances with rising costsimpairing profit margins and thereby affecting levelsof growth in corporate income tax and centralexcise. With global commodity prices remaininghigh and given limited flexibility in domestic pricesetting, there have been some expenditureadditionalities with implications for the levels of deficit – both revenue and fiscal. The higher outgoin terms of tax refunds, the lower levels of non-taxrevenues and the state of the equities market thatwas inappropriate for achieving the planneddisinvestment in the first nine months of the currentfiscal make it a challenge to reach the budgetedrevenues in the current fiscal. At the same time
Economic Survey
global crude oil prices (Indian basket) averaged US$ 110.1/bbl in the first nine months, which was muchhigher than what was assumed at the time of budgetformulation. Together with the fact that headlineinflation has been high even with limited pass throughof fuel prices, these have implications for higher levels of subsidies. While efforts are afoot to rein inexpenditure overruns, it is likely that deficitcalculations may have to factor in additionalexpenditure.3.4The Budget for 2011-12 had estimated amodest decline of 
4385 crore in revenue receipts,which was placed at
7,89,892 crore over 2010-11.Given that non-tax revenues were bound to dip after a huge jump in 2010-11, revenue receipts were tobe mainly driven by gross tax revenues which wereestimated to reach
9,32,440 crore. It was alsoenvisaged that growth in expenditure would belimited to 4.9 per cent and accordingly totalexpenditure was placed at
12,57,729 crore. As aproportion of GDP, revenue deficit was to be broughtdown to 3.4 per cent and fiscal deficit to 4.6 per cent in 2011-12 (Table 3.1 and Figure 3.1). Asagainst a long-period average annual growth of 13.7per cent in nominal GDP (between 1991-92 and 2007-08), the growth since 2008-09 has been more volatile,impacting fiscal aggregates when expressed asproportions of nominal GDP. For instance, asubstantial part of the correction in fiscal deficit in2010-11 owes to changes in nominal GDP (Table3.1 A). While in absolute terms the provisional fiscaldeficit was close to the BE, as a proportion of GDPthere was sharp reduction.
3.5The macroeconomic backdrop leading to thepresentation of the Budget for 2011-12 was fairlypromising and the Economic Survey had indicated
Table 3.1(A) : Trends in Deficits due to Change in GDP
2010-11(BE)2010-11(AE) 2010-11(RE) 2010-11(QE)At the time ofAdvanceRevisedQuickBudget 2010-11EstimatesEstimatesEstimates(Estimates)GDP(CMP) (
 `  `  `  `  ` 
6934700787794778756277674148Nominal GDP growth (per cent)12.520.320.217.2 
2010-11(BE)2010-11(RE)2010-11(P)2010-11(P)Fiscal deficit (
 `  `  `  `  ` 
Fiscal deficit as per cent of GDP5.55.14.7
a return to the high growth path with a projection of 9 +/- 0.25 per cent. In terms of quarterly GDP data,growth was still strong even though there was somedeceleration in the second quarter for 2010-11.Inflation was above 9 per cent in January 2011 andmonetary policy was in a tightening mode; coreinflation was moderate and while growth in theindustrial sector as per the index of industrialproduction (IIP) was buoyant in the first two quartersof 2010-11, there was strong deceleration in the IIPin November 2010, which was seen more as a roadbump than any long-run problem; and the savingsand investment data showed promise of reverting totheir pre-crisis trajectories. Against this backdrop,the Budget for 2011-12 indicated sustaining theprocess of fiscal consolidation and announced a
Table 3.1 : Trends in Deficits of CentralGovernment
 YearRevenueFiscalPrimaryRevenueDeficitDeficitDeficitDeficit asper centof FiscalDeficit
(As per cent of GDP)
: Union Budget documents and Controller General of Accounts.BE : Budget Estimates.P: Provisional Actuals (Unaudited).
:The ratios to GDP at current market prices (CMP)are based on the Central Statistics Office’s (CSO)National Accounts 2004-05 series.
Fiscal Developments and Public Finance
plan to introduce an amendment to the FiscalResponsibility and Budget Management (FRBM) Actin 2011-12, laying down the fiscal roadmap for thenext phase.3.6Pointing to the criticality of effectivemanagement of public expenditure in sustaining thefiscal consolidation process, the Budget for 2011-12 indicated the initiatives in this regard includingthe constitution of the High Level Expert Committeeon Efficient Management of Public Expenditure, theintent of the government to extend the nutrient-basedsubsidy regime to urea and the move towards directtransfer of subsidy. While reiterating the commitmentto retaining at least 51 per cent ownership andmanagement control of the central public-sector undertakings, the Budget for 2011-12 set a
40,000crore disinvestment target . Given this situation andagainst the then estimated (Revised Estimates) levelof fiscal deficit of 5.1 per cent, the Budget for 2011-12 placed fiscal deficit at 4.6 per cent (Table 3.2and Figures 3.2 and 3.3).3.7The key objective of the FRBM Act 2003 wasto ensure intergenerational equity in fiscalmanagement and towards this end, revenuesurpluses were to be generated by a specified timeframe. The intention was that borrowings and revenuesurpluses could be channeled into capital expenditureleading to creation of assets conforming to the‘golden rule’ principle of treating borrowings only for capital expenditure. Given that there were largeintergovernmental transfers which typically in anaccounting sense could get classified as revenueexpenditure, in the Union Budget 2011-12, a newfiscal indicator, namely “Effective Revenue Deficit”was introduced to ascertain the actual deficit in therevenue account after adjusting for expenditure of capital nature. Hence the “adjusted or “effective”revenue deficit is what is of importance for equityacross generations. The effective revenue deficit for 2011-12 is projected at 1.8 per cent of GDP asagainst the revenue deficit estimate of 3.4 per centof GDP.
   P   e   r   c   e   n   t   o    f    G   D   P
Trends in deficits of the Central Government
Figure 3.1
    2   0   0   4  -   0   5    2   0   0   5  -   0   6    2   0   0   6  -   0   7    2   0   0   7  -   0   8    2   0   0   8  -   0   9    2   0   0   9  -   1   0    2   0   1   0  -   1   1   (   P   )    2   0   1   1  -   1   2   (   B   E   )
   P   e   r   c   e   n   t   o    f    G   D   P
Receipts and expenditure of the Central Government
Figure 3.2
    2   0   0   4  -   0   5    2   0   0   5  -   0   6    2   0   0   6  -   0   7    2   0   0   7  -   0   8    2   0   0   8  -   0   9    2   0   0   9  -   1   0    2   0   1   0  -   1   1   (   P   )    2   0   1   1  -   1   2   (   B   E   )

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