Pre-Budget Discussion

Agenda of the Discussion

Revenue Receipts

Capital Receipts

Expenditure

Deficit

Reasons for Indias Fiscal Deficit

Income for Government

Revenue receipts

Capital Receipts

Revenue Receipts
Non Tax Revenues

Tax Revenues B
It consist of taxes on Income and Goods & Services.

Primarily Consists of Interest receipts from States

75% of income earned by Indian Govt comes from taxes.

Dividends
Profits earned by state companies

Govt levies 2 kinds of taxes: Direct taxes & Indirect Taxes

Revenue Receipts Indian Scenario

1. Corporate tax contributes the maximum in govt coffers, but this is highly vulnerable to economic cycles.

2. Over all direct tax contribution is 50-60%. 3. Share of services sector in Indias GDP is over 60% but its contribution to tax revenue is only 9%.

Capital Receipts
Capital Receipts refers to inflows to the government, that are not regular in nature. Eg: Borrowings, Repayments or proceeds from sale of asset. Small Saving Schemes Small savings schemes have a crucial role in public finance. Eg: Post office Savings A/c, NSC, PPF ,MIS etc.

Borrowings

Disinvestment

If Govt expenses are higher than the income, then to make good the deficit the government has to resort to borrow.

It is an activity where by government offloads its stake in a PSU to the investors.

Capital Receipts Indian Scenario

1. Borrowings: In the recent years Borrowings constitute 80% of Capital Receipts. 2. Disinvestment: Disinvestment is an activity totally dependent on the market sentiments. For the year 2011-2012 the governments target of disinvestment was 40,000 crores, but only 1145 crores has been realized due to market conditions. 3. Small Savings: Capital receipts via small savings are also dependent on alternative investment options like FDs, Equity etc where a consumer ideally chases higher returns. So higher the interest rates in alternative schemes more will be the flow of funds from Small Saving schemes. 4. Failure of the government to raise funds via disinvestment & Small saving schemes has increased its market borrowings.

Trivia: In the year 2010 , the government had its biggest windfall gains in form
of 3G auction. The govt got 67,715 Crores from it, which was used by the govt to reduce its borrowings and cut the Budget Deficit.

Expenditure
Government spends for two purpose: Managing day to day activities (Revenue Expenditure) OR creating Income Generating Assets (Capital Expenditure) A part of govt spending is known as Planned Expenditure (as per 5 Year Plan), all other expenditure done is non-plan expenditure.

Salaries Pension Non Plan Expenditure Defense Interest payment Subsidies

Salaries & Pensions are pre-committed expenses and hence it is difficult to scale them down.

Defense Expenditure is stable @ 10% of Expenditure

Expenditure Indian Scenario

1. About 87% of Govt spending is in form of revenue expenditure, the remaining 13% is capital expenditure. 2. Interest payments: They are directly proportionate to the government borrowings. About 26% of government expenses are towards interest payments. 3. Subsidies: Of the Subsidies total: Food 36.9% Fertilizers 33.5% Petroleum 23.4% , they share a direct relation with actual price of commodities. 4. Apart from this, budgets do not show liabilities like Oil Bonds, Fertilizer bonds that are issued by Govt to arrest cash outflow. In reality such bonds just postpone the impact of subsidy on future years.

Trivia: The mechanism for oil bonds was devised in 2005-06. Bonds being in the nature of deferred payment, help the government keep the bloating oil subsidy bill off its budget. For compensating the losses of OMCs from 2009-10, the government shifted from a system of bonds to cash. The transition from bonds to cash impacted the governments fiscal deficit, but helped the oil marketers as it improved their liquidity

Deficit
Revenue Deficit
Revenue Deficit = Revenue Expenditure Revenue receipts. A revenue Deficit will mean that govts Tax and non tax revenues are not enough to cover the current running expenses.

Fiscal Deficit
Total Expenditure All receipts except inflows from borrowings.
Indicates the flow from tax, non tax, disinvestments etc are not enough to cover total expenditure.

Primary Deficit

Fiscal Deficit Interest Payments.

Measures the current fiscal position by excluding the impact of debt taken in earlier period.

Deficit Indian Scenario

Revenue Deficit: Since 1980 81 Indias revenue a/c has been in deficit every year.

Fiscal Deficit: Deficit in 2010 11 was 5.1% of GDP. In 2011-12, the deficit may overshoot the targeted 4.6% and is estimated to be around 5.9% of GDP.

Reason being slow growth depressed direct tax collections and inability of the government to meet its non-tax revenue targets because of difficulty with asset sales.

Deficit Indian Scenario

Reasons For Indias Fiscal Deficit

FRBM (Fiscal Responsibility & Budget Management Act)

The rational of FRBM, was that Tax & Non-Tax Revenues will be used to cover current expenditure & capital expenditure will be met by moderate borrowing. As per the target, Revenue Deficit had to be nil in 5 Years, beginning 200405. Fiscal Deficit to be reduced to 3% of GDP by 2008-09. Impact of Adopting FRBM: Impact can be gauged from 2003 04 to 200708: GDP grew @ Avg 8.8% Corporate IT increased Overall expenditure grew @ slower rate. Revenue Deficit Declined to 1.1% & Fiscal Deficit declined to 2.5% of GDP by 2007-08.

Reasons For Indias Fiscal Deficit

FRBM (Fiscal Responsibility & Budget Management Act)

Halted Progress: The budget of 2008-09 overturned this fiscal progress : Farm Loan Waiver (60,000 70,000 Crore) Outlay on NREGA Pay Hike (Sixth Pay Commission) Two externalities also impacted the budget: Steep Rise in commodity & Oil price 2008-09 (140$/Bbl) Fiscal Stimulus package was announced to counter the impact of global financial crisis of 2008. T hese factors led to relaxation of FRBM deficit for 2008-09 & 2009-10.

What to Expect From the Budget

Populist Reformist

Political Scenario
No budget gets completed without having a political angel attached to it. In the recent concluded polls, Congress party has been defeated in 3 states out of four, leaving very little room for it to push ahead with reforms.

DTC - 2012
The Direct Taxes Code (DTC) is said to replace the existing Indian Income Tax Act, 1961.[1] If approved, the DTC shall come into force on the April 1, 2012, and shall be applicable for income earned during the financial year 2012-13.

DTC 2012 - Highlights

Tax Rates

Deduction & Exemption

Wealth Tax

The basic genesis of FSB was based on the following: Per-capita cereal production had declined Income levels of the poor had been stagnant FSB calls for reviewing the food security issue not only in terms of production of cereals but also in terms of improving the Nutritional Outcome for the poor

Food Security Bill

Thank You