Transcript Overview of the Indian Economy: Budget 2008 and beyond

Overview of the Indian Economy:
Budget 2008 and beyond
By A.V. Vedpuriswar
The Indian Economy at a glance
•The Indian Economy
1990
1999
2000
2001
2002
2003
2004
2005
2006
2007
-91
-00
-01
-02
-03
-04
-05
-06
-07
-08
GDP at factor
cost
5.6
6.1
4.4
5.8
4
8.5
7.5
9.4
9.6
8.7
Manufacturing
9
7.1
5.3
2.9
6
7.4
9.2
9.1
12.5
9.8
Foodgrain (Mt)
176
210
197
213
175
213
198
209
217
219
WPI
12.1
3.3
7.2
3.6
3.4
5.5
5.1
4.1
5.9
4.1
FDI ($mn)
97
2093
3272
4734
3217
2388
3713
3034
8479
FII ($mn)
0
2135
2590
1952
944
11356
9287
12494
7062
-
Forex reserves
($bn)
2.2
-
40
51
72
108
136
145
272
-
IPOs (Jan-Dec)
-
-
-
525
1981
1940
12402
9918
24779
33912
GEN0190n.ppt
3
The Rupee vs Dollar
GEN0190n.ppt
4
EIU forecasts
Key indicators
Real GDP growth (%)
Consumer price inflation (av;
%)
2007 2008 2009 2010 2011 2012
8.7
7.8
7.2
7.4
7.7
8
6.4
5.8
5.5
5.2
5
5.2
Budget balance (% of GDP)
Current-account balance (%
of GDP)
-3.2 -3.1 -2.9 -2.8 -2.7 -2.5
Lending rate (av; %)
13.1 12.8
Exchange rate Rs:US$ (av)
41.3 38.5 36.4 35.5
Exchange rate Rs:¥100 (av)
35.1 37.8 37.9
-1.2 -2.4 -1.5 -1.5 -2.1 -2.7
12
11
10
10
35 34.5
38 38.1 37.6
Highlights of Economic Survey
Economy will slow down to 8.7% in 2007-08
Inflation projected at 4.4 per cent in 2007-08.
Holding 9% growth will be a challenge.
Inflation and infrastructure are the biggest growth challenges.
Skill dearth is causing attrition, wage hike; pushing inflation
Agricultural growth in FY'08 is seen at 2.6%, against 3.8% a
year ago.
Industrial growth slower at 9% in first 9 months of FY'08.
Recommendations in survey
Complete the process of selling 5-10% equity in previously
identified profit making non-navratna PSUs.
Phase out control on sugar, fertilisers, drugs.
Sell old oil fields to private sector.
Allow a share for foreign equity in retailing.
Raise foreign equity in insurance to 49 per cent.
Allow 100 per cent FDI in greenfield private agri banks.
Key challenges
Challenges
Although BPO, IT, Telecom, manufacturing have boomed in
recent years, India’s economy remains mostly agricultural.
Many parts of the economy are cut off from free trade.
Restrictions on FDI make growing businesses difficult.
Economic reforms, especially labor market reforms, have been
slow in coming.
Even without significant reform, India’s economy has
performed so well (growing by 9.4% in the fiscal year ending in
March 2007) that it may be overheating.
Huge supply side challenges remain. Especially when we
consider that by 2025 the country could have more than 580m
middle class consumers
- Source : The Economist
Three main barriers to growth
Multiplicity of
regulations governing
product markets
Distortions in the
market for land.
• Unfairness and
ambiguity
• Uneven
enforcement
• Reservation for
SSIs
• FDI restrictions
• Licensing
• Unclear
ownership
• Counter
productive
taxation
• Inflexible zoning,
rent and tenancy
laws
GEN0190n.ppt
Widespread
government ownership.
•
11
Growth inhibitors

According to McKinsey (2001) these
factors inhibit GDP growth to the extent
of 4% plus every year.
Using resources effectively
Clearly this is the need of the hour
But what does the data tell us?
A quick look at Union Budget
2008
2008 Budget at a glance (Rs Crores)
2006-07
(Actuals)
2007-08
(RE)
2008-09
(BE)
Revenue receipts
434,387
525,098
602,935
Capital receipts
149,000
187,275
147,949
Total receipts
583,387
709,373
750,888
Non plan exp
413,527
501,849
507,498
Plan exp
169,860
207,524
243,386
Total exp
583,387
709,373
750,884
80,222
63,488
55,184
142,573
143,653
133,287
-7,699
-28,318
-57,520
Revenue deficit
Fiscal deficit
Primary deficit
GEN0190n.ppt
15
Major plan expenditure
2007-08
(Rs. Crores)
Rural development
2008-09
(Rs. Crores)
17,511
18,972
8,544
10,075
Health & family welfare
12,049
14,878
Education
23,073
29,054
4,808
5,674
Agriculture
Urban development
GEN0190n.ppt
16
Where the rupee comes from?
Non tax revenue
10%
Non debt capital
receipts
2%
Borrowings & other
liabilities
14%
Service & other taxes
7%
Corporation tax
24%
Excise
15%
Customs
13%
Income tax
15%
GEN0190n.ppt
17
Where the rupee goes?
Non plan assistance to
state govt
5%
State plan assistance
7%
Central plan
19%
States’ share of
taxes/duties
19%
Other non plan
expenditure
10%
Interest
21%
Defence
11%
Subsidies
8%
GEN0190n.ppt
18
Changing revenue mix
(Rs. billion)
2004 - 05
(% of total revenue)
2008 - 09
2004 - 05
2008 - 09
Corp tax
830
2264
22
29
Income Tax
509
1383
13
18
Customs
563
1189
15
15
1007
1379
26
18
142
644
4
8
9
18
0
0
Tax revenue
3060
6877
80
88
Non tax rev
751
958
20
12
3811
7835
100
100
Excise
Service Tax
Other
Total revenue
GEN0190n.ppt
19
Budget deficit
Currently, the revenue deficit is 1% of GDP.
Fiscal deficit is 2.5% of GDP.
But does this tell the complete story?
Off Balance Sheet items
Amount
(Rs Crore)
% of GDP
Debt Waiver
60,000
1.12
Oil bonds
11,257
0.21
7,500
0.14
Food subsidy
10,000
0.19
Sixth pay commission
25,000
0.47
Total
113,757
2.13
Fiscal deficit budgeted
133,287
2.50
Gross fiscal deficit
247,044
4.63
Fertiliser subsidy
GEN0190n.ppt
21
 What
about the budget deficits of
states?
GEN0190n.ppt
22
India vs China
GEN0190n.ppt
23
China is sitting pretty
According to official estimates, China's government ran a
budget deficit of around 1% last year.
But some economists reckon that the cautious government is
understating its true fiscal health: it probably had a small
surplus.
If the profits of state-owned firms were also added in, the
government could have a surplus of around 3% of GDP.
China's public debt has also fallen to only 17% of GDP, well
below the average ratio of 77% in OECD economies.
Indeed, China has the best fiscal position of any big country,
giving the government plenty of room to cushion the economy
if demand suddenly falls.
By contrast, India, though improving, has one of the worst
fiscal positions in the world.
The Indian government claims it has reduced its deficit to an
estimated 3.3% of GDP in the year ending March, from 6.5% in
2001-02.
However, in a recent report the IMF argued that the true total
deficit is closer to 7% of GDP once we add in the state
governments' deficits and various off-budget items.
If the losses of state electricity companies are also added in,
the total deficit could cross 8% of GDP.
India's public debt is also uncomfortably high at about 75% of
GDP.
(The Economist)
Newspaper editorial
Should the Fiscal Responsibility and Budget Management
(FRBM) Act be scrapped? For this law seems to be having the
perverse effect of making the government hide more and more
of its expenditure and not show it in the Budget. The finance
minister can then claim that he is meeting FRBM targets, when
in truth he is not. Scrapping the law might encourage more
honest budgeting.
Business Standard
Sectoral Reforms
Agriculture
GEN0190n.ppt
28
Farm loan waiver
Moral hazard?
What about people who have borrowed from money lenders?
Is this the best way to help farmers?
To give a boost to agriculture?
A scorched earth policy?
Options to minimise the damage
Give borrowers with good records lower interest rates.
Lower credit limits/impose higher collateral on bad borrowers.
Reduce the risks in agriculture
This will lower the number of intermediaries and bring down
the consumer price.
And improve the realisation for farmers..
Institutional reforms
moneylenders.
(Subhir Gokarn)
to
reduce
the
dependence
on
Get back to the fundamentals
Increase output per acre.
Reduce the gap between the farmer’s price realisation and
what the consumer pays.
Reduce wastage because of poor roads, inadequate
warehousing and refrigerated transport.
Reduce the number of people dependent on agriculture.
Encourage organised retailing, contract farming, ebusiness
(A.V. Rajwade)
Industry
GEN0190n.ppt
32
No big ticket reforms in key
industries
Power
Retail
Financial sector
Financial sector reforms
Reduce micro management by RBI and SEBI.
Liberalise derivatives and commodity markets.
Encourage more competition and innovation
To be a global financial services player, India needs :
- An open capital account
- Capable and efficient markets
- World class institutions and responsive regulators
- Less intervention by RBI and MOF.
- (Percy Mistry, MIFC report)
Raghuram Rajan Committee
report
“India is dangerously complacent. Its concerns about over-sophisticated
markets resemble a clock that looks right only because it is 12 hours
behind. Indian households put only about half of their savings in the
bank, and banks funnel less than half of their credit to private firms, ….
The government's financing needs crowd out other borrowers, and
state-owned banks account for about 70% of India's financial assets ….
The cost of these financial failings is probably a percentage point or two
of growth. They leave India's savers with too little reward for their thrift,
its poorer borrowers with too few alternatives to the moneylender and
its incumbent firms with too much protection from upstarts, who cannot
raise money to compete. “
The Economist, April 12, 2008
“If America's subprime crisis demonstrates the pitfalls of untrammelled
finance, India illustrates the opposite danger. Since its regulators get
blamed only for mishaps, not for lost growth and wasted opportunities,
they are too conservative. ... New ideas are banned unless explicitly
permitted. This helps regulators feel more secure, but it does little for
the system's stability. ….For example, companies are barred from
speculating in derivatives, but many have done so anyway. Those that
have lost money now cite the very rules they broke as reason to back
out of their obligations, saying they should not pay for mistakes they
were not officially allowed to make.”
The Economist, April 12, 2008
“Last year the government banned futures trading in two types of
bean, rice and wheat, arguing that speculators were driving up
prices,…... Some in the leftist parties, … now argue it should
extend the ban to other commodities, such as edible oils and
perhaps even iron and steel.
This would be like “shooting the messenger”, argues B.C. Khatua,
chairman of the Forward Markets Commission, which regulates
futures exchanges. Before they were shut down, …. the futures
markets conveyed the message that prices of wheat and rice
would continue to rise. Sure enough, that is what happened.”
The Economist, April 12, 2008
“The futures market provides farmers with a sneak preview of the
prices they will face in the months ahead, which should allow
them to make an informed decision about what to sow. In
principle, futures contracts should also allow farmers to lock in a
price for their crops, insulating them from the vagaries of the spot
market. At the moment, farmers are too small to participate in the
market directly… small banks could aggregate the demands of
farmers up to a practical size. “
The Economist, April 12, 2008
Pensions
The existing formal pension channels don’t cover unorganised
sector workers.
Given the dismal levels of penetration of financial services, a
majority of Indian people are not contributing towards their oldage security.
The Pension Bill could bridge that gap, and give people
greater control over their retirement benefits.
Pensions ( Cont..)
But the Left has been a stumbling block
In 1981, Ronald Reagan launched the 401K plan in the US.
The US pension industry, which was $60 billion then, is today a
$9 trillion industry, with most of the money invested in equities.
Under the shadow of the Left, the government has not moved
on increasing FDI limits from 26% to 49% in insurance .
General economic reforms
Subsidies
Labour
Education
Entrepreneurship
Legal system
Not a great place for
entrepreneurs
It takes 71 days to get all requisite clearances for starting an
enterprise in India.
The same will require just five days in the US, six days in
Singapore and 48 days in China.
Legal system fails to deliver
It takes 425 days to enforce a contract in India, compared to
69 days in Singapore and 241 days in China.
According to a World Bank 2007 survey, ‘Ease of Doing
Business’, India is ranked 177th out of 178 countries in
enforcing business contracts.
Rigid Labour markets
The absence of a bankruptcy law and labour reforms,
especially the difficulty in retrenching workers, has also
reduced the competitiveness of Indian firms.
The Industrial Disputes Act, 1947—particularly, Chapter 5B—
bars manufacturing companies that employ more than 100
workers from firing employees without state government
approval.
Employers have been reluctant to add extra staff during peak
seasons because they cannot be laid off during lulls.
Despite having surplus labour in the country, many large
employers are expanding output through capital investment
wherever possible.
(Amit Mitra, Secretary General FICCI)
Education
“Higher education is a dark spot. Though FM has enhanced
allocation for education, he hasn’t done much for higher
education. Starting a few IITs is not going to make much
difference to the country. Bold steps are called for to open the
sector. While steps have been announced to invest in skills
development and education, clearly they are timid.”
Nandan Nilekani, Economic Times, March 1
“We are very keen to do more in these areas but we have our
resource constraints. So we cannot do everything at one go.”
Manmohan Singh, Economic Times, March 1
Conclusion
“Generous grants, compression, righteous rule and succour to
the downtrodden are the hallmarks of good governance.”
P. Chidamabaram in his Budget speech
Contact Information
[email protected]
GEN0190n.ppt
48