Most components of aggregate demand slowed down in 2011-12. Investment, as noted in
aggregate capital formation as well as corporate investment intentions, has been drying up
and is expected to start improving slowly in 2012-13. Net export demand dipped reflecting
global slowdown. However, firmer oil prices have dented government’s fiscal numbers due to
high fuel subsidies and in the absence of price adjustment, added to the aggregate demand in
2011-12. While the Union Budget for 2012-13 has enunciated a commitment to cap subsidies,
any slippage in the fiscal deficit numbers will have implications for demand management and
could come in the way of reviving investment.
Investment downswing in conjunction with
net exports drags down demand
II.1 Capital formation in the economy dipped
during April-December 2011. This reflects in
part, the lagged impact of the anti-inflationary
monetary policy stance. Net exports also
declined, particularly in Q3, reflecting an
adverse base effect as well as a higher outgo on
imports due to rupee depreciation (Table II.1).
Given the Advance Estimates of the expenditure-
side growth rates for 2011-12, the implicit growth rates of private consumption expenditure
and gross fixed capital formation during Q4 of 2011-12, show a marked increase over the corresponding period of the previous year.
While consumption would benefit from the dip
in inflation and also election-related spending
in a few states, investment should improve largely on account of the base effect. This further validates growth having bottomed out
in Q3.
Table II.1: Expenditure Side GDP (2004-05 prices) |
(Per cent) |
Item |
2010-11
QE |
2011-12
AE |
2010-11 |
2011-12 |
2010-11
Apr-Dec |
2011-12
Apr-Dec |
Q1
|
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
12 |
|
Growth rate |
Real GDP at market prices |
9.6 |
7.5 |
9.5 |
8.9 |
10.1 |
7.7 |
8.5 |
6.7 |
6.3 |
9.5 |
7.1 |
Total Consumption Expenditure |
8.1 |
6.0 |
9.6 |
9.2 |
7.1 |
7.5 |
5.5 |
3.4 |
5.9 |
8.6 |
5.0 |
(i) Private |
8.1 |
6.5 |
9.3 |
8.7 |
7.6 |
8.0 |
5.9 |
2.9 |
6.2 |
8.5 |
5.1 |
(ii) Government |
7.8 |
3.9 |
11.1 |
12.2 |
4.7 |
4.9 |
2.9 |
6.1 |
4.4 |
8.8 |
4.4 |
Gross Fixed Capital Formation |
7.5 |
5.6 |
8.8 |
6.9 |
11.1 |
0.4 |
4.9 |
-4.0 |
-1.2 |
8.9 |
-0.2 |
Change in Stocks |
37.4 |
2.9 |
39.4 |
35.5 |
37.7 |
4.6 |
1.8 |
-4.7 |
-0.4 |
37.5 |
-1.1 |
Net Exports |
5.5 |
-30.1 |
-40.8 |
-10.1 |
18.6 |
34.8 |
-14.3 |
38.5 |
-33.0 |
-6.6 |
-1.6 |
|
Relative shares |
Total Consumption Expenditure |
70.1 |
69.1 |
73.0 |
72.4 |
72.9 |
63.1 |
70.9 |
70.1 |
72.6 |
72.7 |
71.3 |
(i) Private |
58.7 |
58.1 |
62.0 |
61.7 |
60.4 |
52.6 |
60.5 |
59.5 |
60.4 |
61.4 |
60.2 |
(ii) Government |
11.4 |
11.0 |
11.0 |
10.6 |
12.5 |
10.5 |
10.4 |
10.6 |
12.2 |
11.4 |
11.1 |
Gross Fixed Capital Formation |
32.5 |
31.9 |
32.2 |
34.0 |
32.3 |
32.1 |
31.2 |
30.5 |
30.0 |
32.8 |
30.6 |
Change in Stocks |
3.7 |
3.5 |
3.7 |
3.8 |
3.5 |
3.4 |
3.5 |
3.4 |
3.3 |
3.7 |
3.4 |
Net Exports |
-6.0 |
-7.3 |
-7.9 |
-7.9 |
-6.3 |
-3.9 |
-8.4 |
-4.6 |
-7.8 |
-7.3 |
-7.0 |
Memo: |
` billion |
Real GDP at market prices |
52,368 |
56,277 |
12,088 |
12,268 |
13,538 |
14,693 |
13,120 |
13,093 |
14,389 |
37,894 |
40,602 |
QE: Quick Estimates. AE : Advance Estimates.
Note: As only major items are included in the table, data will not add up to 100.
Source: Central Statistics Office. |
Decline in savings and investment rates a
concern
II.2 Both investment and saving rates
declined in 2010-11 (Table II.2). The decrease
in the overall savings rate in 2010-11 was due to both households and the private corporate sector, which more than offset the improvement in the public sector savings rate. The household
sector savings rate declined in 2010-11, after
touching a record high in 2009-10. Within
household savings, while the financial savings
rate declined sharply, the physical savings rate
increased in 2010-11. The decline in the net financial savings rate was on account of the slower growth in households’ savings in bank
deposits and life insurance as well as an absolute
decline in investment in shares and debentures,
mainly driven by redemption of mutual fund
units. Even so, there was a shift in favour of
small savings and currency during the year.
Table II.2: Gross Domestic Savings and Gross Domestic Capital Formation |
(Per cent to GDP at current market prices) |
Item |
2008-09 |
2009-10 |
2010-11 QE |
1 |
2 |
3 |
4 |
1. Gross Domestic Savings |
32.0 |
33.8 |
32.3 |
1.1 Household Sector |
23.6 |
25.4 |
22.8 |
i) Financial savings |
10.1 |
12.9 |
10.0 |
ii) Saving in physical assets |
13.5 |
12.4 |
12.8 |
1.2 Private Corporate Sector |
7.4 |
8.2 |
7.9 |
1.3 Public Sector |
1.0 |
0.2 |
1.7 |
2. Gross Domestic Capital Formation* |
34.3 |
36.6 |
35.1 |
2.1 Household Sector |
13.5 |
12.4 |
12.8 |
2.2 Private Corporate Sector |
11.3 |
12.7 |
12.1 |
2.3 Public Sector |
9.4 |
9.2 |
8.8 |
* : Adjusted for errors and omissions.
QE : Quick Estimates. |
II.3 The decline in the rate of gross domestic
capital formation (investment) in 2010-11 was
on account of a decline in private corporate sector and public sector investment rates even
as the household investment rate increased.
Given the huge demand for infrastructure development as well as extremely strained
capacity in sectors such as petroleum refinery,
there is a compelling case for increasing the rate of capital formation in the economy, both in
construction and in machinery and equipment.
Going forward, the revival and sustainability of
a high growth rate over the medium-term is contingent upon the enhancement of savings
and investment rates, besides improvements in
productivity.
Corporate investment remains subdued
II.4 Corporate pipeline investment has shrunk
and new investment remains tepid. As such,
investment revival is expected to materialise
slowly in 2012-13. Analysis of the time-phasing
details of projects sanctioned institutional
assistance in various years reveals that intended
capital expenditure incurred by private corporate (non-financial) sector during 2011-12 is likely
to be lower than that in the previous year (Table II.3). Higher interest rates and rising input
prices, among other factors, are likely to have
adversely affected the investment sentiment.
II.5 The deceleration in capital formation is
apparent in the sharp moderation in the number/
outlay of projects sanctioned finance by major banks/financial institutions (FIs). The moderation that started in Q3 of 2010-11 has persisted through Q3 of 2011-12 (Table II.4).
The decline in outlay/projects that were
sanctioned financial assistance is particularly
acute for ‘metal and metal products’ and power industries (Chart II.1).
Table II.3: Phasing of Capital Expenditure of Projects Sanctioned Assistance by Banks/FIs |
(` billion) |
Capital Expenditure in the Year ® |
Up to 2007-08 |
2008-09 |
2009-10 |
2010-11 |
2011-12 |
2012-13 |
Beyond 2013-14 |
Grand Total |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
Year of Sanction ¯ |
|
|
|
|
|
|
|
|
Up to 2007-08 |
1,826 |
1,317 |
583 |
376 |
98 |
47 |
- |
4,247 |
2008-09 |
265 |
1,029 |
864 |
568 |
366 |
84 |
46 |
3,223 |
2009-10 |
2 |
448 |
1,494 |
1,282 |
853 |
365 |
116 |
4,560 |
2010-11 |
- |
3 |
373 |
1,262 |
1,294 |
979 |
691 |
4,602 |
2011-12* |
- |
- |
14 |
154 |
527 |
419 |
437 |
1,551 |
Grand Total # |
2,093 |
2,797 |
3,328 |
3,642 |
3,138 |
1,894 |
1,290 |
- |
*: Data available up to Q3:2011-12
#: The estimates are ex ante, incorporating only the envisaged investment, and thus are different from those actually realised/utilised. |
Table II.4: Institutionally Assisted Projects and their Envisaged
Cost (Quarter-wise) |
Period |
Number of
Projects* |
Project Cost
(` billion) |
1 |
2 |
3 |
2010-11 |
Q1 |
199 |
1,431 |
|
Q2 |
239 |
1,508 |
|
Q3 |
173 (166) |
801 (795) |
|
Q4 |
185 |
864 |
2011-12# |
Q1 |
144 |
880 |
|
Q2 |
176 (172) |
363 (361) |
|
Q3** |
124 |
310 |
*: Based on data reported by 39 banks/FIs.
**: Data for Q3:2011-12 is based on reported data from 34 banks/
FIs. Corresponding data for Q3:2010-11 and Q2:2011-12 is
given in brackets.
#: Data for 2011-12 is provisional. |
Corporate profitability hit by high interest
expenses and rising input costs
II.6 While sales continued to be healthy
during Q3 of 2011-12, registering higher growth
on both y-o-y and q-o-q basis, operating profit
and net profit declined as expenses and interest
cost increased substantially (Tables II.5 and II.6). Net profits were further dented on account of the large non-operating deficit of a few large
companies.
Table II.5: Corporate Sector- Financial Performance |
Item |
Common Companies (y-o-y growth in per cent) |
2010-11 |
2011-12 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
Q3 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
No. of Companies |
2,352 |
Sales |
24.7 |
18.9 |
17.6 |
20.6 |
22.6 |
19.3 |
19.4 |
Change in stock |
411.6 |
-45.5 |
110.1 |
131.5 |
-39.4 |
-2.9 |
88.0 |
Expenditure, |
29.1 |
20.1 |
19.6 |
22.7 |
23.0 |
22.8 |
24.9 |
of which Raw Material |
37.1 |
21.6 |
20.9 |
25.3 |
27.9 |
23.6 |
25.6 |
Staff Cost |
16.4 |
20.4 |
21.2 |
19.8 |
20.1 |
17.7 |
19.0 |
Power & fuel |
17.7 |
13.0 |
19.6 |
26.6 |
27.1 |
26.0 |
30.2 |
Operating Profits (PBDIT) |
15.4 |
7.3 |
11.1 |
16.6 |
12.5 |
-0.9 |
-5.7 |
Other Income* |
-21.5 |
58.7 |
6.3 |
-15.3 |
39.6 |
25.9 |
69.3 |
Depreciation |
20.1 |
17.5 |
14.7 |
15.2 |
9.8 |
9.8 |
10.4 |
Gross Profits (PBIT) |
8.9 |
9.5 |
9.7 |
11.6 |
16.1 |
-0.1 |
-2.5 |
Interest |
27.4 |
6.2 |
23 |
31.2 |
22.1 |
47.6 |
42.8 |
Tax Provision |
6.2 |
10.0 |
6.5 |
2.2 |
21.6 |
3.8 |
-2.4 |
Net Profits (before non-operating profit) |
4.5 |
10.4 |
7.0 |
9.6 |
12.3 |
-16.3 |
-16.7 |
Net Profits (PAT) |
3.7 |
9.1 |
9.4 |
13.6 |
6.7 |
-15.4 |
-31.0 |
|
Ratios in per cent |
Change in stock# to Sales |
2.5 |
0.8 |
1.3 |
2.3 |
1.2 |
0.5 |
2.2 |
Interest to Sales |
2.8 |
2.6 |
2.6 |
2.5 |
2.8 |
3.2 |
3.1 |
Interest Burden |
20.7 |
19.2 |
19.6 |
18.6 |
21.7 |
28.6 |
28.5 |
Interest Coverage |
4.8 |
5.2 |
5.1 |
5.4 |
4.6 |
3.5 |
3.5 |
PBDIT to Sales |
16.2 |
15.4 |
15.9 |
15.3 |
14.9 |
12.8 |
12.5 |
PBIT to Sales |
13.7 |
13.5 |
13.5 |
13.4 |
13.0 |
11.3 |
11.0 |
PAT to Sales |
8.6 |
8.6 |
8.4 |
8.6 |
7.5 |
6.1 |
4.8 |
Other Income to PAT |
16.4 |
21.7 |
15.9 |
19.9 |
21.4 |
32.3 |
39.6 |
#: For companies reporting this item explicitly.
*: Other income excludes extraordinary income/expenditure if reported explicitly.
Note: Growth rates are percentage changes in the level for the period under reference over the corresponding period of the previous year for common set of companies. |
Table II.6: Corporate Sector- Financial Performance – Sequential |
Item |
Common Companies (q-o-q growth in per cent) |
Q1:2010-11
over
Q4:2009-10 |
Q2:2010-11
over
Q1:2010-11 |
Q3:2010-11
over
Q2:2010-11 |
Q4:2010-11
over
Q3:2010-11 |
Q1:2011-12
over
Q4:2010-11 |
Q2:2011-12
over
Q1:2011-12 |
Q3:2011-12
over
Q2:2011-12 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
No. of Companies |
2,352 |
Sales |
-4.5 |
5.9 |
5.7 |
12.9 |
-3.1 |
3.1 |
5.7 |
Change in stock |
100.0 |
-66.2 |
75.3 |
95.1 |
-47.7 |
-44.7 |
234.3 |
Expenditure, |
-3.8 |
5.0 |
5.7 |
14.8 |
-3.6 |
4.9 |
7.6 |
of which Raw Material |
-4.1 |
3.1 |
9.4 |
15.8 |
-2.3 |
1.6 |
8.4 |
Staff Cost |
3.2 |
8.1 |
2.1 |
5.2 |
3.6 |
5.8 |
3.4 |
Power & fuel |
11.6 |
1.0 |
4.4 |
7.6 |
12.3 |
-0.1 |
7.9 |
Operating Profits (PBDIT) |
-2.1 |
0.8 |
8.8 |
8.6 |
-5.6 |
-11 |
3.1 |
Other Income* |
-44.7 |
39.7 |
-24.2 |
44.7 |
-9.1 |
26.3 |
3.2 |
Depreciation |
1.3 |
2.1 |
3.2 |
8.0 |
-3.6 |
2.1 |
3.6 |
Gross Profits (PBIT) |
-10.1 |
4.5 |
5.8 |
12.4 |
-6.5 |
-9.9 |
2.9 |
Interest |
17.5 |
-2.7 |
7.7 |
6.6 |
9.4 |
18.7 |
2.7 |
Tax Provision |
-11.9 |
4.4 |
2.0 |
9.0 |
4.8 |
-11.2 |
-4.0 |
Net Profits (PAT) |
-10.3 |
5.6 |
3.4 |
16.1 |
-15.8 |
-16.3 |
-15.6 |
*: Other income excludes extraordinary income/expenditure if reported explicitly. |
II.7 The ratio of stock-in-trade to sales was
higher in Q3 of 2011-12 compared to the corresponding period of the previous year and
the preceding quarter (Chart II.2). The accumulation of inventory in Q3 was mainly
observed in chemical fertilisers and pesticides,
iron and steel, refineries and food products and
beverages industries.
II.8 Sector-wise analysis shows that Information Technology (IT) was the best performing sector in terms of sales and
operating profit. Hence, the net profit margin of
the sector remained largely intact (Chart II.3).
This mainly reflected the depreciation of the rupee. Higher growth in input prices and interest payments led to a decline in profits for both
manufacturing and services sectors.
Significant budgeted reduction in fiscal deficit for 2012-13 needs to be supported
by credible fiscal consolidation strategy
II.9 The central government could not contain
its fiscal deficit within the budget estimates for
2011-12, resulting in the widening of the gross
fiscal deficit (GFD)-GDP ratio to 5.9 per cent.
The fiscal situation is, however, budgeted to
record a significant improvement in terms of
both revenue deficit and GFD indicators in
2012-13. The fiscal correction, as indicated in
the Union Budget, along with other policy
measures to address supply-side bottlenecks in
agriculture, energy and transport sectors, are expected to create conditions for revival of
investment activity in the economy.
II.10 It may be noted that the proposed fiscal
consolidation in 2012-13 is primarily based on
the revenue-raising efforts of the central government. The achievement of budgeted
reduction in GFD-GDP ratio would also depend
on the commitment of the government to
contain its expenditure on subsidies within the
stipulated cap of 2 per cent of GDP in 2012-13.
II.11 The amendment of the FRBM Act, 2003
and introduction of a Medium-term Expenditure
Framework Statement in the Act, which will,
inter alia, include three-year rolling targets in
respect of expenditure indicators, is expected
to bring about fiscal discipline and create the
fiscal space essential for the government to
pursue its objective of a faster, sustainable and
more inclusive growth during the Twelfth Plan.
Notwithstanding the envisaged fiscal correction,
the key deficits will remain higher than the path
set out by the 13th Finance Commission
(Table II.7).
Budgeted tax buoyancy for 2012-13 reflect tax measures but is subject to downside
risks
II.12 Given the slowdown in 2011-12 as well
as tax changes introduced earlier, both direct and indirect tax revenues grew at a lower rate
than the budgeted rate for the year as well as
the rate in 2010-11 (Table II.8). On the basis of
tax measures announced in the Union Budget
2012-13, viz., widening the base of services tax
through stipulating a negative list of exempted
categories, partial rollback of reductions in
standard excise duty and service tax rates, and
the rationalisation of customs duty rates, tax
buoyancy is budgeted at 1.39 for 2012-13. This
is significantly higher than the long-term
average tax buoyancy of 1.11 for the period
2003-04 to 2011-12 as well as the average of
1.14 for the recent period 2010-11 to 2011-12.
Table II.7: Key Fiscal Indicators |
(Per cent to GDP) |
Year |
Primary Deficit |
Revenue Deficit |
Effective Revenue Deficit |
Gross Fiscal Deficit |
1 |
2 |
3 |
4 |
5 |
Centre |
2009-10 |
3.2 |
5.2 |
- |
6.5 |
2010-11 |
1.8 |
3.3 |
2.1 |
4.9 |
2011-12 BE |
1.6 |
3.4 |
1.8 |
4.6 |
2011-12 RE |
2.8 |
4.4 |
2.9 |
5.9 |
2012-13 BE |
1.9 |
3.4 |
1.8 |
5.1 |
13th FC |
- |
1.2 |
- |
4.2 |
2013-14 |
|
|
|
|
Rolling targets |
- |
2.8 |
1.0 |
4.5 |
13th FC |
- |
0.0 |
- |
3.0 |
2014-15 |
|
|
|
|
Rolling targets |
- |
2.0 |
0.0 |
3.9 |
13th FC |
- |
-0.5 |
- |
3.0 |
States* |
2009-10 |
1.2 |
0.5 |
- |
2.9 |
2010-1 1RE |
1.0 |
0.3 |
- |
2.7 |
2011-12 BE |
0.6 |
-0.2 |
- |
2.2 |
Combined |
2009-10 |
4.5 |
5.7 |
- |
9.4 |
2010-1 1RE |
3.4 |
3.8 |
- |
8.1 |
2011-12 BE |
2.5 |
3.2 |
- |
7.0 |
BE: Budget Estimate. RE: Revised Estimate.
13th FC : Thirteenth Finance Commission.
*: Data based on budget documents of 28 state governments.
Note: Negative sign (-) indicates surplus in deficit indicators.
Source: Union Budget 2012-13 and 13th Finance Commission. |
Commitment to cap subsidy expenditure
from 2012-13 onwards a positive step
II.13 As noted in the Union Budget for 2012-13, overshooting of expenditure on subsidies
was one of the main reasons for deterioration
of fiscal balance in 2011-12. The expenditure
restructuring strategy in 2012-13 is premised
on capping expenditure on subsides while
raising allocations for capital expenditures (both plan and non-plan components).
Restricting expenditure on subsidies to below
2 per cent of GDP in the coming years would
be a major achievement towards fiscal consolidation.
II.14 There are latent pressures on the expenditure side of the central government
finances for 2012-13. On the petroleum subsidy
front, upside risks stem from high international
crude oil prices and pressures on the exchange
rate. Unless the government progresses towards phasing-in flexible pricing of administered
petroleum products in the early part of the year,
the risk to budget projections remain substantial.
If prices for these products are not adjusted
upwards, the under-recoveries in 2012-13 would
well exceed that in 2011-12. This will lead to a
large fiscal slippage.
II.15 Also, the budgeted growth of 3 per cent
in food subsidies in 2012-13 appears to be modest when viewed in the context of the
implemention of the Food Security Bill
(Table II.9).
Table II.8: Central Government Finances |
Item |
Growth rate (per cent) |
Per cent to GDP |
2010-11 |
2011-12 RE |
2012-13 BE |
2010-11 |
2011-12 RE |
2012-13 BE |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
1. Total Expenditure |
16.9 |
10.1 |
13.1 |
15.6 |
14.8 |
14.7 |
2. Revenue Expenditure |
14.1 |
11.6 |
10.7 |
13.6 |
13.0 |
12.7 |
3. Capital Expenditure |
39.0 |
0.1 |
30.6 |
2.0 |
1.8 |
2.0 |
4. Non-Developmental Expenditure |
7.3 |
15.4 |
16.1 |
7.2 |
7.1 |
7.3 |
5. Development Expenditure |
26.1 |
6.8 |
9.2 |
8.7 |
8.0 |
7.6 |
4. Non-Plan Expenditure |
13.5 |
9.0 |
8.7 |
10.7 |
10.0 |
9.5 |
5. Plan Expenditure |
24.9 |
12.6 |
22.1 |
4.9 |
4.8 |
5.1 |
6. Revenue Receipts |
37.6 |
-2.7 |
22.0 |
10.3 |
8.6 |
9.2 |
i) Tax Revenue (net) |
24.8 |
12.7 |
20.1 |
7.4 |
7.2 |
7.6 |
ii) Non Tax Revenue |
88.0 |
-42.9 |
32.0 |
2.8 |
1.4 |
1.6 |
7. Gross Tax Revenue |
27.0 |
13.7 |
19.5 |
10.3 |
10.1 |
10.6 |
i) Direct Tax |
18.1 |
12.3 |
13.9 |
5.8 |
5.6 |
5.6 |
ii) Indirect Tax |
40.5 |
15.5 |
26.5 |
4.5 |
4.5 |
5.0 |
Memo : |
|
8. Revenue Deficit |
-25.6 |
56.6 |
-11.3 |
3.3 |
4.4 (3.4) |
3.4 |
9. Effective Revenue Deficit |
- |
56.3 |
-27.8 |
2.1 |
2.9 (1.8) |
1.8 |
10. Gross Fiscal Deficit |
-10.7 |
39.7 |
-1.6 |
4.9 |
5.9 (4.6) |
5.1 |
11. Gross Primary Deficit |
-32.0 |
76.5 |
76.5 |
1.8 |
2.8 (1.6) |
1.9 |
BE: Budget Estimate. RE: Revised Estimate.
Note: Figures in parentheses are budget estimate for 2011-12 as per cent to GDP.
Source: Union Budget 2012-13. |
Table II.9: Total Subsidies |
(Amount in ` billion) |
Items |
2010-11 |
2011-12 RE |
2012-13 BE |
Amount |
% to GDP |
Amount |
% to GDP |
Amount |
% to GDP |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
Total Subsidies |
1,734.2 |
2.3 |
2,163.0 |
2.4 |
1,900.2 |
1.9 |
of which: |
|
|
|
|
|
|
i. Food |
638.4 |
0.8 |
728.2 |
0.8 |
750.0 |
0.7 |
ii. Fertiliser |
623.0 |
0.8 |
672.0 |
0.8 |
609.7 |
0.6 |
iii. Petroleum |
383.7 |
0.5 |
684.8 |
0.8 |
435.8 |
0.4 |
iv. Interest subsidy |
46.8 |
0.1 |
57.9 |
0.1 |
79.7 |
0.1 |
v. Other subsidies |
42.2 |
0.1 |
20.0 |
0.0 |
24.9 |
0.0 |
Source: Union Budget 2012-13. |
Increasing dependence on market
borrowing for financing fiscal deficit could
exert pressure on interest rates
II.16 The fiscal deficit financing pattern for 2012-13 shows continued reliance on market
borrowings though the recourse to short-term
financing through treasury bills is budgeted at 2 per cent, significantly lower than the 22 per cent in 2011-12 (Table II.10). The larger market borrowing of the central government could put pressure on yields, especially at the long end.
Such pressures could exacerbate considerably
if credit demand picks up with recovery in
growth, increasing the interest burden on the
government and crowding out private investment.
Economic recovery hinges on credible fiscal consolidation, inflation control and
higher capital formation
II.17 Even though investment spending
floundered in 2011-12, a slow recovery could
set in during 2012-13. The recovery would be
dependent on inflation not accelerating again.
On current assessment, investment should start
picking up at a moderate pace, especially if the
cost of capital comes down. Rigidities in
funding costs for the banks and the large draft
of the government on financial surplus of the
households, however, impart stickiness to
interest rates.
II.18 The Indian economy maintained a
reasonable consumption-fixed investment mix,
during the 4-year period beginning 2004-05. However, in recent years the consumption
component has been the predominant driver of
growth, with the contribution of the fixed
investment component showing a sharper
decline from the pre-crisis (2005-08) levels.
Deceleration in investment reduces the potential output of the economy, emphasising the importance of rebalancing. High levels of government spending do provide a consumption
stimulus but compound the inflationary
situation. Reigning in inflation through tight monetary policy assumes importance in
promoting sustainable growth and investment,
even if it results in high cost of capital in the
short run.
Table II.10: Financing Pattern of Gross Fiscal Deficit |
(Amount in ` billion) |
Item |
2011-12 (BE) |
2011-12 (RE) |
2012-13 (BE) |
1 |
2 |
3 |
4 |
Gross Fiscal Deficit |
4,128.2 |
5,219.8 |
5,135.9 |
Financed by |
|
|
|
Net market borrowing* |
3,531.3 |
4,843.0 |
4,930.0 |
|
(85.5) |
(92.8) |
(96.0) |
Small savings (net) |
241.8 |
-103.0 |
12.0 |
|
(5.9) |
(-2.0) |
(0.2) |
External assistance |
145.0 |
103.1 |
101.5 |
|
(3.5) |
(2.0) |
(2.0) |
State provident fund |
100.0 |
100.0 |
120.0 |
|
(2.4) |
(1.9) |
(2.3) |
NSSF |
0.9 |
60.8 |
49.4 |
|
(0.0) |
(1.2) |
(1.0) |
Draw down of cash balances |
200.0 |
-246.6 |
- |
|
(4.8) |
(-4.7) |
- |
Others |
-90.9 |
462.5 |
-77.0 |
|
(-2.2) |
(8.9) |
(-1.5) |
RE: Revised Estimates. BE: Budget Estimates. –: Nil
* includes dated securities and 364-day treasury bills only.
Note: Figures in parentheses represent percentages to GFD. |
II.19 In this context, it is important to note that fiscal consolidation as envisaged in the latest
budget is subject to risks, especially with respect
to subsidies. Tax revenues may also be adversely
affected if the economic climate remains subdued. The indirect tax measures introduced
in the budget will themselves have inflation
implications. Against this backdrop, aggregate
demand management poses challenges for policy during 2012-13.
|