Aggregate demand weakened further in Q1 of 2012-13, led by patchy investment demand. Corporate sales have moderated significantly On the fiscal front, the deficit indicators have considerably widened. While the slowdown has had an impact on indirect taxes, both excise and customs, public expenditure remained high, particularly on subsidies. Recent initiatives taken by the government, especially those related to its expenditure on fuel subsidies are welcome but are less than adequate to avert fiscal slippage in 2012-13. Further steps will need to be taken soon.
Protracted slowdown in private
consumption and investment
II.1 Expenditure side GDP growth moderated sharply to 3.9 per cent in Q1 of 2012-13 from 9.0 per cent in the corresponding quarter of previous year (Table II.1). Private final consumption expenditure and gross fixed capital formation, which account for around 60 per cent
and 30 per cent, respectively, of GDP and which
had both decelerated in the previous year,
slackened further in Q1 of 2012-13.
II.2 The downturn in investment, as explained
in previous reports, was led by non-monetary
factors, though interest rates also had a material effect. At the same time, government final consumption expenditure (which excludes transfer payments such as subsidies), which accounts for around 11 per cent of GDP, picked up sharply in Ql of 2012-13, partly reflecting a base effect.
Table II.1: Expenditure Side GDP (2004-05 prices) |
(Per cent) |
Item |
2010-11 |
2011-12 |
2011-12 |
2012-13 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
|
Growth Rates |
Real GDP at market prices |
9.6 |
6.9 |
9.0 |
6.9 |
6.2 |
5.6 |
3.9 |
Total Consumption Expenditure |
8.1 |
5.4 |
4.9 |
4.9 |
6.1 |
5.8 |
4.7 |
(i) Private |
8.1 |
5.5 |
4.9 |
4.6 |
6.4 |
6.1 |
4.0 |
(ii) Government |
7.8 |
5.1 |
4.9 |
7.2 |
4.7 |
4.1 |
9.0 |
Gross Fixed Capital Formation |
7.5 |
5.5 |
14.7 |
5.0 |
-0.3 |
3.6 |
0.7 |
Change in Stocks |
37.4 |
2.4 |
7.1 |
2.8 |
0.4 |
-0.4 |
-1.2 |
Valuables |
32.4 |
7.9 |
9.8 |
9.4 |
2.9 |
9.3 |
-55.4 |
Net Exports |
5.5 |
-30.7 |
-23.2 |
-46.7 |
-117.9 |
117.8 |
-2.1 |
Discrepancies |
38.9 |
-112.7 |
-51.8 |
-119.6 |
-152.0 |
-124.0 |
-123.7 |
|
Relative shares |
Total Consumption Expenditure |
70.1 |
69.1 |
70.1 |
70.8 |
72.7 |
63.6 |
70.6 |
(i) Private |
58.7 |
57.9 |
59.5 |
60.3 |
60.4 |
52.2 |
59.5 |
(ii) Government |
11.4 |
11.2 |
10.6 |
10.5 |
12.5 |
11.4 |
11.1 |
Gross Fixed Capital Formation |
32.5 |
32.0 |
33.9 |
33.4 |
30.3 |
30.9 |
32.8 |
Change in Stocks |
3.7 |
3.5 |
3.7 |
3.6 |
3.4 |
3.4 |
3.5 |
Valuables |
2.4 |
2.4 |
2.6 |
2.7 |
2.1 |
2.2 |
1.1 |
Net Exports |
-6.0 |
-7.4 |
-8.6 |
-11.3 |
-11.1 |
0.6 |
-8.5 |
Discrepancies |
-2.5 |
0.3 |
-1.7 |
0.8 |
2.6 |
-0.6 |
0.4 |
Memo: |
|
|
|
|
|
|
|
Real GDP at market prices (` billion) |
52368 |
55959 |
13174 |
13111 |
14377 |
15296 |
13693 |
* : Quick Estimates. # : Revised Estimates.
Note: As only major items are included in the table, data will not add up to 100.
Source: Central Statistics Office. |
II.3 The decline in the weighted contribution of net exports and valuables in Q1 of 2012-13 is in line with the balance of payments, in contrast to the data for the previous quarter (Table II.2). Significantly, discrepancies continue to vitiate expenditure data. The table shows that the sum of the contribution-weighted growth rates of the different expenditure components works out to only 1.9 per cent in Q1 of 2012-13, which is much lower than the growth rate of 3.9 per cent derived from the production approach GDP (‘supply side’) after adjusting for net indirect taxes. Since the production-approach GDP is considered as the firmer estimate in the National Accounts Statistics, the difference between the expenditure side GDP derived from the supply side and that obtained from the different components of expenditure is reported as a statistical discrepancy. The discrepancy largely arises due to the lack of firm data on the expenditure components and the consequent use of indicator based approach by the CSO. Such large discrepancy complicates the assessment of aggregate demand in the economy for monetary policy.
Moderation in sales growth coupled with decline in profits and contraction in margins reflect slack demand
II.4 The subdued demand is reflected in the dampened sales of non-government non-financial (NGNF) listed companies. Sales growth decelerated to a 10-quarter low of 13 per cent in Q1 of 2012-13 (Table II.3). Further, due to a higher rate of growth in expenditure compared to sales, net profits declined by 10.7 per cent. The decline in net profits on a q-o-q basis was even sharper at 18 per cent (Table II.4).
II.5 Lower growth in profits (EBITDA/EBIT/
net profits) relative to sales led to a decline in
profit margins (EBITDA/EBIT/net profits as percentage of sales). A decline in change in
stock-in-trade to sales ratio is in line with lower
capacity utilisation as observed from OBICUS and indicates a possible moderation in
expectation on demand conditions, going
forward (Chart II.1).
Table II.2: Contribution-Weighted Growth Rates of Expenditure-Side GDP
(2004-05 Prices)* |
(Per cent) |
Item |
2011-12 |
2012-13 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
1 |
2 |
3 |
4 |
5 |
6 |
1. Private Final Consumption Expenditure |
3.0 |
2.8 |
3.9 |
3.2 |
2.4 |
2. Government Final Consumption Expenditure |
0.5 |
0.8 |
0.6 |
0.5 |
1.0 |
3. Gross Fixed Capital Formation |
4.7 |
1.7 |
-0.1 |
1.1 |
0.2 |
4. Change in Stock |
0.3 |
0.1 |
0.0 |
0.0 |
0.0 |
5. Valuables |
0.3 |
0.2 |
0.1 |
0.2 |
-1.5 |
6. Net Exports (i-ii) |
-1.8 |
-3.8 |
-6.4 |
4.0 |
-0.2 |
(i) Exports |
3.9 |
4.4 |
1.5 |
4.6 |
2.4 |
(ii) Imports |
5.7 |
8.2 |
7.9 |
0.6 |
2.6 |
7.Sum (1 to 6) |
7.0 |
1.8 |
-2.0 |
9.0 |
1.9 |
8.Discrepancies |
2.0 |
5.1 |
8.2 |
-3.4 |
2.1 |
9.GDP at Market Prices (7+8) |
9.0 |
6.9 |
6.2 |
5.6 |
3.9 |
*: Contribution-weighted growth rate of a component of expenditure side GDP is obtained as follows:
(Year-on-Year change in the component ÷ Year-on-Year change in GDP at constant market prices) × Year-on-Year growth rate of
GDP at constant market prices.
Source: Central Statistics Office. |
Table II.3: Corporate Sector- Financial Performance |
Item |
2011-12 |
2011-12 |
2012-13 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
No. of Companies |
2308 |
|
Growth Rates1 (in Percent) |
Sales |
18.8 |
22.3 |
19.3 |
19.3 |
15.3 |
13.0 |
Expenditure, of which |
21.4 |
22.8 |
22.7 |
24.9 |
16.4 |
15.3 |
Raw Material |
22.6 |
28.0 |
23.1 |
25.0 |
16.1 |
13.0 |
Staff Cost |
17.4 |
19.0 |
18.0 |
18.6 |
14.4 |
17.5 |
Power & fuel |
28.2 |
31.1 |
26.2 |
30.4 |
25.4 |
17.7 |
Operating Profits (EBITDA) |
1.1 |
12.6 |
-0.8 |
-5.5 |
-0.8 |
-4.1 |
Other Income* |
49.3 |
63.5 |
25.6 |
69.9 |
47.5 |
29.4 |
Depreciation |
10.6 |
11.4 |
9.8 |
10.3 |
10.7 |
9.5 |
Gross Profits (EBIT) |
4.5 |
18.2 |
-0.1 |
-2.2 |
3.3 |
-3.0 |
Interest |
40.3 |
34.1 |
47.4 |
43.6 |
36.7 |
36.3 |
Tax Provision |
6.3 |
22.0 |
4.0 |
-2.6 |
2.9 |
-5.5 |
Net Profits |
-11.9 |
7.1 |
-15.3 |
-30.5 |
-7.9 |
-10.7 |
|
Select Ratios |
Change in stock # to Sales |
1.3 |
1.4 |
0.5 |
2.3 |
1.0 |
0.8 |
Interest Burden |
26.7 |
23.4 |
28.5 |
28.5 |
26.8 |
32.9 |
Interest Coverage |
3.7 |
4.3 |
3.5 |
3.5 |
3.7 |
3.0 |
EBITDA to Sales |
13.4 |
15.0 |
12.9 |
12.6 |
13.1 |
12.7 |
EBIT to Sales |
12.1 |
13.3 |
11.4 |
11.2 |
12.4 |
11.4 |
Net Profits to Sales |
6.4 |
7.6 |
6.1 |
4.9 |
6.9 |
6.0 |
#: For companies reporting this item explicitly.
*: Other income excludes extraordinary income/expenditure if reported explicitly.
1.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.4: Corporate Sector Financial Performance (Sequential Growth) |
Indicator |
Common Companies ( Q-o-Q Growth in Percent) |
2011-12 |
2012-13 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
1 |
2 |
3 |
4 |
5 |
6 |
No. of Companies |
2308 |
Sales |
-2.9 |
3.4 |
5.6 |
8.7 |
-4.8 |
Expenditure, of which |
-3.6 |
4.9 |
7.7 |
6.8 |
-4.5 |
Raw Material |
-3.3 |
1.1 |
8.3 |
9.7 |
-5.9 |
Staff Cost |
2.7 |
6.7 |
3.1 |
1.3 |
5.4 |
Power & fuel |
13.5 |
-3.0 |
7.9 |
5.5 |
6.6 |
Operating Profits (EBITDA) |
-4.9 |
-10.8 |
3.0 |
13.5 |
-8.1 |
Other Income |
-9.6 |
7.7 |
4.8 |
44.5 |
-20.7 |
Depreciation |
-1.9 |
0.6 |
3.7 |
8.2 |
-3.0 |
Gross Profits (EBIT) |
-6.3 |
-11.2 |
3.1 |
20.5 |
-12.1 |
Interest* |
8.4 |
8.0 |
3.1 |
13.3 |
8.0 |
Tax Provision |
5.0 |
-11.3 |
-4.5 |
15.6 |
-3.6 |
Net Profits |
-15.1 |
-16.3 |
-15.1 |
52.5 |
-17.7 |
*: Some companies report interest on net basis. |
|
II.6 Early results of 190 companies for Q2 of
2012-13 indicate that the sales growth continued
to slowdown for these companies (Table II.5).
There was a marked improvement in growth of net profits. However, the early results are from
a small set of companies which are not
representative of the overall corporate sector.
Table II.5: Corporate Sector- Early Results
Q2 of 2012-13 |
Growth Rates1 (in Per cent) |
Item |
2011-12 |
2012-13 |
Q2 |
Q1 |
Q2 |
1 |
2 |
3 |
4 |
Number of Companies |
190 |
Sales |
28.9 |
16.1 |
13.5 |
Expenditure,of which |
32.6 |
19.8 |
15.7 |
Raw Material |
39.6 |
20.7 |
15.8 |
Staff Cost |
22.0 |
23.1 |
23.0 |
Power & fuel |
21.9 |
8.1 |
12.5 |
Operating Profits (EBITDA) |
11.7 |
2.0 |
8.4 |
Other Income* |
77.6 |
37.5 |
30.7 |
Depreciation |
5.8 |
-2.6 |
-3.4 |
Gross Profits (EBIT) |
21.6 |
8.6 |
15.4 |
Interest |
57.6 |
33.0 |
-5.2 |
Tax Provision |
24.7 |
6.8 |
12.0 |
Net Profits |
15.9 |
7.9 |
21.6 |
Select ratios |
Change in stock # to Sales |
1.2 |
1.2 |
2.3 |
Interest Burden |
9.8 |
10.0 |
8.1 |
Interest Coverage |
10.2 |
10.0 |
12.4 |
EBITDA to Sales |
15.8 |
14.4 |
15.0 |
EBIT to Sales |
15.1 |
14.2 |
15.4 |
Net Profits to Sales |
10.3 |
9.8 |
11.0 |
#: For companies reporting this item explicitly.
*: Other income excludes extraordinary income/expenditure if
reported explicitly.
1. Growth rates are percentage changes in the level for the
period under reference over the corresponding period of the
previous for common set of companies. |
Investment remained subdued in Q1 of
2012-13
II.7 Moderation in the cost of projects
sanctioned by major banks/FIs for new corporate
investment persisted during Q1 of 2012-13
(Table II.6). While the number of approvals
declined sharply, there was a marginal increase
in the envisaged cost of projects during the
quarter. Industry-wise analysis of investment
intentions reveals that the share of the power
sector in the total planned investment was the
highest (Chart II.2).
Table II.6: Institutionally-Assisted Projects and their Envisaged Cost (Quarter-wise) |
Financial Year |
No. of Projects |
Project Expenditure #
(` billion) |
1 |
2 |
3 |
2011-12 |
Q1 |
154 (131) |
787 (677) |
|
Q2 |
194 |
572 |
|
Q3 |
151 |
506 |
|
Q4 |
169 (153) |
255 (226) |
2012-13 |
Q1* |
80 |
268 |
#: Based on data reported by 39 banks/FIs.
*:Data for Q1:2012-13 is provisional and is based on reported
data from 32 banks/FIs. Corresponding data for Q1:2011-
12 and Q4:2011-12 are given in parentheses. |
Fiscal slippage likely in 2012-13, in spite
of recent measures
II.8 The deficit indicators of the central
government widened during 2012-13 (April-
August) compared with the corresponding
period of the previous year (Table II.7). There
is a deviation from the projected fiscal
consolidation path as the fiscal deficit during
the first five months of 2012-13 comprised
nearly two-thirds of the budget estimate for the
year as a whole. On the current reckoning, the
centre’s gross fiscal deficit (GFD/GDP) ratio in
2012-13 is unlikely to see a significant
improvement from that in the previous year.
This underscores the need for taking further
steps soon, in addition to the measures taken
since mid-September 2012.
Table II.7: Central Government Finances during April-August 2012 |
(` billion) |
Item |
2011-12
(RE) |
2012-13
(BE) |
April-August
Amount |
Percentage to
Budget Estimates |
Growth Rate
(Per cent) |
(Amount) |
2011-12 |
2012-13 |
2011-12 |
2012-13 |
2011-12 |
2012-13 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
1.Revenue Receipts (i+ii) |
7669.9 |
9356.9 |
1885.5 |
2227.3 |
23.9 |
23.8 |
-35.2 |
18.1 |
i)
Tax Revenue (Net) |
6422.5 |
7710.7 |
1449.0 |
1750.6 |
21.8 |
22.7 |
4.6 |
20.8 |
ii) Non-Tax Revenue |
1247.4 |
1646.1 |
436.6 |
476.7 |
34.8 |
29.0 |
-71.3 |
9.2 |
2. Non-Debt Capital Receipts |
297.5 |
416.5 |
101.4 |
50.8 |
18.4 |
12.2 |
85.1 |
-49.9 |
3. Non-Plan Expenditure |
8921.2 |
9699.0 |
3402.2 |
4174.0 |
41.7 |
43.0 |
9.3 |
22.7 |
of which |
|
|
|
|
|
|
|
|
i) Interest Payments |
2756.2 |
3197.6 |
1002.4 |
1137.7 |
37.4 |
35.6 |
17.1 |
13.5 |
ii) Food Subsidies |
728.2 |
750.0 |
282.2 |
451.0 |
46.6 |
60.1 |
-11.7 |
59.8 |
iii) Fertiliser Subsidies |
672.0 |
609.7 |
263.1 |
377.1 |
52.6 |
61.8 |
20.0 |
43.3 |
iv) Petroleum Subsidies |
684.8 |
435.8 |
10.3 |
396.1 |
4.4 |
90.9 |
20.5 |
- |
4. Plan Expenditure |
4266.0 |
5210.3 |
1320.0 |
1479.5 |
29.9 |
28.4 |
-3.3 |
12.1 |
5. Revenue Expenditure |
11619.4 |
12861.1 |
4185.5 |
5001.7 |
38.1 |
38.9 |
7.0 |
19.5 |
6. Capital Expenditure |
1567.8 |
2048.2 |
536.7 |
651.9 |
33.4 |
31.8 |
-5.1 |
21.5 |
7. Total Expenditure |
13187.2 |
14909.3 |
4722.2 |
5653.5 |
37.5 |
37.9 |
5.5 |
19.7 |
8. Revenue Deficit |
3949.5 |
3504.2 |
2300.0 |
2774.4 |
74.9 |
79.2 |
129.2 |
20.6 |
9. Gross Fiscal Deficit |
5219.8 |
5135.9 |
2735.2 |
3375.4 |
66.3 |
65.7 |
80.6 |
23.4 |
10. Gross Primary Deficit |
2463.6 |
1938.3 |
1732.8 |
2237.7 |
119.6 |
115.4 |
163.3 |
29.1 |
Source : Controller General of Accounts, Ministry of Finance. |
II.9 On the revenue side, the net collections
under direct taxes improved during April-
August 2012, with a growth rate higher than
budgeted for the year, mainly reflecting lower refunds than a year ago (Chart II.3). The growth
in indirect tax collections, however, has
moderated during the period. Deceleration in
industrial growth and foreign trade has affected
collections under union excise duties and
customs duties, respectively. Service tax
revenue increased sharply over the period due
to an increase in the service tax rates as well as
the widening of the services tax base since July 2012. For the year as a whole, the gross
tax-GDP ratio, is likely to be much lower than
the budget estimates, reflecting the impact of
slowdown in economic growth on tax collections.
|
II.10 Overall, there could be some shortfall in
centre’s revenue receipts. With regard to nondebt
capital receipts, the government recently
approved partial disinvestment of its equity
holding in four public sector enterprises. Given
the recent buoyancy witnessed in the stock
markets, it may be possible to meet the
budgetary target for disinvestment proceeds.
II.11 Total expenditure growth during 2012-13
(April-August) was higher than in the
corresponding period of 2011-12 and the
budgeted growth for 2012-13. The expenditure
on subsidies was more than two-thirds of the
budget estimates. For the year as a whole, a
significant slippage in all three major subsidies
– food, fertilisers and petroleum – is likely,
resulting in higher than budgeted non-plan
expenditure. Consequently, a cut-back in plan
expenditure is envisaged to restrict the fiscal
slippage.
II.12 The recent measures such as upward
revision in diesel prices, restriction on subsidised
LPG and levy of service tax on railway freight
and passenger fares are steps in the right
direction but further corrective measures are
required to contain the fiscal deficit within
sustainable limit. In this regard, the Committee
on Roadmap for Fiscal Consolidation (Chairman:
Dr. Vijay Kelkar) has made recommendations
for policy interventions. The report set out the
targets as well as the steps for course correction
that need to be adhered to. In accordance with
the stipulations of the amended Fiscal
Responsibility and Budget Management Act,
2003, the government has placed before the
Parliament in September 2012, the Medium
Term Expenditure Framework Statement which
sets out a three-year rolling target for the expenditure indicators, specifying the underlying
assumptions and risks involved.
Subsidies remain high and likely to
overshoot budget estimates
II.13 Notwithstanding the recent price revisions
and quantitative restrictions in administered
petroleum products, the required compensation
for under-recoveries of OMCs is estimated to
be higher than budget estimates. Though the
government had budgeted for an absolute
decline in the amount of fertiliser subsidy in
2012-13, these have already crossed the budget
estimate for the year as a whole. The food
subsidy in 2012-13, as per official sources, is
estimated to be `924.9 billion, an increase of
around 24 per cent over the budget estimates.
II.14 Rationalisation and reprioritisation of
government expenditure is imperative for fiscal
consolidation. Strategically, overall expenditure
on subsidies needs to be restricted, and
complemented with better targeting and
distribution in accordance with policy priorities.
Direct cash transfer of subsidies in food,
fertilisers and petroleum will help towards
subsidy reduction.
Financial restructuring of state distribution
companies may have medium to long-term
implications for state finances
II.15 The consolidated key deficit indicators
of states are budgeted to improve in 2012-13
over 2011-12 (RE), reflecting the intent to carry
forward fiscal consolidation in line with the
recommendations of the Thirteenth Finance
Commission (Table II.8). The consolidated
revenue surplus for states is budgeted to
increase in 2012-13, primarily through an
increase in revenue receipts. The improvement
in the revenue account is expected to reduce the
fiscal deficit and primary deficit by 0.2
percentages points of GDP each and would also
provide resources for higher capital outlay. The revenue expenditure-GDP ratio is expected to
decline by 0.1 percentage point in 2012-13. This
will, however, be on account of lower growth
in the development component, both social and
economic services.
Table II.8: Key deficit Indicators |
(As per cent of GDP) |
Year |
Primary
Deficit |
Revenue
Deficit |
Gross
Fiscal
deficit |
Outsta nding
Liabilities |
1 |
2 |
3 |
4 |
5 |
|
Centre |
2010-11 |
1.8 |
3.3 |
4.9 |
52.8 |
2011-12 RE |
2.8 |
4.5 |
5.9 |
51.9 |
|
(2.7) |
(4.3) |
(5.8) |
|
2012-13 BE |
1.9 |
3.4 |
5.1 |
- |
|
States |
2010-11 |
0.5 |
-0.1 |
2.1 |
23.4 |
2011-12 RE |
0.8 |
-0.1 |
2.3 |
22.5 |
2012-13 BE |
0.6 |
-0.4 |
2.1 |
21.8 |
|
Combined |
2010-11 |
2.4 |
3.2 |
6.9 |
66.0 |
2011-12 RE |
3.6 |
4.4 |
8.2 |
65.6 |
2012-13 BE |
2.6 |
3.0 |
7.1 |
- |
RE: Revised Estimates. BE: Budget Estimates.
Note: 1. Minus (-) sign indicates surplus.
2. Outstanding liabilities of centre and combined
includes external liabilities of the centre calculated
at current exchange rates.
3. Figures in parentheses are provisional accounts.
Source: Budget documents of the Central and State
governments. |
II.16 The recently announced scheme for
financial restructuring of state distribution
companies (discoms) proposes a strategy for
their financial turnaround. As per the announced
scheme, 50 per cent of the outstanding short-term liabilities of the discoms to lending
institutions would be converted into bonds
issued by the former, backed by state government
guarantees. These bonds are to be taken over
within 2-5 years and converted into special
securities by the state governments. The
restructuring/ rescheduling will be subject to
state governments and discoms taking certain
prior steps to improve the operational
performance of the discoms. The financial
restructuring plan will hence not have any
immediate implications for state finances as
there is a moratorium on repayment of the
principal for three to five years and even the
interest payment would be due only in the next
fiscal. This will, however, have a medium- to
long-term impact on the state finances.
Fiscal consolidation and boost to
investment is key to growth revival
II.17 High fiscal deficit has impacted the
macroeconomic climate and contributed to the
investment downturn. A credible fiscal
consolidation strategy is now on the anvil but
needs to be backed by further measures. Overall
demand conditions during 2012-13 have stayed
depressed, due mainly to slack in investment.
With a number of initiatives to address structural
impediments and augment FDI, the investment
climate should start improving. As the structural
constraints facing investment get removed,
there could be some revival in investment
demand going forward.
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