AEC-65 1 Doctroal Seminar

1. AEC-651 Doctroal Seminar Fiscal Consolidation : Harsh but Inevitable Measures Department of Agricultural EconomicsInstitute of Agricultural SciencesBanaras Hindu UniversityVaranasi – 221005 RenuMartolia PE-11016 www.powerpointpresentationon.blogspot.com

2. Fiscal Consolidation????

5. Revenue Deficit: When the net amount received (revenues less expenditures) falls short of the projected net amount to be received. RD = RR (Revenue receipt) –RE (Revenue expenditure) • Budgetary Deficit (BD) : Budget deficit is also known as the "national debt." BD = TR-TE • Fiscal Deficit (FD) : When a government's total expenditures exceed the revenue after including borrowing also.FD = TR- Borrowing- TE • Primary Deficit (PD) : The deficit which is derived after deducting the interest payments component from the total  deficit  of any budget. PD = FD- i • Current Account Deficit (CAD): imports more than exports.

6. Success story of Fiscal Consolidation in India

8. Objectives of FRBM Act 2003 The main objectives of FRBM Bill / Act are :- • To reduce fiscal deficit • To adopt prudent debt management • To generate revenue surplus

9. The fiscal improvement from financial year 2002-03 to 2007-08 saw a rise in foreign reserves providing unprecedented import cover and global confidence. • Under this act the revenue deficit and fiscal deficit of the government may exceed the targets only on the grounds of national security or national calamity faced by the country. • The central government should ensure that the total liabilities (including external debt at current exchange rate) should not exceed 9% of GDP for the financial year 2004-2005.

10. The central government shall not normally borrow from the R.B.I.   • Fiscal Transparency. • The aggregate disbursements of the central and state government showed an increase in capital outlays from 11.87 per cent in 2002-03 to 18.59 per cent 2007-08 (as percentage of aggregate disbursements).

11. Budget 2012-13 • Introduction of amendments to the FRBM Act as part of Finance Bill, 2012. • Concept of “Effective Revenue Deficit” and “Medium Term Expenditure Framework” statement are two important features of amendment to FRBM Act in the direction of expenditure reforms. • Effective Revenue Deficit is the difference between revenue deficit and grants for creation of capital assets. This will help in reducing consumptive component of revenue deficit and create space for increased capital spending. • Recommendations of the Expert Committees to reduce the number of centrally sponsored schemes and to address plan and non-plan classification to be kept in view while implementing Twelfth Plan. • Central Plan Scheme Monitoring System to be expanded for better tracking and utilization of funds.

12. Need of fiscal consolidation?????

13. India is suffering from a serious CAD which appears to be because of the twin problems of low savings, caused by reckless fiscal policy, and evidence of falling export competitiveness. • India’s exports seem more diversified than China’s, though the degree of diversification has fallen somewhat in the last few years. • While India has been able to maintain its comparative advantage in tea, coffee, spices and marine products, it has lost comparative advantage in export of some agricultural commodities to other Asian competitors during the period after economic reforms. • Tea has suffered one of the sharpest falls in RCA since 2000, with Sri Lanka increasingly dominant. The RCA of coffee has also fallen sharply from 3.5 in 2000 to 1.3 in 2012. In coffee exports, Indonesia, Thailand and Vietnam are the major competitors to India.

16. “The Reserve Bank’s own research shows the economy can sustain a CAD of about 2.5 per cent of GDP under a scenario of slower growth,” (Deepak Mohanty, executive director, RBI). • The Fiscal Deficit of around 6.1 per cent which is far higher than the budget estimate of 5.1 per cent of GDP suggests in 2012-13. • There is a also need to reduce imports and boost merchandise exports to bring the CAD to sustainable levels. • High deficits have an adverse impact on India’s growth. Runaway fiscal deficits, leading to unsustainable level of public debt, can cause diverse forms of macroeconomic imbalances varying with means through which the deficit is financed.

17. The CAD was already high at 4.2 per cent of GDP in 2011-12 and could deteriorate further. This will further weaken the rupee and negatively impact the capital markets and the banking sector. • The growing fiscal deficit also leaves limited monetary space for lowering interest rates to stimulate private investment and growth. • The recent increase in government deficits, the investment decline (due to tight monetary policy), the rigidity of inflation, the pronounced IIP (index of industrial production) ( industrial output in September contracted by 0.4% due to dismal show by manufacturing sector and decline in consumer as well as capital goods output, Ahluwalia )decline and the widening of the CAD are all pointers to a deepening fiscal crisis. • Besides this, the need for fiscal consolidation is the financial health of the Oil Marketing Companies (OMCs)(OMCs were currently losing Rs 17.05 on a litre of diesel, Rs 32.70 on a litre of kerosene and Rs 347 on a cylinder of cooking LPG and that their losses on these three fuels could touch Rs 1.87 lakhcrores in the current fiscal)(The Indian Express 11sept2012). The high debt of the OMCs could lead financial crisis. • It is imperative that the government draw up a clear roadmap to reduce fiscal deficits thus fiscal consolidation came into existence.

18. The vicious circle: Trade to Fiscal deficit This leads to weak rupee and ultimately retrograding our economy.

19. 5.3 per cent fiscal target is a tough target. But the Finance Minister has full ambition to reach this target and the fiscal consolidation roadmap unveiled by P. Chidambaram will help limit fiscal deficit.(MrRajan Prime Minister Economic Advisory Council Chairman)

20. Ground of Fiscal Consolidation The credible and effective fiscal consolidation is built on 3 grounds A) High fiscal stress B) Twin deficits (fiscal deficit and trade deficit of the country go up) C) High gross borrowing: 5.8 per cent of GDP versus 5.4 per cent of GDP last year, leading to crowding-out of private sector financing for investment.

21. Tax Measures ? Subsidy Disinvestment Plan Expenditure

22. Tax Measures Fiscal Consolidation Subsidy Disinvestment Plan Expenditure

23. Tax Measures • The tax to GDP ratio will fall from 10.6 per cent as budgeted to 10.1 per cent as estimated in 2012-13. • The shortfall is occurred due to the fiscal stimulus extended by government through concessionary tax measures, and subsequently by the economic downturn. • Therefore, there is a need to initiate interventions for greater buoyancy in revenue mobilization and reach near to 11.9 per cent in 2007-08. • With the policy interventions, the shortfall can be limited and the tax GDP ratio for 2012-13 could end up at 10.3 per cent.

24. India taxes income at three rates — 10 per cent, 20 per cent and 30 per cent. These rates were fixed in 1997 by the then Finance Minister Mr. Chidambaram. “We need to bring down the fiscal deficit over next few years. For this purpose, we need to act on expenditure side and as well as revenue side. On the expenditure side, we must focus on how to prune the subsidies and reduce them as a proportion of GDP,” Mr. Rangarajansaid. (6th January 2013 The Hindu)

25. “Divestment programme is picking up and that’s good news. We have had at least one success and the pace should pick up.”. (Mr. Rajan)

26. Disinvestment (2007) Disinvestment : “privatization of public sector under takings with the purpose to provide financial support and improve the performance of public sector enterprises”. It is a process where Government sells its equity holding to private sectors.  Need???? • Enlarging competition and allowing new firms to enter the markets. • Due to more emphasis on welfare aspect govt. spend more revenue in development rather than creation of capital expenditure. So, for resource (fund) mobilization disinvestment occurred. Types of Disinvestment • Strategic Disinvestment (BALCO, MARUTI) • IPO(initial public offer) /FPO(follow on public offer) Disinvestment.

27. Maharatna CPSEs1) Coal India Limited2) Indian Oil Corporation Limited3) NTPC Limited4) Oil & Natural Gas Corporation Limited5) Steel Authority of India Limited Miniratna CPSEs • Central Warehousing Corporation • Housing & Urban Development Corporation Limited (unlisted) • India Tourism Development Corporation Limited • Indian Railway Catering & Tourism Corporation Limited • Manganese Ore (India) Limited • National Fertilizers Limited • NHPC (National Hydroelectric Power Corporation) Limited • Rashtriya Chemicals & Fertilizers Limited Navaratna CPSEs Bharat Electronics Limited Bharat Heavy Electrical Limited Bharat Petroleum Corporation Limited GAIL (Gas Authority of India Limited) Hindustan Aeronautics Limited Hindustan Petroleum Corporation Limited Mahanagar Telephone Nigam Limited National Aluminium Company Limited NMDC (National Mineral Development Corporation) Limited Neyveli Lignite Corporation Limited Oil India Limited Power Finance Corporation Limited Power Grid Corporation of India Limited RashtriyaIspat Nigam Limited Rural Electrification Corporation Limited Shipping Corporation of India Limited

28. Disinvestment Receipt 2 policy concerns for accelerating the Disinvestment: 1) how to get the sale price right, and 2) how to reduce risks for retail investors Instruments used for these above policy- A) Offer for sale (OFS) : it is created by The Securities and Exchange Board of India (SEBI) divestment in PSUs by using the secondary market mechanism of stock exchanges concentrating huge volume sales on a single day. This facility has been available since February 2012.

29. B) Call option model: Under this option, the GoI may offer for sale, simultaneously, multiple securities over a period of time until the divestment targets are achieved. C) Exchange Traded Fund: the shareholders and retail investors will encourage to participate. • GoI may also like to sell all the stocks that it holds instead of a select few. • It offer a number of advantages to the retail investors. • If these measures are adopted, the disinvestment target by the budget estimates, of Rupees 30,000 crore, can be achieved.

30. Subsidies • It was planned in 2012-13 to contain subsidies within 2 per cent of the GDP. Over next 3 year, to be further brought down to 1.75 per cent of GDP in 2014-15 concluding by the conversation of the Ministry of Petroleum and Natural Gas, and Department of Fertilizers. (Budget 2012-13). • Based on recommendation of ShriNandanNilekani, a mobile-based Fertilizer Management System has been designed to provide end to end information on movement of fertilisers and subsidies Nation-wide roll out during 2012. • However, subsidies are projected to rise to 2.6 per cent of GDP due to depreciating Rupee and oil prices in international market remaining sticky.

31. Petroleum Subsidy • Subsidy on diesel has been a major contributor to fiscal slippage in recent years. • Govt. policy objectives should at a minimum aim to eliminate half of the diesel per unit subsidy during this year itself by March 31, 2013, and the remaining half over the next fiscal year. • Similarly, our policy goal should be to eliminate the LPG subsidy by 2014-15 by reducing it by 25 per cent this year, with the remaining 75 per cent reduction over the next 2 years. • For kerosene, the objective should be to reduce the subsidy by one-third by 2014-15.

32. To immediately increase the price of diesel by Rupees 4 per litre, of kerosene by Rupees 2 per litre and of LPG by Rupees 50 per cylinder. • This would reduce the projected under recovery by Rupees 20,000 crore for the next half year. • Regarding LPG, there is also a recommendation of the Committee on direct cash transfer of subsidy headed by ShriNandanNilekani to cap the number of subsidized cylinders.

33. Fertilizer subsidy • The most urgent reform required on the fertilizer subsidy front is revision in the price of urea. • This will not only reduce the subsidy burden but would also reduce the unsustainable imbalance in the current consumption pattern of fertilizer in the country. • This is most necessary from the viewpoint of long term soil quality and agricultural productivity. • The Department of Fertilizers propose to increase the MRP of Urea by 10 per cent during the first year.

34. The price increase mechanism proposed is summarized below: (i) Increases in the pool price of overall energy i.e. Natural Gas, FO/LSHS and Naphtha, may be considered for increasing the retail price under modified NPS-III policy. (ii) The Department of Fertilizers could be authorized to decide on the amount of the MRP increase every fiscal year. • In subsequent years, regular increases in urea prices should be carried out to close the wide gap between urea and P&K fertilizer to enable efficient use of fertilizers and better agricultural productivity.

35. Food subsidy • On food subsidy, there is a need to increase the Central Issue Price (CIP). • Progressive reduction in food subsidy also needs to be achieved through reduction in administrative cost associated with economic cost. • It should be possible to effect reduction in food subsidy through more efficient foodgrain delivery operations in the medium term. • Regarding subsidy on sugar, there is a need to remove the system of levy sugar, which is only about 10% of the total consumption of the sugar in the country.

36. Government also needs to initiate measures to direct the subsidies to the beneficiary. • Introduction of direct transfer of cash subsidies may be a more efficient way of reaching the beneficiaries. • In Government assessment, the above steps can help contain total subsidy expenditure at 2.2 per cent of GDP in 2012-13.

37. Plan expenditure • The plan expenditure is budgeted to increase by almost 26 per cent over the last year’s actual plan expenditure. • To keep the deficit at an acceptable level, there is a need to take proactive measures to keep the plan expenditure under a further check. • Through proper prioritization and efficient use of available resources, the saving under plan expenditure can be increased by another Rupees 20,000 crore. • These cuts are made without in any way affecting benefits to malnourished children and lactating and pregnant mothers, and employment generation which protect the most vulnerable segments of the Indian population. • The Planning Commission has to improve its monitoring systems, and keep a very careful watch on the downstream deployment of its expenditures. • It is also important to protect allocations for schemes that lead to creation of capital assets, either through direct expenditure or through grants to other implementing agencies.

39. Deficit • With these policy interventions, the Government will be able to close the current fiscal year with a fiscal deficit of 5.2 per cent of the GDP. • The policy interventions are tough and touch almost all sections of the society but we feel that such achievements cannot happen unless the burden is equitably shared.

40. Social impact • The measures outlined will be undoubtedly expected to have significant short-term negative impact on incomes and spending of all households. • The consequences and pain would be even worse were these widely spread fiscal consolidation measures not be pursued – because a do-nothing approach would mean the risk of a much larger adjustment of incomes and spending forced by the markets, both domestic and international, with a spiraling fiscal deficit and its consequences for much slower growth, rising unemployment, and higher inflation.

41. Some of the specific price adjustments proposed, as on fuel, would be, nevertheless, expected to have an immediate negative impact on all households and the poor by raising short-term inflation however, these short term inflation impacts would be relatively limited. • The fiscal consolidation measures are thus essential to protect the economy and all households from these worse impacts.

42. Fiscal Roadmap for the Medium Term • In the base year of 2012-13, it is possible to achieve a Fiscal deficit target of 5.2 per cent with various policy initiatives, which involve limiting expenditure on subsidies, meeting the tax receipts and disinvestment targets set at the budgetary estimates stage and effecting savings in Plan expenditure by rationalizing expenditure. • The committee examined various measures which are needed to be undertaken by Government for fiscal consolidation in the medium term.

43. These measures include: i. Raising the Tax-to-GDP ratio; ii. Policy measures for pruning expenditure on subsidies and other items of expenditure; iii. Rightsizing the size of Plan support; and iv. Steps for increasing disinvestment proceeds.

44. Achievements of Fiscal Consolidation

45. Fiscal deficit hits 80% of Budget estimates in April-November The government has run up a fiscal deficit  of 80.4% of the budget estimates  in the first eight months of the current financial year, marginally better than 85.6% in the same period last fiscal. Fiscal deficit in 2011-12 was 1.8% points higher than budgeted 4.1% of the GDP and this year the government has revised the estimate to 5.3% from 5.1% at the time of budget. the finance ministry has put tight controls on the expenditure 10% mandatory cut on non-plan expenditure in the current year, ban on holding of meetings and conferences at 5-star hotels, ban on creation of plan and non-plan posts and restrictions on foreign travel. In order to bring down the subsidy, the government in September raised the diesel price by a steep Rs 5 per litre and capped the number of subsidised cooking gas cylinders to six per household in a year. Net tax receipts during the April-November period stood at Rs 3.7 lakhcrore or 47.9% of the budget estimate. Total expenditure was Rs 8.67 lakhcrore or 58.2% of the budget expenses showing that expenditure measures were working. (Economic Times 1stjanuary 2013)

46. Staggered rise in diesel price will squeeze inflation: Swaminathan S A Aiyar. The government is considering raising the price of diesel by Rs 1 per litre per month for 10 months. This will slash the fiscal deficit without creating the big outcry of a one-shot rise of Rs 10. inflation will actually be higher and GDP lower if diesel prices are kept static. (Economic Times 2ndjanuary 2013)

47. Government transfers Rs.35.45 lakh on launch day Direct Benefit Transfers kicked off in 20 districts with 1980 transactions as government, as government transferred Rs. 35.45 lakh to the accounts of beneficiaries with Adhar or Unique Identity Number. (Economic Times 2ndjanuary 2013)

48. Future Targets of Fiscal Consolidation The Government plans to bring down the fiscal deficit to 4.8 per cent in the next fiscal, 4.2 per cent in 2014-15, 3.6 per cent in 2015-16 and to 3 per cent of GDP in 2016-17 and this target will be achieved by: • Cut down subsidies. • Stop leakages in subsidies. • Reform the tax structure (implement GST). • Improve the performance of PSUs. • Recover blackmoney • Stop ministers from using Business class airtickets  and other wasteful Government expenditures. 

49. Fiscal Consolidation : Harsh but Inevitable Measures

50. Reference • Kelkar, V., (September 2012); “Report of the committee on Roadmap for fiscal consolidation”; p.n. 1-38. • WWW.ECONOMICTIMES.COM • www.divest.nic.in • www.thehindu.com • www.indianexpress.com