CURRENT ECONOMIC SCENARIO AND BUDGET

Siddhartha Roy

6th March, 2013

REAL GDP GROWTH: BELOW POTENTIAL

Source: Economic Survey (2012-13); AE = CSO Advance Estimate; P = Mean of Ministry of Finance Projection 6.1% to 6.7%

• Indian economy has attained a high growth trajectory in the past buttressed by higher

domestic savings and investment together with the growth in the global economy.

• Currently, the growth pace has slowed down due to uncertainty in the global market and high

cost of finance and slowdown in investment domestically.

GDP GROWTH: INCREASED VOLATILITY

Period Average GDP

Growth (%)

Standard

Deviation

Coefficient of

Variation*

1951-52 to 1979-80 3.5 3.6 1.03

1980-81 to 1991-92 5.2 2.4 0.44

1992-93 to 2002-03 5.8 1.3 0.22

2003-04 to 2007-08 8.9 0.9 0.10

Q1 2008-09 to

Q2 2012-13 7.3 1.3 0.18

* Coefficient of Variation = Standard Deviation / Average Growth Rate

SECTORAL GDP GROWTH (y/y %)

Industry Agriculture Services

Trade, Hotel, Transport and

Communication (46.4%)*

Finance, Insurance, Real

Estate & Business Services (31.6%)

Community, Social & Personal Services (22.0%)

2007-08 10.3 5.5 10.3 10.9 12.0 6.9

2008-09 4.7 0.4 10.0 7.5 12.0 12.5

2009-10 9.5 1.5 10.5 10.4 9.7 11.7

2010-11 9.5 7.5 9.8 12.3 10.1 4.3

2011-12 3.8 3.1 8.2 7.0 11.7 6.0

2012-13 (AE) 3.3 1.6 6.6 5.2 8.6 6.8

*Figures in bracket are % share within service sector

• Service sector can not be immune to developments in industry and agriculture sectors. • To sustain the high growth performance of the service sector growth sustenance in other

sectors is necessary.

Source: CSO

SAVINGS RATE

(% of GDP at current market prices)

Domestic savings in 2011-12 came down. This was owing to :

- Lower Household sector savings due to decline in financial savings

- Lower Retained Earnings in private sector

- Lower Public sector savings

Source: CSO

No. Sector 2007-08 2008-09 2009-10 2010-11 2011-12

.. Gross domestic savings 36.8 32.0 33.7 34.0 30.8

(A) Household sector 22.4 23.6 25.2 23.5 22.3

(A.I) Financial savings 11.6 10.1 12.0 10.4 8.0

(A.II) Saving in physical assets 10.8 13.5 13.2 13.1 14.3

(B) Private corporate sector 9.4 7.4 8.4 7.9 7.2

(C) Public sector 5.0 1.0 0.2 2.6 1.3

INVESTMENT RATE

Unless FDI picks up, investment is likely to be lower.

Investment cycle was affected by higher interest costs, land acquisition

problems, environmental and regulatory hurdles.

No. Sector 2007-08 2008-09 2009-10 2010-11 2011-12

.. Gross capital formation 38.1 34.3 36.5 36.8 35.0

(A) Household sector 10.8 13.5 13.2 13.1 14.3

(B) Private corporate sector 17.3 11.3 12.1 13.4 10.6

(C) Public sector 8.9 9.4 9.2 8.4 7.9

.. Gross capital formation 38.1 34.3 36.5 36.8 35.0

Source: CSO

(% of GDP at current market prices)

INVESTMENT & CONSUMPTION GROWTH: DECLINING

Source: CSO

Growth in Private Final Consumption Expenditure and Gross Fixed Capital Formation at Constant Prices (%, y/y)

GOVERNMENT & PRIVATE SECTOR BORROWINGS: EVIDENCE OF CROWDING OUT

0

7

14

21

28

35

42

10

15

20

25

30

35

20

01-0

2

20

02-0

3

20

03-0

4

20

04-0

5

20

05-0

6

20

06-0

7

20

07-0

8

20

08-0

9

20

09-1

0

20

10-1

1

20

11-1

2

20

12-1

3*

Bank's Credit to Commercial Sector (%, y/y) Bank's Credit to Government (%, y/y)

*up to Feb’13 Source: RBI

CORPORATE PROFITS / PROJECT INVESTMENTS

Q1 2011-12 Q2 2011-12 Q3 2011-12 Q4 2011-12 Q1 2012-13 Q2 2012-13 Q3 2012-13

Sales (Y-o-Y % change)

27.0 19.9 24.2 17.9 11.7 13.0 7.6

PAT (Y-o-Y % change)

8.9 -26.0 -2.4 26.4 -44.1 72.2 23.6

Source: CMIE

Rs. Billion Apr-Dec 2011-12 Apr-Dec 2012-13 % change (y/y)

New Projects 7383 3443 -53.3

Projects Shelved 3717 2786 -25.0

Source: CMIE

SLOWDOWN IN CORPORATE INVESTMENTS

0

3000

6000

9000

Jun

-07

Jan

-08

Au

g-0

8

Mar

-09

Oct

-09

May

-10

De

c-1

0

Jul-

11

Feb

-12

Sep

-12

New Investment Announcement (Rs. Bn)

0

700

1400

2100

Jun

-07

Dec

-07

Jun

-08

Dec

-08

Jun

-09

Dec

-09

Jun

-10

Dec

-10

Jun

-11

Dec

-11

Jun

-12

Dec

-12

Investments Shelved (Rs. Bn)

Source: CMIE

QUARTERLY USE-BASED INDUSTRY-WISE IIP GROWTH (y/y %)

General Capital Goods Intermediate Goods Consumer Durables

2011-12 Q1 7.0 17.0 1.8 2.7

2011-12 Q2 3.2 -5.8 -0.8 7.9

2011-12 Q3 1.2 -16.2 -2.9 4.9

2011-12 Q4 0.6 -6.9 -0.5 -4.1

2012-13 Q1 -0.3 -20.1 0.8 8.0

2012-13 Q2 0.4 -8.1 1.5 0.1

2012-13 Q3 2.1 -1.0 2.4 3.2

Source: CSO

INDUSTRIAL SECTOR: DECLINING GROWTH TREND

GROWTH OF IIP 12 MONTHS MOVING AVERAGE (2004-05=100, %, Y-O-Y)

Source: CSO, DES Calculations

INVESTMENT IN AGRICULTURE

80-81

to 84-

85

85-86

to 89-

90

90-91

to 94-

95

95-96

to 99-

00

00-01

to 04-

05

05-06

to 09-

10

Growth in

investment in

agriculture (%)

39.8 9.8 15.4 12.1 8.3 19.5

GCF in agriculture

(% of overall GDP) 7.0 3.2 2.9 2.7 2.5 2.6

GCF in agriculture

(% of agriculture

GDP)

23.0 11.9 11.2 11.3 12.6 15.4

Investment in agriculture in early 80s was high due to the predominance of agriculture

sector in economic growth. However, over a period of time, it has come down.

Similarly, share of investment in agriculture as % of GDP has come down.

Of the 2.6%, 2.3% came from the private sector and the rest from the public sector. This

proportion has remained constant since 2005-06.

Source: CSO

BALANCE OF PAYMENTS ACCOUNT

2007-08 2008-09 2009-10 2010-11 2011-12 2011-12

H1 2012-13

H1

Merchandise Exports 166.2 189 182.2 256.2 309.8 158.2 146.5

Merchandise Imports 257.6 307.7 300.6 383.4 499.5 247.7 237.2

Merchandise Trade Balance

-91.5 -118.7 -118.4 -127.3 -189.8 -89.5 -90.7

% of GDP (-7.4%) (-9.7%) (-8.5%) (-7.5-%) (-10.2%) (-9.9%) (-10.9%)

Net Invisibles 75.7 89.9 80.0 79.3 111.6 53.1 51.7

% of GDP 6.1% 7.4% 5.8% 5.0% 5.9% 5.9% 6.2%

of which Software

36.9 43.7 48.2 56.8 60.9 28.2 30.8

Private Remittances 41.7 44.6 53.5 53.4 63.5 30.3 32.4

Investment Income -4.4 -4 -5.5 -13.9 -16.5 -9.3 -9.3

Current Account Balance

-15.7 -28.7 -38.4 -48.1 -78.2 -36.4 -38.9

% of GDP (-1.3%) (-2.3%) (-2.8%) (-2.6%) (-4.2%) (-4.0%) (-4.6%)*

Source: Economic Survey, CSO *CAD as % of GDP was at a record high of -5.4% in Q2 2012-13

ELASTICITY OF TAX REVENUES TO GDP

Elasticity

Direct Tax 1.32

Income Tax 1.57

Corporate Tax 1.02

Indirect Tax 0.94

Total Tax 1.10

Sources: Ministry of Finance, DES Estimates; Elasticity indicates % change in tax revenue for 1% change in GDP

BUDGET 2013-14 OVERVIEW • The budget FY 14 estimates fiscal deficit at 4.8% of GDP (or Rs. 5.42 lakh

crore) as compared to 5.2% in FY 13. Fiscal consolidation will help RBI to bring down interest rates which in its turn can affect investment and growth positively.

• The budget assumes 13.4% nominal GDP (at market prices) growth in FY 2013-14. Assuming 7% inflation, the real growth works to around 6.4% which is in the range of 6.1-6.7% estimated by the Economic Survey 2012-13.

• Total expenditure (Rs. 16.6 lakh crore) is expected to grow 16.1% against the total revenue (Rs. 10.6 lakh crore) growth of 21.2%

• The budget has focused on plan expenditure (29.4% growth, accounting for 1/3rd of total expenditure) while keeping non-plan expenditure under control (10.8%)

• The Government continues to maintain that between 2012-17, Rs. 55 lakh crore or US $ 1 trillion would be spent on infrastructure of which private sector’s share is estimated at 47%.

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• Capital expenditure which is around 14% of total expenditure, is budgeted to increase by 36.6% while revenue expenditure is budget to increase by 13.7%.

• From the revenue collection point of view, the budget has not altered the tax structure much apart from increasing surcharge on personal and corporate incomes above a certain limits (Rs. 1 cr and Rs. 10 cr respectively.

• 15% tax rate maintained on dividends repatriated by Indian companies subsidiaries abroad. Further the Indian company shall not be liable to pay dividend distribution tax on the distribution to its shareholders of that portion of the income received from its foreign subsidiary. The impact of this will be significantly positive.

• Withholding tax of 20% to be levied on unlisted companies which undertake share buyback.

• Transfer Pricing: Current problems remain & notices continue to be issued against MNCs. Rules on safe harbour provisions is expected to be issued after submission of the Rangachary committee on 31.03.2013

BUDGET 2013-14 OVERVIEW (II)

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FOCUS ON EXPENDITURE

• Some important areas of spending in the budget are:

• Rural Development: Allocation of Rs. 80,194 cr (46% increase) to the ministry of rural development. Allocation to MGNREGA has been kept unchanged at Rs. 33000 cr. Higher allocation will provide buoyancy to the rural market for consumer durables, two wheelers, SUVs etc.

• JNNURM: Rs. 14,873 cr (100% increase) with more focus on buses

• Agriculture: Increase in target of agriculture credit to Rs. 7 lakh crore

• Food security: Allocation of Rs. 10,000 cr in addition to the food subsidy.

• Road Projects: 3000 kms of construction projects to be awarded in Apr-Sept 2013

• Industrial Corridors: Plans for development of 7 new cities and 2 smart industrial cities along the DMIC (in Gujarat & Maharashtra states)

• Housing: Rs. 6000 cr (50% increase) allocation to rural housing fund and Rs. 2000 cr to urban housing fund under National Housing Bank

• This would provide thrust to the sectors like Housing/Construction, Automobiles, Steel, etc.

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DIRECT TAX CHANGES

Category of tax payer Existing effective rate Proposed effective rate

Domestic Company

Income < Rs. 1 cr 30.90 30.90

Income between Rs. 1 cr & Rs. 10 cr. 32.44 32.44

Income > 10 Cr 32.44 33.99

Foreign Company

Income < Rs. 1 cr 41.20 41.20

Income between Rs. 1 cr & Rs. 10 cr. 42.02 42.02

Income > 10 Cr 42.02 43.26

• Personal Tax Rates: Tax slabs remain unchanged Tax credit of Rs 2000 to the individuals in 2-5 Lakh taxable income bracket 10% Surcharge on individuals with taxable income greater than Rs. 1 cr.

• Corporate Tax Rates:

• Tax rate for royalty payments by MNCs to parents abroad to be streamlined to 25% from existing range of 10-30%.

• For foreign investors some uncertainty created by the statement that tax residency certificate may not be a sufficient condition to obtain treaty (DTAA) benefits.

• Surcharge on corporate income as well as distributed income (Dividends) increased to 10% from 5%.

• All the proposed surcharge hikes are temporary and applicable only for FY 2013.

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SNAPSHOT OF BUDGET 2013-14 (Rs. Cr.)

2011-12 2012-13 (RE) 2013-14 (BE) Growth (%)

Total Net Tax Revenue 6,29,765 7,42,115 8,84,078 19.1

Direct Tax Receipts 1,71,131 2,06,961 2,48,589 20.1

Indirect Tax Receipts 3,95,230 4,72,202 5,67,761 20.2

Other 63,404 62,952 67,728 7.6

Non-Tax Revenue 1,21,672 1,29,713 1,72,252 32.8

Total Expenditure 13,04,365 14,30,825 16,65,297 16.4

Plan Expenditure 4,12,375 4,29,187 5,55,322 29.4

Non-Plan Expenditure

891,990 1,001,638 11,09,975 10.8

Source: Ministry of Finance

BUDGET HIGHLIGHTS – 2013-14

REVENUE * Expect 133 billion rupees through direct tax proposals in 2013/14

* Expect 47 billion rupees through indirect tax proposals in 2013/14 CURRENT ACCOUNT DEFICIT * India's greater worry is the current account deficit - will need more than $75 billion this year and next year to fund deficit INFLATION * Food inflation is worrying, will take all steps to augment supply side

BUDGET HIGHLIGHTS – 2013-14

• TAX * Proposes surcharge of 10 pct on rich taxpayers with annual income of more than 10 million rupees a year

* To increase surcharge to 10 pct on domestic companies with annual income of more than 100 million rupees * To continue 15 pct tax concession on dividend received by India companies from foreign units for one more year * Propose to impose withholding tax of 20 pct on profit distribution to shareholders * Amnesty on service tax non-compliance from 2007 * 10 billion rupees for first installment of balance of GST (Goods and Services Tax) payment * Propose to reduce securities transaction tax on equity futures to 0.01 pct from 0.017 pct * Time to introduce commodities transaction tax (CTT) * CTT on non-agriculture futures contracts at 0.01 pct

BUDGET HIGHLIGHTS – 2013-14 • CORPORATE SECTOR AND MARKETS

* Plans to issue inflation-indexed bonds * Proposes capital allowance of 15 pct to companies on investments of more than 1 billion rupees * Foreign institutional investors (FIIs) can use investments in corporate, government bonds as collateral to meet margin requirements * Insurance, provident funds can trade directly in debt segments of stock exchanges * FIIs can hedge forex exposure through exchange-traded derivatives * Investor with less than 10 pct stake in a company will be regarded as FII, more than 10 pct stake as FDI (foreign direct investment) * Stock exchange regulator will simplify know-your-customer norms for foreign portfolio investors

• * To implement quickly recommendations of financial sector legislative reforms commission

BUDGET: SOME UNRESOLVED ISSUES

Movement towards GST

DTC

Amendments with retrospective effect

Transfer Pricing Clarifications & its Impact on FDI

Other than constitutional amendment for GST, not much clarification has been provided. GAAR may remain abeyance till April 2016.

SHARE OF MAJOR COMPONENTS OF REVENUE EXPENDITURE

2011-12 2012-13 (RE) 2013-14 (BE)

Interest Payments 24.6 22.1 22.3

Major Subsidies 12.3 18.0 13.9

Defense Expenditure 9.0 7.6 7.0

GDP (Current Market Prices) 2013-14: Rs. 1,13,71,886 Cr

• With 7.9% average cost of borrowings Rs. 3,70,684 Cr is the interest payment on Rs 46,92,202.

• Lowering interest rates by 25 bps could save the government Rs. 11,730 Cr.

FISCAL DEFICIT AND DEBT INDICATORS (% of GDP)

2007-08 2008-09 2009-10 2010-11 2011-12

(RE) 2012-13

(BE)

Centre Liabilities

58.9 58.6 56.3 52.0 51.2 51.7

States Liabilities

26.6 26.1 25.5 23.0 22.2 22.1

Total Liabilities

85.5 84.7 81.7 75.0 73.4 73.8

Centre Gross Fiscal Deficit

2.5 6.0 6.5 4.8 5.7 5.2*

States Gross Fiscal Deficit

1.5 2.3 2.8 2.1 2.4 2.1

Combined Gross Fiscal Deficit

4.0 8.3 9.3 6.9 8.1 7.3

RE – Revised Estimates;

BE – Budget Estimates

Sources: Government Liabilities Data – RBI (Except 2012-13 BE), Deficit Data – Economic

Survey 2012-13; * Revised Estimate

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