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GS Paper: GS3-03.Government Budgeting

  • Freebie model of Governance

    Context

    The newly elected Punjab government’s announcement of providing up to 300 units of free power to every household has raised questions: What constitutes “freebies”?

    Two categories for providing support

    • In India government provides two types of support.
    • 1] support to low-income households for augmenting their consumption of selected goods and services.
    • 2] Government also provides incentives to support selected categories of investors and producers.
    • Different objectives: The economic objectives in these two categories are quite different.
    • The first category would include the free or subsidised provision of foodgrains and services such as health and education.
    • Examples of the second group include the central government’s recent initiative for production-linked incentives to various sectors and tax concessions.
    • In the past, incentives in the form of reduction of corporate taxes have been offered to promote investment in general, or in certain regions such as backward areas.

    What commodities should be distributed free?

    • The key question is to decide what commodities should be distributed free or at a subsidised level and what the level of subsidy should be.
    • Essential goods: The provision of foodgrains at a heavily subsidised price to target groups has found general acceptance, particularly among political parties, even though there are some critics of the measure.
    • The distribution of commodities which are considered “essential”, primarily foodgrains, faces no criticism.
    • Merit goods: There is also a category of goods which are called “merit” goods where significant positive externalities are associated with their consumption — for instance, health and education-related provisions, including mid-day meals and breakfast.
    • In such cases, subsidisation is justified: If only market prices prevail, the community will consume less than what is socially desirable.

    What should be the suitable mode of providing support?

    • The question of a suitable model for providing budgetary support arises in the context of both consumption and production-supporting initiatives.
    • 1] In the first case, budgetary support to a targeted segment of the population for augmenting their consumption of essential items may be provided either through direct income support or by a free or highly subsidised provision. 
    • Procurement set up and distribution system: When the provision of subsidised goods is involved, there may, in general, be a requirement of a procurement set-up and a public distribution system.
    • Managing procurement and distribution by government agencies involves additional costs which tend to be higher than the corresponding supply through the market because of leakages and avoidable administrative costs.
    • 2] Production-related incentives: In the case of production-related incentives, alternative methods include direct budgetary support and indirect support through tax concessions.
    •  Both have a differential impact.
    • These schemes also require to be carefully designed to avoid their misuse and minimise their costs. The provision of free power to farmers was often misused.
    • In the case of tax concessions, there have not been any convincing studies as to whether the stated initial objectives were achieved in line with the large budgetary costs.
    • The magnitudes involved amounted to 1.9 per cent and 2.5 per cent of the GDP in 2018-19 and 2019-20 respectively.

    What should be a prudent fiscal limit for funding such programmes?

    • Let us consider the case of distribution of commodities that are meant to support consumption.
    • Limited budgetary resources: This question should be considered in light of our limited budgetary resources.
    • Stagnating revenue to GDP ratio: In India, the revenue to GDP ratio has been stagnating over a long period of time.
    • During 2010-11 to 2019-20, combined revenue receipts of central and state governments, relative to GDP, have languished in the narrow range of 18.4 per cent to 20.3 per cent.
    • In contrast, in many developed and emerging market economies, this ratio tends to be much higher.
    • In 2019, these ratios were 36 per cent and 30.1 per cent for the UK and USA.

    Suggestions

    • It is advisable to limit the distribution of commodities and services at highly subsidised levels to essential and merit goods.
    • Infrastructure expansion: Production may be incentivised more effectively by other methods such as infrastructure expansion.
    • Determining the total quantum of support: In respect of production-related incentives also, greater care is required for determining the total quantum of support as well as the specific forms of such support.
    • Limit of 10 %: It would be prudent to limit overall fiscal support for the distribution of commodities to less than 10 per cent of the total expenditure of the central government and state governments until their revenue GDP or GSDP ratios are successfully increased in a sustained way.

    Conclusion

    Governments that do not pay adequate attention to the strength of their fisc eventually become exposed to the cost of the choices that they make.

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    Back2Basics: Merit goods

    • Merit goods are the goods that are provided generally by the government to certain sections of the society.
    • Unlike in the case of pure public goods, the merit goods are not provided to the entire society; rather they are given to certain targeted people.
    • The government here believe that the deserving people may under-consume such goods and hence provides these to them at low cost or no cost.

    Positive externalities

    • A positive externality exists if the production and consumption of a good or service benefits a third party not directly involved in the market transaction.
    • For example, education directly benefits the individual and also provides benefits to society as a whole through the provision of more informed and productive citizens.

  • Managing the fiscal shock of the Russia-Ukraine conflict

    Context

    The Union Budget 2022-23 received a great deal of attention even before the financial year began due to the Russia-Ukraine conflict, and the consequent rise in inflation. There has been considerable speculation on whether the fiscal targets will be altered due to the evolving conditions.

    Estimate of GDP

    •  The critical estimate of GDP growth assumed for this year has certainly changed, with the RBI also adjusting its earlier forecast.
    • However, the budget was conservative to begin with, assuming an 11.1 per cent growth estimate on which its revenue collection targets were based.
    • Given that real GDP growth has been scaled down by the RBI to 7.2 per cent, and as inflation has gone up, on balance, the 11.1 per cent assumption looks tenable.
    • Hence, inflation has been a positive for the government in this respect.

    Tax collection

    • Another positive that emerged last year was that overall tax collections were even more buoyant than expected.
    • From the budgeted figure of Rs 22.17 lakh crore, the revised estimates raised the target to Rs 25.16 lakh crore.
    • In comparison, actual collections have turned out to be even higher at Rs 27.07 lakh crore.
    • If this buoyancy is maintained, then the government can expect the 2022-23 target of Rs 27.57 lakh crore to be exceeded by around Rs 2.5 lakh crore (of this, around 30 per cent will go to the states).
    • This additional revenue would ideally flow from enhanced GST collections, corporate tax, and customs.
    • Central to GST collections increasing is private consumption.
    • Today, high inflation erodes the purchasing power of households, which will divert a larger portion of their incomes for necessities that have become expensive.
    • Therefore, there will be uncertainty here. 
    • Corporates did well last year as they did manage to pass on higher input costs to the consumers, especially in the second half of the year.
    • Can they do it for the second time is the question.
    • High growth in trade volumes led to the government raking in higher customs collections. W
    • ith global growth set to slow down in 2022, a similar flow is unlikely.

    Excise collection and challenges

    • The government will be watchful of excise collections as it is possible that rising fuel prices will lead to lower consumption.
    • Also, in case crude oil continues on the current path and remains in the region of $100-120/barrel, a call may have to be taken by the government on the excise duty: Once the prices of diesel and petrol remain at a new threshold, there will be a tendency for freight rates to be increased permanently.
    • This will have a secondary impact on inflation. 

    Disinvestment challenges

    • On the revenue side, the LIC disinvestment that was to happen last year will materialise this year.
    • The disinvestment has been pushed through for May, but would be of a much lower amount (around Rs 21,000 crore) than envisaged earlier.
    • It will be interesting to see if this would be a part of the Rs 65,000 crore target for this year.

    Uncertainty on the expenditure side

    • The biggest concern will be the fertiliser subsidy, which has been a volatile expenditure item.
    • Higher prices of natural gas have meant that fertilisers have been more expensive and so, the budgeted amount of Rs 1.05 lakh crore will have to be revisited.
    • With inflation already high and agriculture expected to be the bright spot again, the government cannot risk ignoring the subsidy element on fertilisers because there can be an impact on farm product prices.
    • The food subsidy will also need to be examined.
    • The present rise in food prices globally has meant that there is a good global market, especially for wheat.
    • Exports for wheat and maize might rise but can distort the procurement process.

    Interest rate and its implications for borrowing

    • The budget had assumed that interest rates would be stable.
    • However, conditions have changed quite quickly with bond yields moving up by almost 50 bps for the 10-year G-secs.
    • This will mean that the entire Rs 15.95 lakh crore of gross borrowing will have to be carried out at a higher cost.
    • This can result in an additional Rs 8,000 crore of interest if the 50 basis points increase holds through the year. There could be an upward bias if rates go up further.

    Conclusion

    The longer the conflict continues the greater will be the impact. While the government has adeptly managed the fiscal numbers in the last couple of years, this year will be particularly challenging considering the nature of the shock.

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  • Budget falls short on green ambitions

    Context

    One can analyse the budget from three standpoints: Direct allocations for the environment sector, allocations for environment in non-environment sectors, and allocations for other sectors with environmental impacts.

    Analysing the Budget from an environmental standpoint

    1] Allocation for MoEFCC

    • There is a slight increase in the budget of the Ministry for Environment, Forests and Climate Change (MoEFCC) from 2021-22’s revised estimate of Rs 2,870 crore to Rs 3,030 crore.
    • This is a meagre 0.08 per cent of the total budgetary outlay.
    • While some sectors like forestry and wildlife have seen a healthy rise in allocation, the outlay for others like the National River Conservation Plan has declined.

    2] Focus on natural and organic farming

    • There is a welcome stated focus on natural and organic farming, and on promoting millets.
    • No details on allocation: There are no details on the allocations, including for linkages necessary to make such farming viable, such as manure and markets.
    • Also, given the major push for food processing in the budget, without making reservations for community-run businesses, there is a danger of big corporations capturing the organic space.
    • Missing focus on rainfed farming: Completely missing is a focus on rainfed farming that involves 60 per cent of the farming population and is ecologically more sustainable than artificially irrigated agriculture.
    • The FM announced the government’s support to “chemical-free farming throughout the country,” but she has also allocated a massive chemical fertiliser subsidy of Rs 1,05,222 crore.
    • A recent announcement that palm plantations are proposed in Northeast India and the Andaman Islands, both ecologically fragile, makes this a worrying prospect.

    3] Positive provisions on the climate front

    • On the climate front, there are several positive provisions — use of biomass for power stations, boost to batteries, energy-efficiency measures in large commercial buildings, and sovereign green bonds.
    • Renewable and “clean” energy has received substantially higher allocations.
    • But the focus remains on mega-parks in solar/wind energy, nuclear power, and large hydro that have serious ecological impacts. 
    • The additional budget for farm-level solar pumps and rooftop solar generation is welcome, but it’s minuscule compared to mega-projects.
    • Missed opportunity for decentralised renewable energy: Another chance to shift towards decentralised renewable energy with less ecological impacts and greater community access has been missed.
    • The budget does promise greater support for public transport, something demanded by citizens’ groups for decades.
    • Unfortunately, most of the allocation in this will go to metros that are extremely carbon-intensive in terms of construction.
    • The National Climate Action Plan gets an abysmally inadequate Rs 30 crore — the same as in 2021-22.
    • And there is no focus on a “just transition” that could help workers in fossil fuel sectors, like coal, to transition to jobs in cleaner, greener sectors.

    4] Concerns with focus on infrastructure in Budget

    • As highlighted by the FM, this is predominantly an “infrastructure budget”.
    • While investments in infrastructure for small towns and villages are urgently needed, much of what is proposed are mega-projects.
    • The proposed 25,000 km increase in highways will further fragment forests, wetlands, mountains, grasslands, agricultural lands and bypass most villages.
    • A shift in paradigm to decentralised, sustainable, and community-oriented infrastructure is missing.
    • Several specific allocations are of further concern. For instance, the Ken-Betwa river-linking project, given over Rs 40,000 crore, will submerge valuable tiger habitat.
    • The Deep Ocean Mission and the Blue Revolution allocations are oriented towards commercial exploitation rather than conservation and sustainable use. 

    5] Missed opportunity on green jobs

    •  The budget misses out on a major shift to “green jobs”.
    • This includes support to decentralised (including handmade) production of textiles, footwear, and other products.
    • Even the MGNREGS, which could have been used for regenerating two-thirds of India’s landmass that is ecologically degraded, has got reduced allocation.

    Conclusion

    Another chance to turn the economy towards real sustainability and equity — a real “Amrit Kaal” as India heads to a centenary of Independence — has been missed.

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  • Fiscal management during a pandemic

    Context

    The fiscal deficit for the year 2022-23 is higher than what was recommended by the Fifteenth Finance Commission. However, if we consider the direction of consolidation, it is towards a reduction in the fiscal deficit.

    The budget focuses on capital investment

    • This year’s Union budget projects an increase in capex by Rs 3.14 lakh crore, as compared to the budgeted numbers of the previous fiscal.
    • Given the economy’s savings-investment profile and macroeconomic uncertainties due to the pandemic, private and household investments are likely to be reactive to the general economic environment.
    • Achieving sustainable recovery: For the government, making capital investment in such uncertain times assumes a much higher priority and is equally indispensable for achieving a strong and sustainable recovery from the pandemic.
    • Increasing share of government: As per National Accounts data, gross fixed capital formation by the general government (Centre and states) has shown an increase as a percentage of GDP from 3.48 in 2011-12 to 3.82 in 2019-20, while other sectors, particularly households, the share fell from 15.75 per cent to 11.39 per cent during the same period.
    • The fiscal stance taken in the post-pandemic budgets for higher capital spending, including the budget of 2022-23, is likely to further enhance the general government share in overall capital formation. 
    • Important role of the States: it is also important to recognise that two-thirds of the general government’s capital expenditure is undertaken by states and in this context, the announcement of the Rs 1 lakh crore interest-free loans to the states to increase public investment has been a significant step.
    •  Since states taken together have a higher share in the country’s public capital spending, effective absorption of this additional borrowing facility will be critical for higher public investment.

    Three broad trends on Fiscal Consolidation

    • 1] Increase in taxes: The increase in taxes by Rs 5.71 lakh crore between 2020-21 (the first year of the pandemic) and 2022-23 shows that the fiscal challenges have eased, but remain present as we navigate economic recovery in uncertain times.
    • 2] Reduction in revenue deficit: Between 2020-21 and 2022-23 (BE), the reduction in revenue deficit has been substantial — from 7.3 per cent to 3.8 per cent of GDP.
    • 3] Revenue deficit dominates fiscal deficit: Compositionally, revenue deficit continues to be more than 55 per cent of the fiscal deficit and the management of such a deficit has few important considerations for revenue expenditure, that is, interest payments and allocation under various centrally sponsored and central sector schemes.
    • Role of CSS in revenue deficit: Aggregate allocation under centrally sponsored and central sector schemes (CSS) as per the 2022-23 (BE) is Rs 3.83 lakh crore and the interest payment cost of the Union government is Rs 9.56 lakh crore.
    • Beyond scheme-wise allocations, it is also important to consider CSS allocation as an issue of macro-fiscal management issue at the Union and state level, especially when it is contributing to the high revenue deficit of the central government and binding state resources for matching contribution, thereby increasing states’ deficit.

    Understanding the direction of fiscal consolidation

    • The fiscal deficit for the year 2022-23 is higher than what was recommended by the Fifteenth Finance Commission.
    • However, if we consider the direction of consolidation, it is towards a reduction in the fiscal deficit.
    • Though in the medium-term, the fiscal story is about supporting recovery, it is also true that there is no “one-size-fits-all” solution to fiscal consolidation and debt sustainability. 

    Conclusion

    The direction of fiscal consolidation rather than a specific quantified path in an unprecedented time like this is probably the most appropriate consideration.

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  • What are Virtual Digital Assets?

    Recently, The Central Board of Direct Taxes (CBDT) issued detailed guidelines on the Tax Deducted at Source (TDS) rule for Virtual Digital Assets (VDAs) such as cryptocurrencies .

    What are Virtual Digital Assets?

    • To define the term “virtual digital asset”, a new clause (47A) is proposed to be inserted into section 2 of the Act.
    • A virtual digital asset is proposed to mean any information or code or number or token (not being Indian currency or any foreign currency):
    1. Generated through cryptographic means or otherwise
    2. Providing a digital representation of value that is exchanged with or without consideration with the promise or representation of having inherent value
    3. Functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes
    4. Can be transferred, stored, or traded electronically.
    • Non-fungible token (NFT) and; any other token of similar nature are included in the definition.

    Why tax them?

    • Popularity: Virtual digital assets have gained tremendous popularity in recent times and the volumes of trading in such digital assets have increased substantially.
    • Growing market: Further, a market is emerging where payment for the transfer of a virtual digital asset can be made through another such asset.
    • Increased transactions: There has been a phenomenal rise in such transactions and the magnitude and frequency of these transactions have made it imperative to provide for a specific tax regime.
    • Prevalence of gifting: The gifting of virtual digital assets is also a popular mode of exchange.

    Key takeaways from the FM’s speech

    • The bill provides for the definition of virtual digital assets which is wide enough to cover emerging digital assets including NFT, assets in metaverse, cryptocurrencies, etc.
    • This recognition of digital assets under income tax is NOT akin to granting legal status.

     

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  • How budget can generate higher growth, jobs

    Context

    Although the impact of Omicron is less on the economy, the loss of GDP in the last two years is high. Also note that the pre-Covid year FY20 had a low base with 4 per cent growth of GDP. Therefore, the need to focus on higher growth in the forthcoming budget and in the medium term, that is, beyond India@75, is obvious.

    Challenges in creating quantity and quality of jobs in the economy

    • Unemployment rate is high in both rural and urban areas;
    • Decline in work participation rates, particularly for women;
    • Recovery in employment is still below the levels of the pre-Covid period.
    • 85 per cent of the workforce is still in informal sector.
    • Lack of skill: Less than 5 per cent of India’s workforce has formal skill training.
    • Need for structural change: Manufacturing and services need structural change.
    • Focus on MSME sector is needed for higher employment.

    Policies needed to achieve higher economic growth and jobs

    1] Capital expenditure and infrastructure

    • The government outlined an infrastructure project pipeline worth more than Rs 102 lakh crore and asset monetisation pipeline of Rs 6 lakh crore to be implemented in the medium term.
    • Continuing focus on infrastructure and capex by the government is important as it is a key driver for the “future of India”.

    2] Focus on export growth

    • It is well known that rise in exports is one of the main engines of growth and also important for employment creation.
    • Export growth in India has increased and is expected to reach $400 billion by the end of FY22.
    • One worrying aspect of India’s export performance is the failure in expanding the share of labour intensive products in the export basket.
    • Protectionist trade policy: However, one problem in recent years is that India’s trade policy has become more protectionist by increasing import tariffs.
    • Join RCEP: India should also join the Regional Comprehensive Economic Partnership (RCEP) for integrating our industries with the value chains in Asia.

    3] Manufacturing and service sector growth

    • The share of manufacturing in GDP and employment has hardly increased over time.
    • Production Linked Incentive (PLI) schemes can improve performance.
    • However, more efforts are required to improve the manufacturing sector.
    •  Similarly, there are a lot of opportunities for India in the service sector.
    • Brand and customer centricity are important here.
    • India can also think of more business in the service sector.
    • Growing startups including unicorns in manufacturing and services is part of this effort.

    4] Banking reforms

    • Banking reforms are important as bank credit growth is a key indicator of economic growth.
    • Low credit-to-gdp ration in India: Credit to GDP ratio in India is only around 55 per cent compared to 100 per cent and 150 per cent in many other countries.
    • Credit should flow to all categories of economic agents like firms, households etc.
    •  The bad bank, a key initiative of the last budget, is yet to take shape.
    • The role of fintech companies in the financial sector has increased significantly.
    • They may not be able to replace banks although they are competing on payments.
    • The banks also have to focus now on ESG (environment, social and governance) while giving credit.
    • Big technology and digital push is also needed for banks.

    5] Deal with K-shaped recovery

    • The K-shaped recovery of the economy is still continuing.
    • The policies have to focus on giving a push to the MSME sector, increasing investment in agriculture and rural infrastructure, a social sector push including bridging divides in health and education, social protection measures like foodgrain distribution, cash transfers, MGNREGA in rural areas, urban employment guarantee schemes etc.
    • This will also create demand for the economy.

    Conclusion

    In the near term, fiscal policy has to play an important role in achieving the objectives of growth and jobs by expanding fiscal space while the fiscal deficit can be stabilised in the medium term. Increase in private investment may take some more time.

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  • What the budget needs to do

    Context

    We need to insure the most vulnerable against shocks such as Covid, but even more, we need to create good job opportunities for the unskilled. What can the budget do?

    Impact on informal economy

    • The last two quarters have seen a substantive recovery in the Indian economy.
    • Corporate profitability of our largest firms has hit a new record this year.
    • So have GST collections, another indicator of the formal economy, with an average monthly collection of Rs 1.2 trillion in the second and third quarters.
    • The glass though is half full, the informal economy was particularly badly hit by Covid and its associated lockdowns.
    • Small enterprises, retail, hospitality, and construction were all hammered.
    • These were our main source of recent employment growth.
    •  Agricultural employment has risen in the last year-and-a-half, while manufacturing and services employment has fallen — this is the opposite of development.
    •  Informal service sector jobs may not seem like great jobs to us, but they are greatly prized relative to eking out a marginal existence in agriculture.
    • We need to insure the most vulnerable against such shocks, but even more, we need to create good job opportunities for the unskilled, equip people at all levels to participate more fully in the modern economy, and systemically promote wider policies of inclusion.

    What can the budget do?

    • Create good jobs for unskilled: The way it can do so directly is through accelerating spending on infrastructure.
    • The National Infrastructure Pipeline has identified a good set of projects.
    • The government should be complimented for its intention and ambition; what we need now is implementation.
    • Labour-intensive manufacturing: Most countries developed by putting millions to work in labour-intensive manufacturing.
    • We do not have the huge firms in export-oriented labour-intensive sectors that employ millions in China, Vietnam, and Bangladesh.
    •  Bangladesh has thrived by putting millions to work in manufacturing.
    • A booming garment sector employs 4.4 million.
    • As 80 per cent of those employed in garment factories are women, Bangladesh has twice the female labour force participation ratio of India.
    • Implement labour laws: In June and September 2020, the government passed four labour laws.
    • These laws have since been left dormant.
    • The budget should announce a time frame for implementation, notification by the Union government and then by the states.
    • Investment in education and skilling:  India has among the least skilled workforces in the world.
    • Under 5 per cent of our workforce is formally skilled, compared to 96 per cent in South Korea, 75 per cent in Germany and 52 per cent in the US.
    • That is why the work of the National Skills Development Corporation is so important.
    • Can the budget specify it as an independent entity controlled and run by the private sector that is then held accountable for delivering on our skilling targets.
    • Education is even more important, especially primary education.
    • Pratham’s education reports make for sobering reading.
    • The New Education Policy has a proposal that every second standard child should be able to read and do arithmetic at the second standard level as a foundation for further education.
    • This welcome initiative must receive greater dedication and focus from both government and industry.
    • School education is a state subject, so the Union budget can at best incentivise states to do the right things, say by linking the flow of additional funds to those that demonstrate improved second standard learning outcomes.
    • As a part of CSR, many companies work actively with schools.
    • Education is already the largest single area for CSR spending, accounting for one-third of the Rs 9,000 crore spent by the top 100 companies.

    Conclusion

    Other policies for economic inclusion must go beyond social inclusion. These include measures like reducing tariffs to benefit millions of consumers instead of thousands of firms. Industrial policies that help all firms such as the ease of doing business, instead of incentivising a selected few.

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  • What are the First Advance Estimates of GDP?

    The Ministry of Statistics and Programme Implementation (MoSPI) has released the First Advance Estimates (FAE) for the current financial year (2021-22 or FY22).

    Tap to read more about:

    National Income Determination, GDP, GNP, NDP, NNP, Personal Income

    What is GDP?

    • GDP measures the monetary value of all goods and services produced within the domestic boundaries of a country within a timeframe (generally, a year).
    • It is slightly different from the other commonly used statistic for national income — the GNP.
    • The Gross National Product (GNP) measures the monetary value of all goods and services by the people and companies of a country regardless of where this value was created.

    GDP estimates for FY22

    • According to MoSPI, India’s GDP will grow by 9.2 per cent in 2020-21.
    • Last financial year, FY21, the GDP had contracted by 7.3%.

    What are the First Advance Estimates of GDP?

    • The FAE, which were first introduced in 2016-17, are typically published at the end of the first week of January.
    • They are the “first” official estimates of how GDP is expected to grow in that financial year.
    • But they are also the “advance” estimates because they are published long before the financial year (April to March) is over.
    • It is important to note that even though the FAE are published soon after the end of the third quarter (October, November, December), they do not include the formal Q3 GDP data.
    • Q3 data is published at the end of February as part of the Second Advance Estimates (SAE).

    Significance of FAE

    • Budgetary calculations: Since the SAE will be published next month, the main significance of FAE lies in the fact that they are the GDP estimates that the Union Finance Ministry uses to decide the next financial year’s budget allocations.
    • Basis for nominal GDP: From the Budget-making perspective, it is important to note what has happened to nominal GDP — both absolute level and its growth rate. That’s because nominal GDP is the actual observed variable.

    Note: Real GDP, which is the GDP after taking away the effect of inflation, is a derived metric. All Budget calculations start with the nominal GDP.

    Real GDP = Nominal GDP — Inflation Rate

    The difference between the real and nominal GDP shows the levels of inflation in the year.

    How are the FAE arrived at before the end of the concerned financial year?

    Ans. Benchmark-Indicator method

    • The FAE are derived by extrapolating (uses ratio and proportion) the available data.
    • The approach for compiling the Advance Estimates is based on Benchmark-Indicator method.
    • In this, the estimates available for the previous year (2020-21 in this case) are extrapolated using relevant indicators reflecting the performance of sectors.”

    What are the main takeaways?

    #1 GDP Growth

    • At 9.2%, the real GDP growth rate for FY22 is slightly lower than most expectations, including RBI’s, which pegged it at 9.5%.
    • These estimates are based on data before the rise of the Omicron variant.

    #2 Role of high inflation

    • For FY22, while real GDP (with 2011-12 base prices) will grow by 9.2%, nominal GDP (calculated using current market prices) will grow by a whopping 17.6%.
    • The difference between the two growth rates — about 8.5 percentage points — is essentially a marker of inflation (or the rate at which average prices have increased in this financial year).

    #3 Private consumption continues to struggle

    • The FAE analyses the three main contributors to GDP — private consumption demand, investments in the economy, and government expenditures.
    • It shows that while the latter two are expected to claw back to the pre-Covid level, the first engine will continue to stay in a slump.

    #4 Average Indian is much worse off

    • For the bulk of the Indian population, thus, aggregate data recovering to pre-Covid levels are largely academic.
    • An average Indian has lost almost 2 years in terms of income levels and 3 years in terms of spending levels.

    Try this PYQ:

    Q. In the context of Indian economy, consider the following statements:

    1. The growth rate of GDP has steadily increased in the last five years.
    2. The growth rate in per capita income has steadily increased in the last five years.

    Which of the statements given above is/are correct?

    (a) 1 only

    (b) 2 only

    (c) Both 1 and 2

    (d) Neither 1 nor 2

     

    Note: There can be no absolute answers to such questions unless the year is mentioned. Still try to substantiate your answer with the FY21 context.

     

    [wpdiscuz-feedback id=”k4u3k21e1t” question=”Please leave a feedback on this” opened=”1″]Do post it here.[/wpdiscuz-feedback]

     

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  • Ensuring that policy outcome matches the intent

    Context

    Policy differences between parties and coalitions arouse heated debates in legislatures and at political rallies. But relatively scant attention is paid to whether the stated policy or enacted law — of any persuasion — delivered the intended outcomes/results.

    Issues with annual budget modalities

    • There are limitations in the structural design of the Union and the state governments of India, which either cause or enable inefficient translation of policy intent to semi-realised outcomes.
    • Nowhere is this more obvious than in the annual budget modalities followed by the Union and state governments.
    • The final accounts (FA) for a financial year are generally presented to the legislative body between 18 and 24 months after that year’s budget is approved, most often as a minor artefact along with the main attraction of the budget for the upcoming year and the minor attraction of the Revised Estimate (RE) for the year in progress.
    • In effect, a small fraction of the attention paid to intent (budget) is paid to the outcome (FA) which is only known many months after the year is over.
    • Governments in India adhere to the archaic cash accounting as opposed to accrual accounting, which is the norm for most companies and governments which introduces some strange incentives and behaviours, especially towards the end of the year.
    • As a result, even the final account is not what it seems, with the possibility that significant funds which have been presented to the legislature as spent are still held in off-balance-sheet accounts not visible to the government’s finance department.

    Way forward: Lessons from Tamil Nadu government

    • This structural limitation was the basis for the initiative to identify and retrieve unutilised funds that the Tamil Nadu government.
    • New procedures and systems will ensure that such moving/parking of funds (especially as the year ends) cannot happen outside of the finance department’s oversight.
    • On another front, the data-integrity project undertaken to support (among other reasons) the crop and jewel loan waiver poll promise has also produced remarkable results.
    • Many instances of ghost pension recipients and free-rice-entitled category of ration card holders and malfeasance in crop and jewel loan sanctioning have come to light.
    • The rectification of such anomalies will save the government a significant amount of funds, but, more importantly, enable fairer societal outcomes.
    • Tamil Nadu is diligently following the five-step approach: Collect and analyse data to develop a deeper understanding, disseminate results into the public domain and generate a public debate, receive feedback from the debate and inputs from experts, use these inputs to design policies and put into execution, constantly seek feedback and course correct when needed.

    Conclusion

    We need the thoughtful design of policies and schemes, and their execution, which are vital to achieving our intended goal of benefiting all citizens in a fair and inclusive manner.

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  • [pib] GoI Floating Rate Bonds

    The Government of India has announced the Sale (Re-issue) of Floating Rate Bonds, 2028’.

    What are Bonds?

    • Bonds are investment securities where an investor lends money to a company or a government for a set period of time, in exchange for regular interest payments.
    • Generally, bonds come with a fixed coupon or interest rate. For example, you can buy a bond of Rs 10,000 with a coupon rate of 5%.
    • Once the bond reaches maturity, the bond issuer returns the investor’s money.
    • Fixed income is a term often used to describe bonds, since your investment earns fixed payments over the life of the bond.

    Why are bonds launched?

    • Companies sell bonds to finance ongoing operations, new projects or acquisitions.
    • Governments sell bonds for funding purposes, and also to supplement revenue from taxes.

    What are Floating Rate Bonds?

    • A floating rate bond is a debt instrument that does not have a fixed coupon rate, but its interest rate fluctuates based on the benchmark the bond is drawn.
    • Benchmarks are market instruments that influence the overall economy.
    • For example, repo rate or reverse repo rate can be set as benchmarks for a floating rate bond.

    How do floating rate bonds work?

    • Floating rate bonds make up a significant part of the Indian bond market and are majorly issued by the government.
    • For example, the RBI issued a floating rate bond in 2020 with interest payable every six months. After six months, the interest rate is re-fixed by the RBI.

     

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