Mrunal Interim Budget 2014_ Plan vs Non-Plan Expenditure

7/8/2014

M r unal Inter i m Budg et et 2014: Plan vs N on- Plan Expendi tur e

[Budget] Interim Budget 2014: Plan vs Non-Plan No n-Plan Expenditure, Subsidies, Disinvestment, Disinvestm ent, Defici Deficits, ts, PDMA Public Public Debt Management Agency 1. Prologue Budget: et: Capital part: incoming incoming (receipts) 2. Budg 1. [Table] Capital Capital receipt 2. #EPICF #EPICFAIL AIL in disinvestment 3. Capital Expenditure Expenditure 3. Plan vs Non Non Plan 1. Pla Plan n vs Nonplan budget: Incoming I ncoming (Receipt) part 2. Plan vs Nonplan budget: Outgoing (Expenditure) part 3. [Ta bl ble] e] Plan vs vs Non pl plan Expen Expenditure diture in Interim Budget 4. [Table] Total Expenditure plans: Women, Children, Children, SC/ST SC /ST 5. [Table] Sub plans: 6. [Table] Subsidies in Interim Budget 201 2014 4 4. Defici Deficits ts 1. #1: Revenue Deficit and Effective Effect ive Revenue Deficit Budgetary def icit icit 2. #2: Budgetary 3. #3: Capital Deficit Surplus 4. Fiscal Deficit 1. Fi Fisca scall deficit deficit targets and achi ac hievement evement 2. How did did Chindu reduce fiscal deficit? increase incoming money 3. #1: increase 4. #2: Decrease outgoing outgoing money 5. Why did Chindu reduce fiscal deficit? 1. Main reason= to prevent pre vent Rating downgrade. downgrade. 2. Consequences if India’s rating fell to junk status: 3. Secondary reasons= to save the economy 5. Primary deficit 6. [Table] Deficits Absolute figures 7. [Table] Deficits as % of GDP 5. PDMA: Public Debt Management Agency in Interim budget 6. Appendix 1. #1: FRBM: States succe succeed ed where Uni Union on fails fails 2. #2: Subsidies 3. #3: Structural deficit & Cyclic deficit

Prologue so far in the [Budget] article series 1. Part I: Why inter interim im budg budget, et, how is it differe different nt from vote on o n account, dire direct ct vs indire indirect ct taxes, tax es, shortfa s hortfall ll in their t heir collection. colle ction. http://mrunal.or http://mrunal.org/2014/02/b g/2014/02/budget-i udget-i nterim-budget-2014-plan-vs-non-plannterim-budg et-2014-plan-vs-non-plan-ex expend penditur iture-subsi e-subsidiesdies-disi disinv nvestme estment-defici nt-defici ts-pdm ts- pdma-public a-public-debt-manageme -debt-management-ag nt-agency ency.h… .h…

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M r unal Inter i m Budg et et 2014: Plan vs N on- Plan Expendi tur e

2. Part II: Revenue part of the budget: Receipt vs. Expenditure, Revenue deficit, effective Revenue Rev enue deficit. defic it. 3. Part III: (you are here) here ) Capital part of the budget, plan vs non plan Exp Expenditure enditure,, Subsidies, all types of deficits. 4. Part IV: IV: (soon)(s oon)- in that last part, we’ll we’ll see se e various various schemes, sc hemes, funds, funds, highlights highlights of Budget Budget speech.

Budget: Capital part: part: incoming (receipts) Two sub-types: Debt because government government has has to repa re pay y this money (with (with interest) intere st) Money borrowed internally (via RBI,, market stabilization scheme RBI MSS, treasury bills, Government Securities G-Sec G-Sec etc.) e tc.) Money borrowed exter externa nally lly (from (fr om IMF, World Ban Bank, k, ADB, ADB, Foreign Fore ign nations etc.)

No n-de bt

because government government does doesn’ n’tt need to repay loan (principal) recovered re covered (e..g (e ..g Mohan Mohan loaned Rs.1 lakh to modi @36%. After 1 year Modi repays 1,36,000=> 1 lakh (capital incoming) + 36000 interestt (non-tax Revenue interes Revenue incoming) proceeds procee ds from disinvest disinvestment ment e.g. Moha Mohan n sells his shares of LIC/ONGC to private investors and earns ca$h.

http://mrunal.or http://mrunal.org/2014/02/b g/2014/02/budget-i udget-i nterim-budget-2014-plan-vs-non-plannterim-budg et-2014-plan-vs-non-plan-ex expend penditur iture-subsi e-subsidiesdies-disi disinv nvestme estment-defici nt-defici ts-pdm ts- pdma-public a-public-debt-manageme -debt-management-ag nt-agency ency.h… .h…

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Mrunal Interim Budg et 2014: Plan vs Non-Plan Expenditure

Money given by juntaa in small savings, State provident fund (Because government needs to repay it at later stage)

–

[Table] Capital receipt Capital receipt Non-Debt Debt Total Capital receipt

BE 2013 66468 542499

RE 2013 36643 509539

BE 2014 67452 528631

608967

546182

596083

1. Majority of the capital receipt comes from Debt. 2. Within debt: internal >> external.

#EPICFAIL in disinvestment

In above table, observe the BE2013 vs RE2013 non-debt. (66k vs 36k) Why didn’t Chindu earn as much capital money as he had expected? Because… disinvestment target (= non-debt Capital receipt)

crore rupees

http://mrunal.org/2014/02/budget-i nterim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-defici ts-pdma-public-debt-management-agency.h…

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BE2013 (Chindu originally hoped to earn this much) 40k RE2013 (he actually earned this much) 16k BE2014 (still Chindu is optimistic next year!) 36k So why didn’t disinvestment fetch truckload of cash? Chindu wanted to disinvest 10% from Indian Oil Corporation (IOC) all the shares of Hindustan Zinc and Balco Coal India Bharat Heavy Electricals Ltd (BHEL) & National Hydroelectric Power Corporation (NHPC) Neyveli Lignite Corporation (NLC), State Trading Corporation (STC), MMTC, and ITDC.

But #EPICFAIL because (Data of Dec 2013)

Moily (Petroleum minister) opposed. and while the file was pending, IOC’s share prices went down. Mining ministry created obstacle about pricing mechanism. Now the matter has been postponed till after election. trade unions opposed Praful Patel (Ministry Heavy industries) opposed saying “ shares of power companies are down at the moment. So even if we sell, it don’t fetch good pr ices. Better just wait and watch for the sharemarket to go up.” Lukewarm response from investors. Barely got ~1300 crores.

Important : Disinvestment matter falls under Department of Disinvestment under Finance minister.

Capital Expenditure Capital receipt (incoming) Debt internal external Non Debt

disinvestment loan (principal) recovered from State/UT/PSU/Foreign nations

Capital Expenditure (outgoing)

self-explanatory1. money spent on capital assets / goods (buildings, machines etc.)- including Defense assets. 2. loan (principal) given to State/UT/PSU/Foreign nations

Within capital Expenditure, majority goes to Five year plans >> Defense >> loans (PSU, State, UT)

Plan vs Non Plan Until now, we learned the annual financial statement looks like this

Revenue Part

Capital Part


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Receipts (incoming) Expenditure (outgoing) Receipts (incoming) Expenditure (outgoing) But in the late 80s, Government comes up with a new method to classify Expenditure (outgoing money) => plan vs non-plan Expenditure. This new format of annual financial statement, looks like this

total income (receipt) Revenue capital income (Receipt) (Receipt)

Total Expenditure Plan Expenditure

Non Plan

Revenue Expenditure

Revenue Expenditure

Capital Expenditure

Capital Expenditure

Wait how can government change the format of annual financial statement? Because as per Art. 112: AFS shall distinguish Expenditure on revenue part, from other Expenditures. Meaning you can present AFS in any format you want…as long as Revenue expenditure is separately shown. Therefore, even above plan vs non-plan format is valid (even through planning commission itself is not a ‘Constitutional’ body).

Plan vs Nonplan budget: Incoming (Receipt) part The total income (Receipt) part is same earlier. total income Revenue (Receipt) Tax Non-tax

capital income (Receipt) Debt Non Debt


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direct indirect

Others (selling goods/services) dividend-profit interest received Grants received

internal external

disinvestment loan (principal) recovered

The numbers, ascending descending order will remain same like earlier articles.

Plan vs Nonplan budget: Outgoing (Expenditure) part Total Expenditure Plan Expenditure

Non plan

money given to Union’s own five year plans money given to States’ five year plans

anything that doesn’t fall into left side part (plan Expenditure)

we further classify this plan Expenditure into two parts Total Expenditure Plan Expenditure Non Plan Revenue Expenditure Capital Expenditure Revenue Expenditure Capital Expenditure xx xx xx xx The component classification method is same like in DevAnand’s case study (And three judaad principles) . The only change is… Five year plan related Expenditure = you put on left side Non-plan Expenditure= you put on right hand side. Defense related capital Expenditure fall under “NON-plan” part. PLAN Expenditure

1. Money spent on Five year plans (of Union) 2. Money given to state/UT for their Five year plans (and their internal classification as Revenue vs. capital )

NON-Plan Expenditure Revenue Expenditure

Capital Expenditure

1. Interest paid (on whatever loan Union had taken) 2. Subsidies, freebies, Debt 1. Defense capital relief to farmers Expenditure (e.g. buying 3. Defense revenue machines, vehicles etc.) Expenditure (lightbill, 2. Loans given to phonebill, diesel, bullets PSUs/States/UT/Foreign etc.) nations. 4. Salaries and pensions (Five year plan related matter 5. Losses in Postal dept given after few paragraphs) (deficit) 6. Grants given to States/UT/Foreign nations.


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[Table] Plan vs Non plan Expenditure in Interim Budget Expenditure Non-Plan Plan Total

BE 2013 1109975 555322 1665297

RE 2013 1114902 475532 1590434

BE 2014 1207892 555322 1763214

MCQ wi sdom

1. Major portion of sarkaari money goes into non-plan Expenditure (and not in plan Expenditure). 2. In 2013, the ministries failed to spend all of the plan Expenditure money given to them. (How much? 555322-475532=nearly 80k crores. And that in turn, helped Chindu reduce fiscal deficit- because outgoing money reduced! 3. Observe that in budget estimates (BE) of 2013 vs 2014, the total Expenditure has increased but plan Expenditure remained the same (555322)=>Basic principles of CSAT Paper II data interpretation: the % should have decreased. Observe the pie chart:

You can see, Plan Expenditure reduced from 33% to 31%. This is the main criticism given by Opposition parties that Chindu reduced plan Expenditure => Congies don’t care about the growth and Development.

[Table] Total Expenditure Expenditure Crores

Sub part

BE 2013 RE 2013 BE 2014


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Revenue Capital Total Non-pl an Expendi ture Revenue plan Capital Total plan Expenditure Total Budget Expenditure (Plan+non) non-plan

992908 117067 1109975 443260 112062 555322 1665297

1027689 87214 1114903 371851 103681 475532 1590435

1107781 100111 1207892 442273 113049 555322 1763214

MCQ Wisdom: majority of government money goes into revenue Expenditure (be it out of plan or non plan or total Expenditure.)

[Table] Sub plans: Women, Children, SC/ST Plan Expenditure thousand crores BE 2013 BE 2014 ST subplan 24 30 SC subplan Child Gender

41 77 97

48 80 97

MCQ wi sdom: Highest amount of plan Expenditure goes to: Gender >>Child>>SC>>ST.

We’ll see the schemes in next article.

[Table] Subsidies in Interim Budget 2014 Subsidies fall under “non-plan” Revenue Expenditure.

subsidy provision in Interim budget 2014 Fuel 65k crore Fertilizer 68k [within that…Desi Urea>>Imported Urea>>non-urea.] http://mrunal.org/2014/02/budget-i nterim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-defici ts-pdma-public-debt-management-agency.h…

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Food other Total

1.15 lakh cr (within that…88k for Food security Act) Hardly ~200 crore. 2.5 lakh cr.

MCQ wi sdom:

1. Almost all of the subsidies go to “NON-Merit” goods. [what are non-merit goods? explained in the appendix]. 2. Within Non-merit goods subsidies: food >> fertilizer >> fuel. We’ll see about the schemes and subsidies in fourth article. Let’s move to deficits.

Deficits #1: Revenue Deficit and Effective Revenue Deficit Already covered in last article, click me

#2: Budgetary deficit This is the difference between total incoming money vs. total outgoing money = Total expenditure MINUS total receipts = (Revenue expenditure + Capital Expenditure) MINUS (Revenue receipt + Capital receipt) official numbers: Total Receipts Total Expenditure Budget deficit

BE 2013 1665297 1665297 0

RE 2013 1590434 1590434 0

BE 2014 1763214 1763214 0

In ALL of above cases, budgetary deficit is ZERO. Because total income is same as total Expenditure. How is this possible? Recall that all the loans borrowed by government are counted as “capital incoming” (Capital receipts). So, even if government’s outgoing money (revenue + capital) is large, they’ll borrow enough money (capital receipt) to fill up this pothole => total receipt will equal total expenditure. still doubt? Read the next topic..

#3: Capital Deficit Surplus Take the difference between outgoing vs incoming. If this was a negative number, we’d call it “Deficit”. (2-4=-2) If this is positive number, we’d call it “surplus”. (4-2=+2) in the capital part, we’ve “Surplus” (Because all the market borrowing/loans are counted as “incoming” capital receipts) http://mrunal.org/2014/02/budget-i nterim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-defici ts-pdma-public-debt-management-agency.h…

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Crore Rs. Capital Deficit “SURPLUS” Budget deficit Revenue defici t (RD)

BE 2013 +379838 0 -379838

RE 2013 +370288 0 -370288

BE 2014 +382923 0 -382923

Observe in above table, every year Revenue deficit = Capital Surplus. That’s why Budget deficit is ZERO. To put this mathematically Budget deficit

= total Expenditure MINUS total receipt = [Revenue Expenditure + capital Expenditure] – [Revenue receipt + Capital receipt] =[Revenue Expenditure – Revenue receipt] + [capital Expenditure – capital receipt] =Revenue deficit + capital deficit But in case of capital part, we’ve as much surplus, as the deficit in Revenue part. that’s why budget deficit becomes ZERO.

Fiscal Deficit Since budgetary deficit is ZERO, it doesn’t show us the true picture of government’s financial “health”. Therefore, in late 90s: Sukhmoy Chakravarti Committee recommends new type of deficit, called….. Fiscal defici t

= Budget deficit + Borrowing = (Total Expenditure – Total Receipts) + Borrowing = (Total expenditure + borrowing) – [Total Receipt] = (Total expenditure + borrowing) – [Revenue Receipts + Capital Receipt]

Fiscal deficit targets and achievement Fiscal deficit is expressed in two ways Absol ute number 100 crore, 200 crore etc. As % of GDP 4.8% of GDP

Absolute number doesn’t give us a “big picture”, doesn’t help us compare two years or two countries objectively. Hence experts prefer second method (GDP%) for doing the analysis, projections and ratings. http://mrunal.org/2014/02/budget-i nterim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-defici ts-pdma-public-debt-management-agency.…

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Anyways, let’s check the numbers official numbers (Actual) 2012-13 BE 2013 RE 2013 BE 2014 Fiscal Deficit in Crores 490597 542499 524539 528631 Fiscal deficit as % of GDP 4.9 4.8 4.6 4.1 from the above table, we can see that during Feb 2013, Chindu had estimated our fiscal deficit would be 4.8% of the GDP. But in Feb 2014, when he revised that estimate. Now it turns out fiscal deficit for the year 2013-14= 4.6% of the GDP. for GDP growth rate bigger number is better for the economy e.g. 10%>9% for Fiscal deficit, smaller number is better for economy e.g. 4.6 better than 4.8. So mil li on dollar question is: how did Chindu manage to perform so excellently despite all the policy paralysis, shortfall in tax collection, shortfall in disinvestment targets- and overall high level of inflation and subsidies?

How did Chindu reduce fiscal deficit? There are two ways to reduce fiscal deficit: 1. Increase incoming money (tax, non-tax revenue, disinvestment etc.) 2. Decrease outgoing money (revenue and capital Expenditure) Let’s check how Chindu used these three methods to bring fiscal deficit to 4.6% of GDP:

#1: increase incoming money

Part

Receipt

detail

did it help reducing fiscal deficit?

We’ve already seen, there was shortfall in the NO collection of direct taxes and indirect taxes. Chindu had ordered the PSUs to declare special Revenue dividends. e.g. Coal India gave Rs.29 dividend on 10 Non TAX YES rupees share => Government earned ~15k crores from Coal India’s dividend alone. Same case with other PSUs. Chindu was hoping to get 40,000 Crore rupees through disinvestment (i.e. selling his shares from PSUs to Capital Disinvestment NO private investors). But in reality, he managed to get barely 16k cores. TAX

#2: Decrease outgoing money Expenditure sub-type detail Plan

–

Ministries failed to spend some of the money, returned back.

money saved Cr. 80k

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non plan

Austerity measures on foreign travel, 5 star hotel Revenue conference, vehicle purchases. Postponed Oil subsidy payment Direct benefit transfer (DBT) prevented leakages capital Defense ministry postponed the purchase of Rafael jet

20k 35k ?? 60k

Thus, with many such measures, Chindu managed to reduce the fiscal deficit (@4.6% GDP) even better than his original target (4.8% GDP). For the next financial year (1 st April 2014 to 31 st March 2015) he has made even more ambitious target: to bring down fiscal deficit to only 4.1% of GDP. Will he (or the successive government) achieve it? Critiques say 4.1%= Mission Impossible . Because 1. Chidu already milked the PSUs by seeking special dividend. Next government cannot do the same (else PSUs will be left with no money to expand business.) 2. Chindu postponed the subsidy payment to oil companies. Next government will have to pay it sooner or later, else those companies will go out of business. 3. Moily increased subsidized LPG cylinders from 9 to 12. This is effective from Feb 2014 (hence its negative impact doesn’t show on the accounts between 31/3/2013 to 31/1/2014). But next government will be forced to continue this 12 cylinder game (To keep vote bank happy). But in their case, subsidy bill will be high for the entire financial year from 1/4/2014 to 31/3/2015. 4. Some of the Sarkaari banks are loss making, and it’s beyond their aukaat to comply with BASEL-III norms without government help. e.g. United Bank of India needs 1000 crore. IF economy doesn’t improve in 2014-15, the NPA will rise, more of the public sector banks will fall in this danger zone=Government will have to dollout truckload of cash to save them. anyways, So far, we learned: 1. What is fiscal deficit? 2. How did Chindu manage to reduce fiscal deficit? Now the third question:

Why did Chindu reduce fiscal deficit? Agreed that fiscal deficit is bad for economy, but if fiscal deficit had increased from 4.8 to 4.9% ….then world wasn’t going to end next day. Besides, poor junta doesn’t understand fiscal deficit. He could simply launch another scheme named after **you know who**, to attract the voters during election year. So, Why did our finance minister make conscious attempts to reduce the fiscal deficit (remember- his “official” target was 4.8% but he performed even better 4.6%.) why? why? why?

Main reason= to prevent Rating downgrade. Every Saturday, Indianexpress gives “Rating” to movies: http://mrunal.org/2014/02/budget-i nterim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-defici ts-pdma-public-debt-management-agency.…

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good

bad

5/5 4/5 3/5 2/5 1/5 0/5

Lower the rating => less people likely to watch the movie. Similarly, Standard and Poor(S&P), Moody, Macgrawhill give ratings to companies and countries. Lower the rating=>less investors coming.

Standard and Poor’s (S&P) ratings Investment Grade from AAA, AA,…to BBB Non-investment grade (“junk status”) from BB, B, CCC, C…. In the recent months, India’s rating = BBBThat is just one rank above the junk status (Starting from BB). So, what will happen if India’s rating is reduced to “BB” (junk status)

Consequences if India’s rating fell to junk status: http://mrunal.org/2014/02/budget-i nterim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-defici ts-pdma-public-debt-management-agency.…

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Foreign investors will pull out their money from India. (Especially the FIIs). But non-investment grade= High risk = high reward, right? Then why will foreign investors pull out money? Because, Most of these foreign investors don’t bring money from their pockets. They also gather it from foreign junta e.g. American Pension fund company who collects monthly payments from nurses and teachers. The (SEBI like) regulatory bodies in US, Japan, EU etc. have made specific norms that prevent such FIIs from investing client’s money into non-investment grade countries (BB and lower). Had Chindu over crossed the fiscal deficit target (e.g. 4.9% or 5% instead of 4.8%) then S&P would have reduced our rating to junk status (BB) = foreign investors will have to pull out money from Indian market. Therefore, to specifically appease S&P and other foreign rating agencies, Chindu made conscious efforts to keep fiscal deficit lower than 4.8%. He even gave ambitious 4.1% target for 2014-15. (In hope that S&P is impressed and increases our rating from BBB to A => more investment can come.).

Secondary reasons= to save the economy In the current situation of Indian economy, if fiscal deficit is lowered, it’ll give us positive impact because 1. Lot of tax payer money wasted in non-productive subsidy (and its leakage). When government cuts down subsidies, implements DBT = saves tax payers’ money (That can be used for other developmental work- such as new roads, bridges, schools and universities) 2. Subsidy leakage prevented= less corruption money going into gold and real estate =>demand lower=>prices go down. Gold demand reduced=>CAD reduced=>Rupee strengthens =>Petrol cheaper. 3. Less fiscal deficit => S&P, Moody et al will give us better rating => more foreign investment => business expansion => more jobs =>social harmony, higher GDP. 4. More foreign investment => more demand of rupees (compared to dollars)=> rupee strengthens against dollar => crude oil import becomes less expensive => inflation lowered. 5. more foreign investment=> business expansion =>More jobs=>more income for middle class=>more demand of consumer goods and services=> higher collection of indirect taxes. 6. More demand of consumer goods/services=> more profit for companies => higher collection of corporate tax. Recall that maximum amout of government’s direct tax revenue comes from corporate tax. 7. More profit for companies => less NPA for banks => banks can re-loan the recovered money to other needy entrepreneurs and families. 8. and so on…. Anyways enough of Fiscal deficit. Let’s move to the last topic of today’s article

Primary deficit http://mrunal.org/2014/02/budget-i nterim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-defici ts-pdma-public-debt-management-agency.…

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Primary deficit = fiscal deficit MINUS interest on previous loans. ya, but why do we need to find primary deficit? fiscal deficit 100

interest payment on previous loans 40

primary deficit

You must to pay this part, even if comment: you don’t like. This part is beyond your control.

100-40=60 This part is where you can try to fix the mess. You have to take maximum effort to decrease this figure via 1. increasing your income 2. decreasing your expenses

Let’s check official data: Crore Rs. A.Fiscal Defici t B. Interest paid on previous loans Pri mary Deficit (A minus B) Pri mary deficit as % of GDP

BE 2013 542499 370684 171814 1.5

RE 2013 524539 380066 144473 1.3

BE 2014 528631 427011 101620 0.8

hmm….Primary deficit is decreasing. so is it good or bad? It is bad because interest payment has increased- observe 370*** to 427***. What’s the wisdom for MCQ? A falling level of primary deficit implies that new borrowings are being used to meet old debt li abil iti es. (Hence the ri se i n interest payment).

[Table] Deficits Absolute figures


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Crore Rs. BE 2013 Capital “SURPLUS” +379838 Budget deficit 0 Primary Defici t (FD-interest) -171814 Effective Revenue deficit (RD-capital grant) -205182 Revenue defici t (RD) -379838 Fiscal Defici t (FD) -542499

RE 2013 +370288 0 -144473 -249005 -370288 -524539

BE 2014 +382923 0 -101620 -236342 -382923 -528631

lowest to highest= budget deficit << PD << ERD << RD <
[Table] Deficits as % of GDP Crore Rs. Capital “SURPLUS” Budget deficit Primary Defici t (FD-interest)

BE 2013 +3.3 0 -1.5

RE 2013 +3.3 0 -1.3

BE 2014 +3 0 -0.8


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Effective Revenue deficit (RD-capital grant) -1.8 Revenue defici t (RD) -3.3 Fiscal Defici t (FD) -4.8

-2.2 -3.3 -4.6

-1.8 -3 -4.1

Again, observe Capital surplus = Revenue Deficit. e.g. for BE 2014, they’re +3% and -3% respectively.

PDMA: Public Debt Management Agency in Interim budget @present, RBI is the debt manager of the Government. = Conflict of interest. How? GOVERNMENT borrows money from market via issuing Government-securities (Gsec). This is one type of bond e.g. “pay me 1000, I’ll pay 8% interest for next ten years, then I’ll repay entire principal.”

RBI RBI uses the same G-sec to control money supply.

Government release Government securities (G-Sec) to borrow money from market. RBI uses the same G-sec to control money supply. Example

1. Repo rate: recall that G-sec are used as “collateral”, so money can be recovered incase the client doesn’t pay. 2. OMO (Open market operation): Here RBI buys/sells G-sec in open market, to control money supply. (RBI buying G-sec from juntaa = money supply increased in juntaa’s hand, and vice versa). 3. SLR: RBI requires the banks to invest part of their money in G-sec. Therefore, monetary policy maker and debt manager should be two separate persons. Else there is conflict of interest, clouding of judgment. Although experts are divided

Argument: RBI should continue as Debt manager http://mrunal.org/2014/02/budget-i nterim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-defici ts-pdma-public-debt-management-agency.…

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because 1. Only RBI has the necessary expertise, staff and tools to make macro-assessments about the debt management (and its impact on money supply, banking and finance sector, foreign exchange rates etc). While An independent agency will not have the same level of expertise. Their mindset will be “narrow”. 2. only RBI can harmonise the Debt management of union and State governments- and their impact on the economy. While the separate debt management office will only focus on union government but not on the state governments. => this lack of coordination will have negative impact on money supply 3. Even a separate debt management office cannot stop conflict of interest. Because government is the majority shareholder in public sector banks. (e.g. Government can order its puppet Board of Directors in SBI, PNB etc to buy government securities beyond the SLR requirement and thus government gets money.) 4. So far, RBI has effectively carried out that Debt management operation without problem. So why waste time in “Trial n Error” with a separate debt Management office?

Argument: RBI should not continue as debt manager because: 1. Because there is conflict of interest (as explained in the beginning). 2. 13 th Finance Commission (Vijay Kelkar) has recommended there should be separate National debt Management agency. 3. In most of the advanced economies, monitoring policy and debt management are carried out by two different agencies. 4. Since late 80s- Sweden, New Zealand have separate offices for Public debt Management (outside their RBI but inside their finance ministry). 5. Germany and Denmark are even one step ahead- they have separate financial companies to look after the public debt management. (outside their RBI and finance ministry) If those economies can run smoothly, then Indian economy can also run smoothly by having a separate debt management office.

Timeline: PDMA 2007: FM makes announcement in the budget, “we’ll setup a statutory body for public debt management.” (meaning they’ll pass a law to create this body) 2011: Public Debt Management Agency Bill 2012: bill not passed 2013: bill not passed 2014, Feb: Interim Budget. Chindu says, no worries, we’ll set up a NON-Statutory Public Debt Management Agency (PDMA), they’ll look after debt Management from 2014-15 (i.e. 1/4/2014 to 31/3/2015). Note: at the moment, PDMA = non statutory, just like UIDAI. (Because there is no law/act behind them).

Appendix http://mrunal.org/2014/02/budget-i nterim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-defici ts-pdma-public-debt-management-agency.…

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Some topics/issues related to the matter at hand.

#1: FRBM: States succeed where Union fails 2003: Fiscal Responsibility and Budget Management (FRBM) Act was enacted. FRBM gave following TARGETs to the Finance minister: deficit target Revenue deficit eliminate (0%) by 31/3/2008 fiscal deficit reduce it to 3% of GDP by 31/3/2009 2010: New concept of “Effective revenue deficit” introduced in the budget. 2012: Chindu realizes, “It is beyond my aukaat to eliminate revenue deficit.” So, he amends the FRBM target. “ I’ll not eliminate revenue deficit, I’ll eliminate “ Effective” revenue deficit.” deficit targets amended EFFECTIVE Revenue deficit eliminate (0%) by 31/3/2015 fiscal deficit reduce it to 3% of GDP by 31/3/2017

FRBM: Success by State governments while union government is yet to reach its targets, target already achieved by Revenue deficit = 0% Gujarat Fiscal deficit = less than 3% of the state’s GDP Gujarat, MP, Odisha, Bihar and WB

#2: Subsidies Back in the mid-90s, Chindu himself classified Subsidies in three types

#Type 1: Public Goods Services given to everyone- be it rich or poor: Police, Defense, Judiciary etc. Any money spent on these public goods = not be counted under “subsidies” because these are essential services. Example, if government announced free electricity to all police station, or free uniforms/shoes to all army personnel, we donot call it “Subsidy”.

#Type 2: Merit goods Polio Vaccination, Primary Education, forest plantation, roads, bridges, R&D on AgroSpace-public Health, renewable energy etc. These have positive “externality” E.g. polio vaccine + free edu. =kid is saved, and 20 years later, companies get healthier-more skilled labor force. Similarly, forest plantation = environment saved, wildlife saved. And simultaneously, more oxygen => healthier population =>more productive labour force=>higher GDP. http://mrunal.org/2014/02/budget-i nterim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-defici ts-pdma-public-debt-management-agency.…

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In short, society at large, benefits. Therefore, subsidies given to Merit goods =not evil. They’re justified. Government should give subsidies to merit goods as and when possible.

#Type 3: Non-Merit Goods Method Direct Cash

example Pension given to elder/widows. Wage payments under MNREGA Instead of giving “cash”, government gives some “item” (Goods) to beneficiary. example

Subsides In “Kind”

Cow, tractor, Diesel pumpset to small/marginal farmer Free wheelchair to physically challenged. Free laptops/tablets to college students. (subsidy beyond primary education, is considered non-merit) taxi to unemployed youth

Procurement

Government declares Minimum support price (MSP) for wheat. if (private) trader offers less price, then farmer can sell wheat to FCI @MSP Government pays for the losses to FCI (for buying wheat @prices higher than market level).

Price Regulation

when government “fixes” the price e.g. (subsidized) LPG, Kerosene, fertilizer, electricity (to farmers) then oil/fertilizer/electric ity company is forced to sell their product @cheap price and government pays for their “loss”.

Interest Relief

farmer, student, small businessman takes bank loan. Government pays a part of his loan interest rate.

Tax Relief

Tax exemption given to BCCI and other cricket boards (hoping they’ll use the money thus saved, in the “promotion” of sports.)

These are called “non-merit” goods because society pays and individual benefits. Where do these fall in the budget? Revenue Expenditure or capital Expenditure? Obviously subsidies= Revenue Expenditure.

(Free market) economists hate them because #1: Non-merit subsides = “negative” externality. http://mrunal.org/2014/02/budget-i nterim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-defici ts-pdma-public-debt-management-agency.…

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Diesel subsidy (meant for farmers): jeep & SUV-owners also get cheap diesel => pollution (+ accidents from drunk driving) excessive use of diesel pumpsets= ground water depletion Fertilizer subsidy => farmers use excessive amount of urea => soil fertility decline, water-pollution after monsoon. #2: Non-Merit subsidies =often diverted & misused MNREGA Subsidies LPG Subsidized kerosene Food subsidies Fertilizer subsidy, free electricity

Bogus job cards, Sarpanch chows down the money. beneficiaries give them to restaurants and 5 star hotels @black market PDS owner sell it to rickshaw-walla rather than poors =>misuse + pollution. Black marketeering by PDS shop owner. Most of the benefit goes to big farmers. The small marginal farmer doesn’t get them.

#3: Non-Meri t subsides =cascading effect

Government pays subsidy to oil/fertilizer/electricity companies to give cheap diesel, urea and electricity to Farmer. Government pays FCI to procure wheat from farmer @MSP (usually above the market prices) Government also gives wheat/rice to the poor @cheap/free price. Result? lot of overlapping, lot of leakage. But still, majority of the subisides go in the nonmerit goods food>> fertilizer >> fuel

#3: Structural deficit & Cyclic deficit Not given in the budget, but for stupid MCQs, we’ve to prepare. Because once in a while, Montek mentions it. Suppose, we consider year1 as “standard”. year total income total Expenditure deficit

Year1 100 110 10

In year2, there is recession like scenario. Government’s tax-income decreases, And government’s expenditure will increase (Because of various social security / unemployment allowance/ MNREGA type schemes) to help the people during slowdown. year total income total Expenditure deficit

Year1 100 110 10

year2 (downturn in economy) 80 120 40 (this is Cyclical deficit)


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In year3, economy recovers and there is FULL employment (Every person has got job). Economist believe that IF a country has FULL employment, then government’s tax Revenue will automatically improve and there will be no deficit (in fact there will be surplus). But in real life, even if there will full employment, still there will be deficit

100

year2 (downturn in economy) 80

year3 (economy recovers, full employment) 100

110

120

105

10

40 (this is Cyclical deficit)

5 (this is structural deficit)

year

Year1

total income total Expenditure deficit

why? because government still running some populist scheme/subsidies to farmers, fertilizer companies, LPG to middle class and so on. This type of deficit, which exists EVEN during full employment = is called structural deficit. Structural deficit results when government is giving unnecessary subsidies and freebies- despite full employment. Visit Mrunal.org/Economy For more on Money, Banking, Finance, Budget, Taxation and Economy.

URL to article: http://mrunal.org/2014/02/budget-interim-budget-2014-plan-vs-non-planexpenditure-subsidies-disinvestment-deficits-pdma-public-debt-managementagency.html Posted By Mrunal On 26/02/2014 @ 15:33 In the category Economy


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Mrunal Interim Budget 2014_ Plan vs Non-Plan Expenditure

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