budget 2013-2014 · deficit at 5.3% of gdp this year and 4.8% of...
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Key Features of Budget
The Economy and the Challenges
Fiscal Deficit, Current Account Deficit and
Inflation
The Plan and Budgetary Allocations
SC, ST, Women and Children
• Getting back to potential growth rate of 8% is
the challenge facing the country.
• Slowdown in Indian economy has to be seen in
the context of slowing global economic growth
from 3.9% in 2011 to 3.2% in 2012.
• 11th Plan period had average growth rate of 8%,
highest during any Plan period, entirely under
the UPA Government.
• High growth rate can again be achieved through
cooperation.
• 'Higher growth leading to inclusive and
sustainable development' to be the mool
mantra.
• Government believes in inclusive development
with emphasis on improving human
development indicators specially of women, the
scheduled castes, the scheduled tribes, the
minorities and some backward classes. This
Budget to be a testimony to that commitment.
• Dr Vijay Kelkar Committee made its
recommendations to Government in September
2012. A new fiscal consolidation path with fiscal
deficit at 5.3% of GDP this year and 4.8% of
GDP in 2013-14 announced by the Government.
• Foreign investment in an imperative in view of
the high current account deficit (CAD). FII, FDI
and ECB three main source of CAD Financing.
Foreign investment that is consistent with our
economic objectives to be encouraged.
• Efforts in the past few months have brought
down headline WPI inflation to about 7% and
core inflation to about 4.2%.
• Food inflation is worrying but all possible steps
to be taken to augment the supply side to meet
the growing demand for food items.
• Faced with huge fiscal deficit, Government
expenditure rationalized in 2012-13. Some
economic space retrieved. Space to be used to
further Government ' s soc ioeconomic
objectives.
• Revised Estimates (RE) of the expenditure in
2012-13 at 96 % of the Budget Estimates (BE)
due to slowdown and austerity measures.
• Plan Expenditure in 2013-14 to grow at 29.4%
over Revised Estimates for the current year.
• All flagship programmes fully and adequately
funded and sufficient funds provided to each
Ministry or Department consistent with their
capacity to spend funds.
• Budget for 2013-14 to have one overarching goal
of creating opportunities for our youth to
acquire education and skills that will get them
decent jobs or self-employment.
• Allocations for Scheduled Caste Sub Plan and
Tribal Sub Plan increased substantially over the
allocations of the current year. Funds allocated
to these Sub Plans cannot be diverted.
• During 2013-14, BE of total expenditure of
16,65,297 crore and of Plan Expenditure at
5,55,322 crore.
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Budget 2013-2014
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• 97,134 crore allocated for programmes relating
to women and 77,236 crore allocated for
programmes relating to children.
• Ministry of Women and Child Development to
design schemes that will address the concerns of
women belonging to the most vulnerable
groups, including single women and widows. An
additional sum of 200 crore proposed to be
provided to the Ministry to begin work.
• Allocation of 160 crore to the corpus of
Maulana Azad Education Foundation to raise
its corpus to 1,500 crore during 12th Plan
period.
• A sum of 110 crore to the Department of
Disablity Affairs for ADIP scheme in 2013-14
against RE 2012-13 of 75 crore.
• 37,330 crore allocated to the Ministry of
Health & Family Welfare.
• New National Health Mission will get an
allocation of 21,239 crore.
• 4,727 crore for medical education, training and
research.
• 150 crore provided for National Programme
for the Health Care of Elderly.
• Ayurveda, Unani, Siddha and Homoeopathy are
being mainstreamed. Allocation of 1,069 crore
to Department of AYUSH.
• 1,650 crore allocated for six AIIMS-like
institutions.
• Allocation of 65,867 crore to the Ministry of
Human Resource Development, an increase of
17% over the RE of the current year.
• 27,258 crore provided for Sarva Shiksha
Abhiyaan (SSA).
• 5,284 crore allocated to Ministries/
Departments in 2013-14 for scholarships to
students belonging to SC, ST, OBC, Minorities
and girl children.
• Mid-Day Meal Scheme (MDM) to be provided
13,215 crore.
• 17,700 crore allocated for ICDS in 2013-14
representing an increase of 11.7% over 2012-13.
• Allocation of 300 crore in 2013-14 for a multi-
sectoral programme aimed at overcoming
maternal and child malnutrition. Programme to
be implemented in 100 districts during 2013-14
to be scaled to cover 200 districts the year after.
• 15,260 crore allocated to Ministry of Drinking
Water and Sanitation.
• 1,400 crore provided for setting-up of water
purification plants in 2000 arsenic and 12000
fluoride-affected rural habitations.
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Minorities
Disabled Persons
Health and Education
ICDS
Drinking Water
• An increase of 12% over the BE and 60% over
the RE of 2012-13 to Ministry of Minority
Affairs.
• Health for all and education to all remains
priority.
• An increase of 25.6% over RE of the current year
for investments in Rashtriya Madhyamik
Shiksha Abhiyan (RMSA).
• Government committed to the creation of
Nalanda University as a centre of educational
excellence.
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Rural Development
JNNURM
Agriculture
Agricultural Credit
Green Revolution
Farmer Producer Organizations
• Allocation of 80,194 crore in 2013-14 for
Ministry of Rural Development marking an
increase of 46% over RE 2012-13.
• 14,873 crore for JNNURM in BE 13-14 as
against RE of 7,383 crore. Out of this, a
significant portion will be used to support the
purchase of upto 10,000 buses, especially by the
hill States.
• 27,049 crore allocated to Ministry of
Agriculture, an increase of 22 % over the RE of
current year.
• Agricultural research provided 3,415 crore.
• For 2013-14, target of agricultural credit kept at
7 lakh crore.
• Bringing green revolution to eastern India a
remarkable success. 1,000 crore allocated in
2013-14.
• 500 crore allocated to start a programme of
crop diversification that would promote
technological innovation and encourage
farmers to choose crop alternatives.
• Rashtriya Krishi Vikas Yojana and National
Food Security Mission provided 9,954 crore
and 2,250 crore respectively.
• Allocation for integrated watershed programme
increased from 3,050 crore in 2012-13 (BE) to
5,387 crore.
• Matching equity grants to registered Farmer
Producer Organization (FPO) upto a maximum
of 10 lakhs per FPO to enable them to leverage
working capital from financial institutions.
• Credit Guarantee Fund to be created in the
Small Farmers'Agri Business Corporation with
an initial corpus of 100 crore.
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• Proposal to carve out PMGSY-II and allocate a
portion of the funds to the new programme that
will benefit States such as Andhra Pradesh,
Haryana, Karnataka, Maharashtra, Punjab and
Rajasthan.
• Average annual growth rate of agriculture and
allied sector was 3.6% during XI Plan against
2.5% and 2.4% in IX and X plans respectively.
• In 2012-13, total food-grain production will be
over 250 million tons. Minimum support price
for every agricultural produce has increased
significantly under the UPA Government.
• Interest subvention scheme for short-term crop
loans to be continued scheme extended for crop
loans borrowed from private sector scheduled
commercial banks.
• Allocation made for pilots programme on
Nutri-Farms for introducing new crop varieties
that are rich in micro-nutrients.
• National Institute of Biotic Stress Management
for addressing plant protection issues will be
established at Raipur, Chhattisgarh.
• The Indian Institute of Agricultural Bio-
technology will be established at Ranchi,
Jharkhand.
• Pilot scheme to replant and rejuvenate coconut
gardens implemented in some districts of Kerala
and the Andaman & Nicobar extended to entire
State of Kerala.
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National Livestock Mission
Food Security
INVESTMENT, INFRASTRUCTURE AND
INDUSTRY
Road Construction
Cabinet Committee on Investment
New Investment
Savings
Industrial Corridors
• National Livestock Mission to be set up.
• Communication with investors to be improved
to remove any apprehension or distrust,
including fears about undue regulatory burden.
• Need of new and innovative instruments to
mobilize funds for investment in infrastructure
sector. Measures such as:
I I F C L t o o f f e r c r e d i t
enhancement.
• A regulatory authority for road sector.
• 3000 kms of road projects in Gujarat, Madhya
Pradesh, Maharashtra, Rajasthan and Uttar
Pradesh will be awarded in the first six months
of 2013-14.
• The Cabinet Committee on Investment (CCI)
has been set up. Decisions have been taken in
respect of a number of gas, power and coal
projects.
• Incentives to semiconductor wafer fab
manufacturing facilities, including zero
customs duty for plant and machinery.
• Need to incentivize greater savings by
household sector in financial instruments.
Following measures proposed:
• Plans for seven new cities have been finalized
and work on two new smart industrial cities at
Dholera, Gujarat and Shendra Bidkin,
Maharashtra will start during 2013-14.
• Delhi Mumbai Industrial Corridor (DMIC) to
be provided additional funds during 2013-14
within the share of the Government of India in
the overall outlay, if required.
• A provision of 307 crore made for the Mission.
• Additional provision of 10,000 crore for
National Food Security Act.
• Infrastructure Debt Funds (IDF) to be
encouraged,
• Infrastructure tax-free bond of 50,000 crore in
2013-14,
• Build roads in North eastern states and connect
them to Myanmar with assistance from WB &
ADB,
• Raising corpus of Rural Infrastructure
Development Fund (RIDF) to 20,000 crore and
5,000 crore to NABARD to finance
construction for warehousing. Window to
Panchayats to finance construction of godowns.
• Companies investing 100 crore or more in
plant and machinery during the period 1.4.2013
to 31.3.2015 will be entitled to deduct an
investment allowance of 15% of the investment.
• Rajiv Gandhi Equity Savings Scheme to be
liberalized.
• Additional deduction of interest upto 1 lakh
for a person taking first home loan upto 25
lakh during period 1.4.2013 to 31.3.2014.
• In consultation with RBI, instruments
protecting savings from inflation to be
introduced.
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• Chennai Bengaluru Industrial Corridor to be
developed.
• Preparatory work has started for Bengaluru
Mumbai Industrial Corridor.
• Two new major ports will be established in Sagar,
West Bengal and in Andhra Pradesh to add 100
million tons of capacity.
• A bill to declare the Lakhipur-Bhanga stretch of
river Barak in Assam as the sixth national
waterway to be moved in Parliament.
• Preparatory work underway to build a grid
connecting waterways, roads and ports.
• A policy to encourage exploration and
production of shale gas will be announced.
• The 5 MMTPA LNG terminal in Dabhol,
Maharashtra will be fully operational in 2013-
14.
• In the medium to long term need to reduce our
dependence on imported coal. One way forward
is to devise a PPP policy framework with Coal
India Limited as one of the partners.
• Ministry of Coal to announce Government's
policies in due course.
• Guidelines regarding financial restructuring of
DISCOMS have been announced.
• State Government urged to prepare the financial
restructuring plan, quickly sign MoU and take
advantage of the scheme.
• Benefits or preferences enjoyed by MSME to
continue upto three years after they grow out of
this category.
• Ministry of Corporate Affairs to notify that
funds provided to technology incubators
located within academic Institutions and
approved by the Ministry of Science and
Technology or Ministry of MSME will qualify as
CSR expenditure.
• A new scheme called the Integrated Processing
Development Scheme will be implemented in
Leh-Kargil Transmission Line
Ports
National Waterways
Oil and Gas
Coal
Power
Micro, Small and Medium Enterprises
Textiles
• Government to construct a transmission system
from Srinagar to Leh at a cost of 1,840 crore.
• A new outer harbor to be developed in the VOC
port at Thoothukkudi, Tamil Nadu through PPP
at an estimated cost of 7,500 crore.
• Refinancing capacity of SIDBI raised to 10,000
crore.
• Another sum of 100 crore provided to India
Microfinance Equity Fund.
• A corpus of 500 crore to SIDBI to set up a
Credit Guarantee Fund for factoring.
• A sum of 2,200 crore during the 12th Plan
period to set up 15 additional Tool Rooms and
Technology Development Centres with World
Bank assistance.
• Technology Upgradation Fund Scheme (TUFS)
to continue in 12th Plan with an investment
target of 1,51,000 crore.
• Allocation of 50 crore to Ministry of Textile to
incentivize setting up Apparel Parks within the
SITPs to house apparel manufacturing units.
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the 12th Plan to address the environmental
concerns of the textile industry.
• Working capital and term loans at a
concessional interest of 6% to handloom sector.
• Scheme of Fund for Regeneration of Traditional
Industries (SFURTI) extended to 800 clusters
during the 12th Plan.
• Support to measures to be taken to boost exports
of goods and services.
• A standing Council of Experts to be constituted
in the Ministry of Finance to analyze the
international competitiveness of the Indian
financial sector.
• All branches of public sector banks to have ATM
by 31.3.2014.
• A multi-pronged approach to increase the
penetration of insurance, both life and general,
in the country.
• Number of proposals finalized, in consultation
with IRDA such as empowering insurance
companies to open branches in Tier-II cities and
below without prior approval of IRDA, KYC of
banks to be sufficient to acquire insurance
policies, banks to be permitted to act as
insurance brokers, banking correspondent
allowed to sell micro-insurance products and
achieving the goal of having an office of LIC and
an office of at least one public sector general
insurance company in towns with population of
10,000 or more.
• Rashtriya Swasthya Bima Yojana to be extended
to other categories such as rickshaw, auto-
rickshaw and taxi drivers, sanitation workers,
rag pickers and mine workers.
• A comprehensive social security package to be
evolved for unorganized sector by facilitating
convergence among different schemes.
• Proposal to amend the SEBI Act, to strengthen
the regulator, under consideration.
• Number of proposal finalized in consultation
with SEBI.
• Designated depository participants, authorized
by SEBI, may register different classes of
portfolio investors, subject to compliance with
KYC guidelines.
• SEBI will simplify the procedures and prescribe
uniform registration and other norms for entry
for foreign portfolio investors.
• Rule that, where an investor has a stake of 10 %
or less in a company, it will be treated as FII and,
where an investor has a stake of more than 10 %,
it will be treated as FDI will be laid.
• FIIs will be permitted to participate in the
exchange traded currency derivative segment to
the extent of their Indian rupee exposure in
India.
Foreign Trade
FINANCIAL SECTOR
Banking
Insurance
Capital Market
• Compliance of public sector banks with Basel
III regulations to be ensured. 14,000 crore
provided in BE 2013-14 for infusing capital.
• Proposal to set up India's first Women's Bank as
a public sector bank. Provision of 1,000 crore as
initial capital.
• 6,000 crore to Rural Housing Fund in 2013-14.
• National Housing Bank to set up Urban
Housing Fund. 2,000 crore to be provided to
the fund in 2013-14.
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• FIIs will also be permitted to use their
inves tment in corporate bonds and
Government securities as collateral to meet their
margin requirements.
• SEBI to prescribed requirement for angel
investor pools by which they can be recognized
as Category I AIF venture capital funds.
• Small and medium enterprises, to be permitted
to list on the SME exchange without being
required to make an initial public offer (IPO).
• Stock exchanges to be allowed to introduce a
dedicated debt segment on the exchange.
• Support to municipalities that will implement
waste-to-energy projects.
• Government to provide low interest bearing
fund from the National Clean Energy Fund
(NCEF) to IREDA to on-lend to viable
renewable energy projects.
• New criteria for determining backwardness to be
evolved and reflect them in future planning and
devolution of funds.
• Target of skilling 50 million people in 12th Plan
period, including 9 million in 2013-14.
• Constraints not to come in the way of providing
any addition requirement for the security of
nation.
• Despite constraints substantial enhancements
given to Science and Technology, Space and
Atomic Energy.
• All cities having a population of more than
1,00,000 will be covered by private FM radio
services.
• Government to fund the conversion of the
Ghadar Memorial in San Francisco into a
museum and library.
ENVIRONMENT
OTHER PROPOSALS
Backward Regions Grant Fund
Skill Development
Defence
Science and Technology
Institutions of Excellence
Sports
Broadcasting
Panchayati Raj
Post Offices
Ghadar Memorial
• 'Generation-based incentive' reintroduced for
wind energy projects and 800 crore allocated
for this purpose.
• Allocation for Defence increased to 2,03,672
crore including 86,741 crore for capital
expenditure.
• 200 crore to be set apart to fund organizations
that will scale up S&T innovations and make
these products available to the people.
• A grant of 100 crore each made to 4 institution
of excellence.
• National Institute of Sports Coaching to be set
up at Patiala at a cost of 250 crore over a period
of three years.
• Augmentation in the Budget allocation of Rajiv
Gandhi Panchayat Sashaktikaran Abhiyan
(RGPSA) to 455 crore in 2013-14. An
additional 200 crore proposed to be provided.
• An ambitious IT driven project to modernize
the postal network at a cost of 4,909 crore. Post
offices to become part of the core banking
solution and offer real time banking services.
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Central Schemes
Three promises
BUDGET ESTIMATES
PART B - TAX PROPOSALS
Direct taxes
• Centrally Sponsored Schemes (CSS) and
Additional Central Assistance (ACA) Schemes
to be restructured into 70 schemes. Central fund
for the schemes to be given to the States as part
of central plan assistance.
• Promises made to woman, youth and poor.
To the poor of India direct benefit transfer
scheme will be rolled out throughout the
country during the term of the UPA
Government with the motive “Äapka paisa
aapke haath”.
• Fiscal deficit for the current year contained at
5.2% and for the year 2013-14 at 4.8%.
• Revenue deficit for the current year at 3.9% and
for the year 2013-14 at 3.3%.
• By 2016-17 fiscal deficit to be brought down to
3%, revenue deficit to 1.5% and effective
revenue deficit to zero %.
• Clarity in tax laws, a stable tax regime, a non-
adversarial tax administration, a fair
mechanism for dispute resolution and
independent judiciary for greater assurance is
underlying theme of tax proposals.
• Tax Administration Reforms Commission to be
set up.
• In short term need to reclaim peak of 11.9% of
tax GDP ratio achieved in 2007-08.
• Little room to give away tax revenues or raise tax
rates in a constrained economy.
• No case to revise either the slabs or the rates of
Personal Income Tax. Even a moderate increase
in the threshold exemption will put hundreds of
thousands of Tax Payers outside Tax Net.
• In all other cases such as dividend distribution
tax or tax on distributed income, current
surcharge increased from 5 to 10 %.
• Additional surcharges to be in force for only one
year.
We stand in solidarity with our girl children and
women. And we pledge to do everything possible
to empower them and to keep them safe and
secure. A fund - “Nirbhaya Fund” - to be setup
with Government contribution of 1,000 crore.
Youth to be motivated to voluntarily join skill
development programmes. National Skill
Development Corporation to set the
curriculum and standards for training in
different skills. 1000 crore set apart for this
scheme.
• Plan expenditure is placed at 5,55,322 crore.
• Non Plan Expenditure is estimated at
11,09,975 crore.
• However, relief for Tax Payers in the first bracket
of 2 lakhs to 5 lakhs. A tax credit of 2000 to
every person with total income upto 5 lakhs.
• Surcharge of 10% on persons (other than
companies) whose taxable income exceeds 1
crore to augment revenues.
• Increase surcharge from 5 to 10% on domestic
companies whose taxable income exceed 10
crore.
• In case of foreign companies who pay a higher
rate of corporate tax, surcharge to increase from
2 to 5%, if the taxable income exceeds 10 crore.
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• Education cess to continue at 3%.
• Permissible premium rate increased from 10%
to 15% of the sum assured by relaxing eligibility
conditions of life insurance policies for persons
suffering from disability and certain ailments.
• Contributions made to schemes of Central and
State Governments similar to Central
Government Health Scheme, eligible for section
80D of the Income tax Act.
• Donations made to National Children Fund
eligible for 100% deduction.
• 'Eligible date' for projects in the power sector to
avail benefit under Section 80-IA extended from
31.3.2013 to 31.3.2014.
• Concessional rate of tax of 15% on dividend
received by an Indian company from its foreign
subsidiary proposed to continue for one more
year.
• Securitisation Trust to be exempted from
Income Tax. Tax to be levied at specified rates
only at the time of distribution of income for
companies, individual or HUF etc. No further
tax on income received by investors from the
Trust.
• Investor Protection Fund of depositories
exempt from Income-tax in some cases.
• Parity in taxation between IDF-Mutual Fund
and IDF-NBFC.
• A Category I AIF set up as Venture capital fund
allowed pass through status under Income-tax
Act.
• A final withholding tax at the rate of 20 % on
profits distributed by unlisted companies to
shareholders through buyback of shares.
• Proposal to increase the rate of tax on payments
by way of royalty and fees for technical services
to non-residents from 10% to 25%.
• Reductions made in rates of Securities
Transaction Tax in respect of certain
transaction.
• Proposal to introduce Commodity Transaction
Tax (CTT) in a limited way.
• Agricultural commodities will be exempted.
• Modified provisions of GAAR will come into
effect from 1.4.2016.
• Rules on Safe Harbour will be issued after
examining the reports of the Rangachary
Committee appointed to look into tax matters
relating to Development Centres & IT Sector
and Safe Harbour rules for a number of sectors.
• Fifth large tax payer unit to open at Kolkata
shortly.
• No change in the normal rates of 12% for excise
duty and service tax.
• No change in the peak rate of basic customs duty
of 10% for non-agricultural products.
• Investment allowance at the rate of 15% to
manufacturing companies that invest more
than 100 crore in plant and machinery during
the period 1.4.2013 to 31.3.2015.
• TDS at the rate of 1% on the value of the transfer
of immovable properties where consideration
exceeds 50 lakhs. Agricultural land to be
exempted.
• A number of administrative measures such as
extension of refund banker system to refund
more than 50,000, technology based
processing, extension of e-payment through
more banks and expansion in the scope of
annual information returns by Income-tax
Department.
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Indirect Taxes
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Customs
Excise duty
Service Tax
• Period of concession available for specified part
of electric and hybrid vehicles extended upto 31
March 2015.
• Duty on specified machinery for manufacture
of leather and leather goods including footwear
reduced from 7.5 to 5%.
• Duty on pre-forms precious and semi-precious
stones reduced from 10 to 2%.
• Export duty on de-oiled rice bran oil cake
withdrawn.
• Duty of 10% on export of unprocessed ilmenite
and 5 % on export on ungraded ilmenite.
• Concessions to air craft maintenance, repair and
overhaul (MRO) industry.
• Duty on Set Top Boxes increased from 5 to10%.
• Duty on raw silk increased from 5 to 15%.
• Duties on Steam Coal and Bituminous Coal
equalized and 2% custom duty and 2% CVD
levied on both kinds coal.
• Duty on imported luxury goods such as high
end motor vehicles, motor cycles, yachts and
similar vessels increased.
• Relief to readymade garment industry. In case of
cotton, zero excise duty at fibre stage also. In case
of spun yarn made of man-made fibre, duty of
12% at the fibre stage.
• Handmade carpets and textile floor coverings of
coir and jute totally exempted from excise duty.
• To provide relief to ship building industry, ships
and vessels exempted from excise duty. No CVD
on imported ships and vessels.
• Specific excise duty on cigarettes increased by
about 18%. Similar increase on cigars, cheroots
and cigarillos.
• Excise duty on SUVs increased from 27 to 30%.
Not applicable for SUVs registered as taxies.
• Proposals to levy 4% excise duty on silver
manufactured from smelting zinc or lead.
• MRP based assessment in respect of branded
medicaments of Ayurveda, Unani, Siddha,
Homeopathy and bio-chemic systems of
medicine to reduce valuation disputes.
• Maintain stability in tax regime.
• Vocational courses offered by institutes
affiliated to the State Council of Vocational
Training and testing activities in relation to
agricultural produce also included in the
negative list for service tax.
• Exemption of Service Tax on copyright on
cinematography limited to films exhibited in
cinema halls.
• Proposals to levy Service Tax on all air
conditioned restaurants.
• Out of nearly 17 lakh registered assesses under
Service Tax only 7 lakhs file returns regularly.
• Duty free gold limit increased to 50,000 in case
of male passenger and 1,00,000 in case of a
female passenger subject to conditions.
• Excise duty on marble increased from 30 per
square meter to 60 per square meter.
• Duty on mobile phones priced at more than
2000 raised to 6%.
• For homes and flats with a carpet area of 2,000
sq.ft. or more or of a value of 1 crore or more,
which are high-end constructions, where the
component of services is greater, rate of
abatement reduced from 75 to 70 %.
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Need to motivate them to file returns and pay
tax dues. A onetime scheme called 'Voluntary
Compliance Encouragement Scheme' proposed
to be introduced. Defaulter may avail of the
scheme on condition that he files truthful
declaration of Service Tax dues since 1st October
2007. • Work on draft GST Constitutional amendment
bill and GST law expected to be taken forward.
Source: indiabudget.nic.in
• Tax proposals on Direct Taxes side estimated to
yield to 13,300 crore and on the Indirect Tax
side 4,700 crore.
• A sum of 9,000 crore towards the first
installment of the balance of CST compensation
provided in the budget.
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Good and Services Tax
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STATE OF THE ECONOMY AND
PROSPECTS
Aspects of growth
Quarterly estimates of growth of GDP
Investment
Following the slowdown induced by the global
financial crisis in 2008-09, the Indian economy
responded strongly to fiscal and monetary stimulus
and achieved a growth rate of 8.6 per cent and 9.3
per cent respectively in 2009-10 and 2010-11.
However, with the economy exhibiting
inflationary tendencies, the Reserve Bank of India
(RBI) started raising policy rates in March 2010.
The moderation in growth is primarily attributable
to weakness in industry which registered a growth
rate of only 3.5 per cent and 3.1 per cent in 2011-12
and 2012-13 respectively. The rate of growth of the
manufacturing sector was even lower at 2.7 per cent
and 1.9 per cent for these two years respectively.
Growth in agriculture has also been weak in 2012-
13, following lower-than-normal rainfall, especially
in the initial phases (months of June and July) of
the south-west monsoon. After achieving double-
digit growth continuously for five years, the growth
rate of the services sector also declined to 8.2 per
cent in 2011-12 and 6.6 per cent in 2012-13.
Despite recovering strongly from the global
financial crisis there are various factors responsible
for rapid slowdown of economy. First, the boost to
demand given by monetary and fiscal stimulus
following the crisis was large. Second, corporate
and infrastructure investment started slowing both
as a result of investment bottlenecks as well as the
tighter monetary policy. Thirdly, it was hit by two
additional shocks: a slowing global economy
(particularly European crisis) and uncertainties
about fiscal policy in the United States, and a weak
monsoon.
In the last decade, growth has increasingly come
from the services sector, whose contribution to
overall growth of the economy has been 65 per cent,
while that of the industry and agriculture sectors
has been 27 per cent and 8 per cent respectively. For
achieving an annual growth rate of 9 per cent or
higher, all the three major sectors of the economy
i.e. agriculture and allied, service and industry have
to perform well. The general pattern over recent
years has been that, in years of sharply higher
growth, GDP growth at market prices exceeds GDP
at factor cost and the reverse is true in years of slow
growth. GDP at factor cost is GDP at market prices
less indirect taxes plus subsidies.
As per the Advance Estimates released by the CSO,
the rate of growth in terms of GDP at market prices
(at 2004-05 prices) is expected to be 3.3 per cent for
2012-13 as against 6.3 per cent in 2011-12. The
growth rate declined significantly on account of
the reduction in investment rate and lower growth
of exports vis-à-vis that of imports.
Quarterly GDP growth rate in India declined in
each of the successive quarters between the fourth
quarter of 2010-11 and the fourth quarter of 2011-
12. Growth in H1 of the current year works out to
5.4 per cent, while the CSO's Advance Estimate for
growth for 2012-13 is 5.0 per cent.
The growth rate of the economy since 2003-04 has
been strongly correlated with investment rate. The
investment rate averaged 34.5 per cent between
2003-04 and 2011-12, much higher rate than before.
ECONOMIC SURVEY 2012-13
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The real growth rate in the economy averaged 9.5
per cent per annum during 2005-06 to 2007-08 and
9 per cent per annum during in 2009-10 and 2010-
11, which were also the years when the growth rate
of investment in real terms averaged around 16 per
cent and 16.2 per cent respectively. The rate of
growth of GDP was lower in the years when growth
rate of investment was low, as was the case in 2008-
09 and 2011-12. The private sector is the major
source of investment in the country.
As per the first revised estimates released by the
CSO in January 2013, gross domestic capital
formation as a ratio of GDP at current market
prices (investment rate) is estimated to be 35.0 per
cent in 2011-12 as against 36.8 per cent in 2010-11.
The reduction in private investment could be
attributed to a number of factors. First is the
increase in policy rates. Second, lower demand for
Indian exports from the rest of the world,
particularly the advanced countries. Third is the
policy bottleneck which led to a number of large
projects becoming stalled, which may in turn have
discouraged new investment.
Savings of the private corporate sector accounted
for 15 per cent of total savings on an average
between 1980-81 and 2011-12. However, during the
years 2004-05 to 2011-12, their share increased to
23.2 per cent. The public sector accounted for 10
per cent of total savings on average between 1980-
81 and 2011-12.
Because of the slowdown and high levels of
leverage, some industry and infrastructure sectors
are experiencing an increase in non-performing
assets (NPAs). Overall gross NPAs of the banking
sector increased from 2.36 per cent of total credit
advanced in March 2011 to 3.57 per cent of total
credit advanced in September 2012. The increase is
particularly sharp for the industry and
infrastructure sectors. Some of the reasons for the
increase in NPAs are technical, but stress also stems
from slow growth and project delays.
The hope for starting a virtuous circle, lies in
shifting national spending from consumption to
investment, removing the bottlenecks to
investment, growth, and job creation, in part
through structural reforms, combating inflation
both through monetary and supply-side measures,
reducing the costs for borrowers of raising
financing, and increasing the opportunities for
savers to get strong real investment returns.
The government has taken a number of steps to
revive investment and growth. These comprise
setting up the CCI headed by the Prime Minister to
fast-track mega projects of over 1,000 crore; a
scheme for restructuring the debts of state power
distribution companies, land acquisition bill that
will clarify and make the process of land
acquisition fairer; permitting FDI in a number of
areas including multi brand retail, power
exchanges, and civil aviation; increasing
investment in irrigation, storage and cold storage
networks; and undertaking programmes to
improve the production of protein foods. Steps
have also been taken on financial-sector reform.
The Banking Laws (Amendment) Act 2012
strengthens the regulatory powers of the RBI and
paves the way for grant of new bank licences by the
RBI.
The revival of growth in the advanced countries is
expected to be slow and uncertain at least in the
near future, despite the measures being taken on
monetary and fiscal fronts. In Europe, in
particular, this is also being accompanied by
Domestic savings
Assessment and policy measuresProspects, short term and medium term
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changes in the institutional framework. Most
analysts have projected only a very moderate global
recovery in 2013, which could gather steam in 2014.
At the same time, if the United States can deal with
its fiscal overhang, the potential upside to global
growth could be substantial. Emerging markets can
also compensate a little for tepid growth in
industrial economies, and the changing direction
of Indian exports towards emerging markets can
help their revival.
The bottom line is that India cannot take the
external environment for granted, and has to move
quickly to restore domestic balance. Given such a
scenario, where all the three major sectors of the
economy perform better in 2013-14 as compared to
2012-13, the overall economy is expected to grow in
the range of 6.1 to 6.7 per cent in 2013-14.
The fiscal outcome of the Indian government
showed improvement in 2012-13 in comparison to
2011-12 even in the face of global economic
slowdown, high crude oil prices and sluggish
financial markets. With fiscal deficit threatening to
spiral out of control; the govt. continued to push
for fiscal reforms by implementing Kelkar
committee recommendations to reach on
beneficial macroeconomic outcomes and rein in
Current Account Deficit. Widening of the tax base
and prioritization of expenditure are key
components for continued improvement in fiscal
position. The introduction of “Effective Revenue”
and “Medium Term Effective Framework
Statement” in the 2012-13 Budget, helped to create
better picture of total capital expenditure and
improve fiscal marksmanship.
The under performance in 2008-09 and 2011-12 in
achieving fiscal consolidation; to counter the
global financial turmoil and its continued after
effects; created risks in matching budgeted revenues
and expenditure. The 2012-13 provisional revenue
receipts were less by approximately 34,000 crore
while expenditures increased by approximately
41,000 crore in comparison to budgeted estimate,
thereby increasing the deficit to 509,732 crore
from 412,817 crore (budgeted). Even the tax
buoyancy also got affected by dropping below 1.
The 2012-13 budget envisioned 13.9% growth in
Direct tax rate over 2011-12 while continuing the
policy of moderation of tax rates. The revision of
income tax slabs and introduction of GAAR and
extending applicability of AMT were put forth to
widen direct tax base and improve tax collection.
The indirect tax collection was estimated to grow by
26.7% in 2012-13 over 2011-12 on account of
increase in excise duty of non-petroleum products
and recovery of manufacturing sector. Various
other measures were also announced. In case of
Service tax the 2012-13 budget envisaged a growth
of 30.5% vis-à-vis 2011-12. However, radical change
of approach was followed by introducing 'Negative
List'.
Due to various exemptions, effective rate of
taxation is less than statutory rate. The corporate
income tax shortfall on account of various
exemptions in 2011-12 was 51,292 Cr., while in
case of individual taxpayer segment the tax forgone
was 35,698 Cr. in 2011-12. In so far as indirect
taxes are concerned, revenue forgone for financial
year 2011-12 in respect of excise duties is estimated
at 2,12,167 crore including 12,880 crore on
account of area-based exemptions. The non-tax
revenue increased due to higher than budgeted
realization from proceeds of 3G/broadband
auctions even though 2G auction receive lukewarm
response due to high reserve price.
PUBLIC FINANCE
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When comparing actual revenue outcome in 2012-
13 vis-à-vis Budget estimates, Gross tax revenue in
April-December 2012 has grown year-on-year by 15
per cent to reach 681,345 crore. While this level of
growth is much higher than that of 12.2 per cent in
April-December 2011, it falls significantly short of
the growth envisaged by BE 2012-13. As a
proportion of BE, gross tax revenue in April-
December 2012 was 63.2 per cent, lower than the
last five-years' average of 69.0 per cent. Apart from
these, non-tax revenue in April-December 2012 is
placed at 86,380 crore, which is 52.5 per cent of
BE, well below the last five years' average. Thus the
overall outcome in terms of non-debt receipts was
586,424 crore in April-December 2012, which is
60.0 per cent of the BE, indicating the stiff
challenge in the fourth quarter of the current fiscal
for better marksmanship.
To encompass the competing factors of funds for
development and to stay within FRBM
requirement, the government needs to prioritize
the expenditure. The subsidies, in the 2012-13
budget were estimated to be 2% of GDP. Partial
deregulation of diesel and restricting subsidized
LPG cylinders to 9 per year per connection were the
attempts to limit the subsidies to 2% of GDP.
Fertilizer subsidies and PDS are other major
contributors to subsidy burden. Direct Benefit
Transfer (DBT) is another initiative to improve the
difficulties associated with PDS.
While Interest expense has reduced as a proportion
of GDP, the outgo on pay allowances and pension
has increased on account of implementation of
Sixth Pay commission. The under-provisioning of
petroleum and fertilizer subsidies has also cash
outgo by 30,804.13 crore in 2012-13.
The economic and functional classification of the
central government Budget is useful to analyze the
macroeconomic impact of fiscal policies. In
2012-13 (Budgeted), out of total estimated
expendi ture of 1 ,497 ,636 crore ,
consumption expenditure is placed at
290,124 crore and gross capital formation
94,906 crore. Transfer payments to the rest
of the economy at 1,010,950 crore
constituted 67.5 per cent of the total
expenditure. As against implied year-on-
year growth of 14.8 per cent envisaged by
budget of 2012-13 (over provisional actuals
of 2011-12), growth in total expenditure in
April-December 2012 has been 10.6 per cent
only. Non-Plan revenue expenditure in
April-December 2012 is placed at 72.3 per
cent of budgeted, which is well below the
five-year average of 77.7 per cent. Similarly
expenditure on both, Plan revenue as well as
Plan capital expenditure in April-December
2012 is well below the five-year average as
proportions of budgeted. However, major subsidies
have burgeoned in April-December 2012 to reach a
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Trends in Deficits of Central Government
YearRevenueDeficit
FiscalDeficit
PrimaryDeficit
Revenue Deficit as percent of Fiscal Deficit
(As per cent of GDP)
Enactment of FRBM
2003-4 3.5 4.3 0 79.7
2004-5 2.4 3.9 0 62.3
2005-6 2.5 4 0.4 63
2006-7 1.9 3.3 -0.2 56.3
2007-8 1.1 2.5 -0.9 41.4
2008-9 4.5 6 2.6 75.2
2009-10 5.2 6.5 3.2 81
2010-11 3.2 4.8 1.8 67.5
2011-12(BE) 3.4 4.6 1.6 74.4
2011-12(P) 4.3 5.7 2.6 75.5
2012-13(BE) 3.5 5.1 1.9 68.2
Source: Union Budget documents and Controller General of Accounts.
B: Budget Estimates.
P: Provisional Actuals (Unaudited)
Notes: The ratios to GDP at current market prices (CMP) are based on theCentral Statistics Office’s (CSO) National Accounts 2004-5 series.
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figure of 166,824 crore (92.2 per cent of budget).
The high levels of fiscal deficit in the post-crisis
period added to the overall debt burden of the
central government. The total liabilities for the
Government of India include debt and liabilities
accounted for in the Consolidated Fund of India
(technically defined as public debt) as well as
liabilities accounted for in the public account.
Public debt constitutes 76.3 per cent of total
liabilities at end March 2012. It is further classified
into internal and external debt. Internal debt
constitutes 90.9 per cent of public debt. A greater
dependence on domestic debt insulates the debt
portfolio from volatility in international capital
markets. It also minimizes currency risk.
The combined gross fiscal deficit of states did not
exceed 3.0 per cent of GDP even in the years of
global crisis. With the exception of 2009-10, the
combined position of states in terms of revenue
deficit has been one of surplus. Besides, what is
noteworthy is that there has been an improvement
in the quality of expenditure with a rise in capital
expenditure to GDP ratio and development
expenditure.
The fiscal deficit of the Centre widened from 4.8
per cent of GDP in 2010-11 to 5.9 per cent in 2011-
12 (RE). With the fiscal deficit of states exhibiting a
modest deterioration to 2.3 per cent of GDP, the
fiscal outcome in terms of center and states
combined was placed at 8.1 per cent.
According to the Survey, addressing the key fiscal
risk of petroleum subsidies is critical in better fiscal
marksmanship. With the recent reforms in diesel
prices and efforts at expenditure reprioritization,
the medium-term fiscal consolidation plan is
credible and could yet again yield macroeconomic
dividends in terms of higher growth and price
stability.
Inflation, as measured by the Wholesale Price Index
(WPI), has remained above 7 per cent since
December 2009. Food inflation has been
particularly elevated over this period, contributing
to an average of one third of total inflation.
Consumer price inflation, with higher weights on
food, has been generally higher than the headline
WPI inflation. A moderation in WPI inflation is
now clearly visible, but the moderation has largely
been due to deceleration in the rate of inflation of
nonfood manufactured products. Apart from
monetary policy attempting to control demand,
supply side responses will be necessary to bring
down inflation in a sustained way, and ongoing
policy initiatives need to be pursued.
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PRICES AND MONETARY MANAGEMENT
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Inflation-broad trends
WPI Inflation
Headline WPI inflation which averaged 9.56 per
cent in 2010-11 and 8.94 per cent in 2011- 2012
decelerated to 7.55 per cent in the first nine months
of 2012-13 (Apr-Dec). Relative importance of
different commodity groups contributing to this
persistent inflation, however, changed over time.
The persistently elevated prices for animal
products, the rise in the prices of cereals and
vegetables, along with the increase in international
prices of fertilizers and the increase in administered
prices of diesel have contributed to inflation in
differing degrees over time.
Annual Inflation as per Different Price Indices
Month WPI CPI-IW CPI-NS CPI-AL CPI-RL
2011-12 2012-13 2011-12 2012-13 2011-12 2012-13 2011-12 2012-13 2011-12 2012-13
Apr 9.74 7.5 9.41 10.22 - 10.26 9.11 7.84 9.11 8.01
May 9.56 7.55 8.72 10.16 - 10.36 9.63 7.77 9.63 8.11
Jun 9.51 7.58 8.62 10.05 - 9.93 9.32 8.03 9.14 8.54
Jul 9.36 7.52 8.43 9.84 - 9.86 9.03 8.61 9.03 8.94
Aug 9.78 8.01 8.99 10.31 - 10.03 9.52 9.18 9.71 9.34
Sep 10 8.07 10.06 9.14 - 9.73 9.43 9.43 9.25 9.93
Oct 9.87 7.32 9.39 9.6 - 9.75 9.36 9.85 9.73 9.84
Nov 9.46 7.24 9.34 9.55 - 9.9 8.95 10.31 9.14 10.47
Dec 7.74 7.18P 6.49 11.17 - 10.56 6.37 11.33 6.72 11.31
Jan 7.23 5.32 7.65 4.92 5.27
Feb 7.56 7.57 8.83 6.34 6.68
Mar 7.69 8.65 9.38 6.84 7.19
Average 8.94 7.55* 8.39 10.00* - 10.04* 8.19 9.17* 8.35 9.41*
Source: Office of the Economic Adviser, Labour Bureau, Central Statistics Office (CSO).
*: Average (Apr-Dec) P: Provisional CPI: Consumer Price Index; IW: Industrial Worker
AL: Agricultural Labourers RL: Rural Labourers NS: New Series
Quarterly Inflation in Major Group of the WPI (percent)
Major GroupsWeight
(%)Average
(Apr-Mar)2011-12 2012-13
2010-11 2011-12 Q1 Q2 Q3 Q4 Q1 Q2 Q3P
All Commodities 100.00 9.56 8.94 9.60 9.71 9.01 7.50 7.54 7.87 7.25
Primary Articles 20.12 17.75 9.80 13.09 12.05 7.76 6.70 9.87 10.32 9.27
Fuel & Power 14.91 12.28 13.96 12.74 12.99 15.08 14.94 11.90 9.72 10.34
Manufactured Products 64.97 5.70 7.26 7.38 7.87 7.95 5.89 5.29 6.23 5.46
Composite groups
All food 24.31 11.10 7.24 8.36 8.81 6.60 5.30 9.12 9.07 9.05
Non-Food Non-Manufacturing 20.69 15.67 14.51 16.20 14.97 13.72 13.33 10.52 10.79 10.37
Non-Food Manufacturing 55.00 6.11 7.29 7.35 7.80 8.13 5.92 5.15 5.71 4.64
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The distribution of inflation across commodities
included in the WPI indicates that there has been a
sharp reduction in the number of commodities
experiencing inflation of over 20 per cent. As
against 72 commodities with a weight of 13.8 per
cent, which reported above 20 per cent inflation in
Q2 of 2011-12, the number of such commodities
declined to 29 with a weight of 5.5 per cent in Q2 of
2012-13.
In India, most attention, including from
policymakers, is devoted to headline WPI inflation.
WPI series have a wider commodity basket, reflect
the underlying economy-wide inflation better.
Some economists, however, would prefer the
central bank to target consumer price inflation
rather than the WPI headline, because the former is
what each consumer experiences. Moreover,
generalized and persistent CPI inflation could
generate high inflationary expectations amongst
the public. There have been 3 consumer price
indices, before the CSO launched the new CPI
series in January 2011, each for a specific class of
consumers. The CPI for industrial workers
(CPIIW), which is primarily used for wage
indexation, however, has been the CPI index
preferred by many economists. Inflation during
August 2010 to March 2012 appears to follow a
more or less similar trend irrespective of whether it
is measured in terms of the WPI or CPI-IW.
However, a nearly 2-percentage point gap has
emerged in recent months between these two
measures. The momentum of the CPIIW, as
measured by its depersonalized series, in recent
months is consistent with WPI-food inflation.
The CSO started a new series of CPI in January
2011. The new series has a wide geographical spread
and covers 310 towns and 1181 villages. With a
weighting scheme derived from the Consumer
Expenditure Survey Data (2004-05), the new series
has an all India character. Broad food and non-food
weights of the new CPI series more or less match
those on CPI-IW. Though the points of inflection
are common, the new series shows higher overall
food inflation than the CPI-IW.
Inflation has been a major cause of concern for
both the government and the RBI. They have taken
a number of measures to contain it. The measures
could be classified as those that contain demand
(such as higher interest rates), those that improve
supply (such as incentives for producers), those
that shield vulnerable consumers (such as targeted
subsidies for below poverty line (BPL) families),
those that protect all against a price rise (such as
subsidizing diesel prices), and those that shut down
markets so as to suppress price signals (such as
shutting down commodity futures markets) or to
quell price increases (such as export bans).
Given that inflation has been persistent, it suggests
a significant mismatch between demand and
supply. In the short run, curbing demand
moderately so as to allow supply to catch up can be
an effective tool, while in the long run, measures to
increase supply are the only way to have non-
inflationary growth. For some articles such as food,
where demand is hard and probably unwise to curb,
supply increases have to be the primary solution.
The government can curb demand through fiscal
consolidation, while the RBI does so through high
policy rates and tight liquidity. Given that India
faces a number of constraints on supply, such as
low agricultural productivity, poor infrastructure,
and a limited skill base, the growth-friendly way to
deal with inflation is to focus on boosting the
supply side, as a number of government initiatives
attempt. However, broader support (such as a diesel
subsidy) tends to suppress price signals, boosts
Consumer Price Indices (CPI)
Measures to contain inflation
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demand excessively, expands the fiscal deficit, and
makes the fight against inflation harder. Such short
term palliatives need to be avoided. Equally
counterproductive are periodic bans of exports,
imposition and removal of tariffs, and repeated
closure of futures markets. These tend to make it
harder for producers to plan, reduces their
incentives to produce by limiting their
remuneration, and inhibits the production
increases that are needed to bring prices under
more sustained control.
The RBI's monetary policy stance has continued to
focus on the twin objectives of containing inflation
and facilitating growth. Mounting inflationary
pressures during January 2010 to October 2011
required adoption of a tight monetary policy by the
RBI. During this period, RBI raised policy rates
(repo rates) by 375 basis points, from 4.75 per cent
to 8.5 per cent. There was a moderation in inflation
from its peak of 10.9 per cent in April 2010, to an
average of 7.6 per cent during April-December
2012. However, increasing risks to growth from
external as well as domestic sources and tight
monetary policy in face of persistent inflationary
pressures has contributed to a sharper slowdown of
the economy than anticipated. There has been a
shift in the policy stance of RBI since October 2011
wherein it has attempted to balance growth and
inflation dynamics. It reduced repo rates by 50
basis points in April, 2012 and again in January
2013 by 25 basis points and reduced the Cash
Reserve Ratio (CRR) and Statutory Liquidity Ratio
(SLR) to improve liquidity conditions.
Government in September 2012, however,
announced a road map of fiscal consolidation with
a clearly defined midterm fiscal target. It also
attempted to improve the investor perception and
create a favourable environment for investment. In
January 2013, the Government also announced an
increase in diesel prices to indicate its resolve to
reduce fiscal deficit consistent with the medium
term fiscal target announced earlier in September,
2012. There has been some moderation in inflation
in the Q3 of 2012- 13 and with the expected fiscal
consolidation, the current macroeconomic
situation creates room for a somewhat
accommodative monetary policy.
RBI in its Third Quarter Review of monetary policy
on January 29, 2013 reduced its GDP projection to
5.5 per cent with expected inflation also
moderating to 6.8 per cent by March 2013. Further,
M3 growth projections were lowered to 13.0 per
cent even though credit growth was retained at 16.0
per cent. Movement of the monetary aggregates,
however, indicate that the growth of broad money
Monetary management
Movement of Key Monetary Aggregates (y-o-y growth rates in percent)
2010-11 2011-12 2011-12 2012-13
Q1 Q2 Q3 Q4 Q1 Q2 Q3
GDP (at current market prices) 18.80 15.40 18.90 16.60 14.80 12.20 12.20 11.30 -
Reserve Money (M0) 21.50 14.10 17.60 15.90 14.70 8.70 7.30 6.50 4.30
Broad Money (M3) 16.20 15.80 17.30 16.80 15.40 13.80 14.20 13.60 12.60
Aggregate Deposits 15.70 16.20 17.40 17.20 16.00 14.30 14.70 14.00 12.90
Bank Credit 21.30 18.70 21.70 19.60 17.60 16.40 18.10 16.80 16.50
Investments 9.40 14.30 10.30 15.50 15.50 15.70 16.10 14.40 15.20
Velocity of Money (M3/GDP) 1.28 1.27 1.22 1.20 1.31 1.35 1.20 1.17 -
Money Multiplier (M3/Mo) 5.00 5.00 4.92 5.03 5.07 5.12 5.24 5.37 5.44
CD Ratio (%) 73.30 74.70 74.30 73.50 74.30 76.40 76.50 75.40 76.70
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and credit have been below the indicative levels set
by RBI.
One of the objectives of the monetary policy is to
provide adequate liquidity to the economy. A
liquidity deficit, however, is considered necessary
for quicker and correct signaling of the monetary
policy stance. Liquidity conditions eased gradually
during the first half of 2012-13. The turnaround in
liquidity conditions was due to a decline in
government's cash balances, injection of liquidity
of about 860 billion by way of OMOs purchases of
securities and increased use of the export credit
refinance facility by banks. Reduction in SLR by
one percentage point also improved the access of
banks to potential liquidity. In September and
October 2012 liquidity conditions, however,
tightened. The liquidity conditions remained
above the Reserve Bank's comfort zone during
most of the third quarter of 2012-13. RBI lowered
the CRR from 4.50 per cent to 4.0 per cent in its
third quarter review of Monetary Policy, effective
from February 9, 2013. By the end of first week of
February, LAF borrowings had declined to the
RBI's comfort level.
Money markets have remained orderly during
2012-13 so far. Banks and primary dealers remained
the major groups of borrowers in the collateralized
segments, while mutual funds (MFs) remained the
major group of lenders in the collateralized
borrowing and lending obligation (CBLO)
segment. The collateralized segment continued to
remain the predominant segment of the overnight
money market; its share was around 78 per cent
during the financial year (till December 2012). The
amount of outstanding CD declined from around
4195 billion at end-March 2012 to around 3030
billion at mid- December 2012, which indicates
decline in net issuances. During 2012-13 so far, the
commercial paper (CP) market also picked up and
the average size of fortnightly issuance increased
significantly to 317 billion (till end December
2012).
The headline WPI inflation has declined to a three
year low of 6.62 per cent in January 2013 backed by
moderation in the non food manufacturing sector.
However, CPI inflation has shown a rising trend in
the past couple of months mainly on account of
higher food inflation leading to a higher gap
between WPI and CPI.
The positive effect of continuous policy easing by
the major advanced and developing countries
could pose a higher risk to inflation expectations
and may be considered as an upside risk to inflation
forecast. However, in the short run, given weak
growth sentiments, the impact of policy easing may
not lead to a surge in inflation and inflation
expectations may remain anchored around current
target inflation rates.
There has been some moderation in inflation in Q3
of 2012-13 and with the expected fiscal
consolidation the current macroeconomic
situation creates room for a more accommodative
monetary policy. Further, with a significant part of
inflation getting generated because of poor supply
responses, a further shift in the policy stance of
RBI, coupled with improving access to credit with
moderation in its cost, would be desirable.
Banks as financial intermediaries collect deposits
from savers and on-lend these to investors and
others. Aggregate deposits of the banking sector
increased from an average of 48,019.8 billion in
Liquidity management
Money market
Challenges and outlook
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2010-11 to 64,362.3 billion during Q3 of 2012-13.
Year-on-year growth of aggregate deposits, however,
to 12.87% in Q3 of 2012-13 leading to a
moderation in the rate of growth of credit to
16.49% in Q3 of 2012-13. While the growth of food
credit which is primarily advanced for food
procurement, and constitutes around 2% of total
credit, fluctuated, growth in non-food credit had a
near secular decline. The ratio of their banks'
investment in approved securities to aggregate
deposits has remained range bound at around 30%,
significantly higher than the minimum required
under the SLR. The higher allocation to
government securities may be either because of a
higher risk perception or non-availability of
quality lending opportunities to the private sector
or both. However, the ratio of credit to deposits,
increased to 76.7% in Q3 of 2012-13, allowing the
banks to maintain a higher credit growth than
would otherwise have been feasible given the
growth in deposits.
Taking a cue from the rate cuts, several banks
reduced their deposit and lending rates during the
year. Though the impact of these policy measures is
still unfolding, the transmission of the policy rate
to deposit and lending rates of banks is relatively
less pronounced compared to money market rates,
reflecting the presence of structural rigidities in the
credit market. The modal term deposit rates for
banks across all maturities declined by 15 bps to
7.27% during 2012-13 (as on 15 December 2012)..
With a view to augmenting foreign currency
inflows into the economy, effective 5 May, 2012 the
interest rate ceiling on FCNR (B) deposits was
raised to LIBOR/Swap rates plus 200 bps for 1-3
year maturity and LIBOR/Swap rates plus 300 bps
for 3-5 year. Following the reduction in the repo
rate in April 2012 and the calibrated liquidity
easing measures announced by the RBI during
2012-13, the modal base rate of banks declined by
25 bps to 10.50% during the current fiscal.
Details of sectoral deployment of credit are
maintained by the RBI on a regular basis for 47
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Growth Rate of Deposits, Credit, and
Investments (y-o-y %)
Sectoral Deployment of Credit
2011-12 2012-132010-11 2011-12
Q1 Q2 Q3 Q4 Q1 Q2 Q3
Aggregate deposits 15.69 16.51 17.92 17.59 16.25 14.51 14.62 13.91 12.87
Bank credit 21.27 18.71 21.73 19.63 17.61 16.37 18.07 16.79 16.49
Food credit 15.85 33.02 24.72 42.52 35.64 29.8 56.99 35.28 33.76
Non-food credit 21.36 18.48 21.69 19.29 17.32 16.14 17.45 16.46 16.17
Investments in approved securities 9.42 14.26 10.26 15.45 15.46 15.74 16.09 14.45 15.18
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scheduled banks accounting for nearly 95% of total
credit flow. Industry has remained the dominant
sector accounting for around 45% of total credit
disbursed by the banks. While food credit,
primarily advanced for food procurement, has
fluctuated, credit to the agriculture and allied
sector has grown after Q3 of 2011-12. While the
growth of credit for the industry and services
sectors has declined, growth in personal loans
appears to have bottomed out and some recovery is
visible in Q3 of 2012-13. Inflation affected the
consumption of non-food items. Sectoral shares in
the credit flow have generally remained stable. The
interest rate on export credit in foreign currency
was deregulated effective 5 May 2012 to increase
foreign currency loans to exporters. The modal
lending rate (at which 60% or more business was
contracted) for the reporting banks on pre-
shipment credit in foreign currency declined in line
with decline in LIBOR rate during the period.
The Government of India has decided to introduce
a Direct Benefit Transfer (DBT) scheme with effect
from 1 January 2013. To begin with, benefits under
26 schemes will directly be transferred into the
bank accounts of beneficiaries in 43 identified
districts across respective states and union
territories (UT). Banks will ensure that all
beneficiaries in these districts have a bank account.
All PSBs and RRBs have made provision so that the
data collected by the Departments/Ministries/
Implementing agency concerned can be used for
seeding the bank account details in the core
banking system (CBS) of banks with Aadhaar. All
PSBs have also joined the Aadhaar Payment Bridge
of the National Payment Corporation of India for
smooth transfer of benefits.
Performance of Indian banks during the year 2011-
12 was conditioned to a large extent by fragile
Financial Performance
2011-12 2012-132010-11 2011-12
Q1 Q2 Q3 Q4 Q1 Q2 Q3
Credit disbursed ( billion)`
Total credit 33359 39506 37525 38299 39957 42244 44190 44610 46386
Food credit 546 726 625 678 769 832 949 950 1018
Agriculture & allied activities 4159 4561 4524 4388 4459 4874 5217 5266 5479
Industry 14461 17656 16541 17121 17964 18999 19772 19890 20752
Services 7859 9298 8903 8943 9395 9950 10405 10383 10617
Personal loans 6333 7255 6932 7129 7369 7588 7847 8121 8520
Shares of the broad sectors in credit disbursed (per cent)
Food credit 1.64 1.84 1.66 1.77 1.93 1.97 2.15 2.13 2.2
Agriculture & allied activities 12.47 11.55 12.06 11.46 11.16 11.54 11.81 11.8 11.81
Industry 43.35 44.69 44.08 44.7 44.96 44.98 44.74 44.59 44.74
Services 23.56 23.53 23.73 23.35 23.51 23.55 23.55 23.28 22.89
Personal loans 18.99 18.36 18.47 18.61 18.44 17.96 17.76 18.2 18.37
Average annual rate of growth (per cent)
Total credit 20.84 18.43 21.19 19.43 17.15 16.38 17.76 16.48 16.09
Food credit 16.03 32.91 19.63 39 39.48 33.46 51.95 40.01 32.38
Agriculture & allied activities 19.82 9.67 12.54 10.27 6.63 9.39 15.32 20.02 22.86
Industry 26.48 22.1 24.82 22.57 21.21 20.24 19.54 16.17 15.52
Services 19.55 18.30 22.23 19.93 16.76 15.02 16.87 16.10 13.01
Personal loans 11.96 14.54 17.78 15.45 13.27 12.13 13.19 13.92 15.61
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recovery of the global financial markets as well as a
challenging operational environment on the
domestic front, with persistent high inflation and
muted growth performance. In addition, stressed
financial conditions of some State Electricity
Boards and airline companies added to the
deterioration in asset quality of banks. The
consolidated balance sheet of SCBs grew at a slower
pace during 2011-12 as compared to the previous
year due to slower growth of credit as well as
deposits. In addition, net profit of banks slowed
down. Though Indian banks remained well-
capitalized, concerns regarding growing
nonperforming assets (NPAs) persisted.
Following the uncertainties prevailing in the
domestic market and relatively subdued
performance of the equity market during the first
half of 2011-12, banks abstained from raising
resources through public issues during 2011-12.
During 2011-12, banks' resource mobilization
through private placements also slowed down as
compared to the previous year. However, this
reduction was seen in the case of PSBs, while
private-sector banks continued to raise resources
through private placements. The capital to risk-
weighted assets ratio (CRAR) remained well above
the RBI's stipulated 9% for the system as a whole as
well as for all bank groups during 2011-12,
indicating that Indian banks remained well-
capitalized. Also, the CRAR at system level
improved marginally compared to the previous
year. The CRAR (under Basel II) at system wide
level stood at 14.24% as at end-March 2012, as
compared to 14.19% as at end- March 2011.
In 2012-13, the Government has infused capital in
PSBs to augment their Tier-I capital so that they
maintain their Tier-I CRAR at a comfortable level
and remain compliant with the stricter capital
adequacy norms under BASEL-III. This will also
support internationally active PSBs in their
national and international banking operations
undertaken through their subsidiaries and
associates. For this purpose an amount of 12,517
crore has been allocated in the Revised Estimates
(RE) 2012-13 under Plan.
The operating performance of the SCBs can be
summed up as follows:
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• PSBs had a dominant share and accounted for 72% of the total income of the SCBs and 72.8% of
aggregate assets.
• In 2011-12, there was a sharp increase in the expenditure on provisioning and contingencies; the rate of
growth, however, varied across the bank categories. While contingency and provisioning expenses
recorded a growth of 16.1% for all commercial banks, the rate of growth was 21.3% for PSBs and only
3% for the new private-sector banks. As percentage of PSB assets, the provisioning expenditure
increased from 1.04% in 2010-11 to 1.11% in 2011-12.
• PSBs were able to increase their interest spread from 2.55% in 2010-11 to 2.59% in 2011-12. The interest
spread declined for old private-sector banks and foreign banks. An increase in interest spread for all
SCBs during 2011-12 with a relatively moderate growth in credit disbursement is significant.
• Net profit as percentage of assets remained sticky at 0.98% in 2010-11 and 2011-12. However, in case of
the PSBs, this declined from 0.85% in 2010-11 to 0.82% in 2011-12. Foreign banks and old and new
private sector banks, however, were able to increase the ratio of net profit to assets.
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Because of the slowdown and high levels of
leverage, some industry and infrastructure sectors
are experiencing a rise in NPAs. Overall NPAs of the
banking sector increased from 2.36% of total credit
advanced in March 2011 to 3.57% of total credit
advanced in September 2012. While there has been
an across-the-board increase in NPAs, the increase
has been particularly sharp for the industry and
infrastructure sectors, with NPAs as a percentage of
credit advanced increasing from 1.91% in March
2011 to 3.44% as in September 2012. Sectors
particularly under stress include textiles,
chemicals, iron and steel, food processing,
construction, and telecommunications. As per RBI
data, gross NPAs (GNPA) of PSBs have shown a
rising trend during the last three years from
59,972 crore (March, 2010) to 71,080 crore
(March, 2011), 1,12,489 crore (March, 2012), and
1,44,437 crore (September, 2012). As a percentage
of credit advanced, NPAs were at a level of 4.01% in
September 2012 compared to 2.09% in 2008-9.
Although GNPAs have increased at system level, the
GNPA ratios of PSBs are still at manageable levels.
However, given their rapid growth, albeit partly for
technical reasons, they need to be closely
monitored. Steps taken by the government and the
RBI have resulted in improvement in recovery of
NPAs by the PSBs which has increased from 9,726
crore as on March 2010 to 13,940 crore as on
March 2011 and 17,043 crore as in March 2012.
NBFCs as a whole account for 12.7% of the assets of
the total financial system. There are two broad
categories of NBFCs based on whether they accept
public deposits, viz. deposit-taking NBFCs
(NBFCs-D) and non-deposit-taking NBFCs
(NBFCs-ND). The total number of NBFCs
registered with the RBI witnessed a continuous
decline mainly due to cancellation of certificates of
registration and their exit from deposit-taking
activities.
The total assets of NBFCs-D (including RNBCs)
increased to 1,24,419 crore as on 31 March 2012
from 1,16,897 crore in the preceding year. Public
deposits held by NBFCs-D and RNBCs together
declined by 15.5% to 10,106 crore as on 31 March
2012 from 11,964 crore in the previous year. The
consolidated balance sheet of NBFCs-D (excluding
RNBCs) recorded 10.8% growth for the year ended
March 2012 (as against 11.9% growth in the
previous year). Borrowings, which is the major
source of funds for NBFCs-D, increased by 15.9%
during the year. On the assets side, loans and
advances witnessed a growth of 12.1% while
investments declined by 24.8% for the year ended
March 2012. During 2011-12, there was significant
increase in the GNPAs to total advances of NBFCs-
D. Category-wise, GNPA and net NPA ratios of asset
finance companies and loan companies
deteriorated during 2011-12 as compared to the
previous year. As on 31 March 2012, 187 out of 198
reporting NBFCs-D had CRAR of more than 15%
as against 199 out of 204 NBFCs-D in the previous
year.
The balance sheet size of the NBFCs-ND-SI sector
increased by 21% to 9,21,321 crore as on 31 March
2012 (against 7,61,282 crore in the previous year).
Significant increase in balance sheet size of the
NBFCs-ND-SI sector is mainly attributed to sharp
increase in owned funds, debentures, bank
borrowings. The pattern of deployment of funds by
the NBFCs-ND-SI sector for the year ending March
2012 remained broadly in line with the pattern
witnessed in the previous year. Secured loans
continued to constitute the largest share (48.7% of
total assets), followed by unsecured loans with a
share of 15.3%, hire purchase assets (6.8%),
investments (17.3%), cash and bank balances
(3.9%), and other assets (7.9%) during the year
ended March 2012.The financial performance of
the NBFCs-NDSI sector deteriorated marginally as
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reflected in the decline in net profit during 2011-12.
Both gross and net NPA ratios of the NBFCs-ND-SI
sector increased for the year ended March 2012
indicating overall deterioration in asset quality of
the sector. As on March 2012, barring a few, most of
reporting companies maintained the stipulated
minimum norm of 15% CRAR.
During financial year 2012-13 (up to 31 December,
2012) resource mobilization through primary
market (equity issue) witnessed an upward
movement. The cumulative amount mobilized as
on 31 December 2012 through equity public issues
stood at 13,050 crore. During 2012-13, 20 new
companies (IPOs) with resource mobilization
amounting to 6,043 crore were listed at the NSE
and BSE with mean IPO size of 302 crore.
However, in the public issue of corporate debt
category, 4,974 crore was mobilized through debt
issue in 2012-13 compared to 35,611 crore in 2011-
12.
After two years of redemption pressures, mutual
funds mobilized 1,20,269 crore from the market
in 2012-13. The market value of their assets under
management stood at 7,59,995 crore as on 31
December 2012 compared to 5, 87,217 crore as on
31 March 2012, indicating an increase of 29.4%.
Indian benchmark indices, i.e. the BSE and NSE
closed at 19426.7 and 5905.1 (as on 31 December
2012), gaining 25.70% and 27.70% respectively
over the closing value of 15454.9 (Sensex) and
4624.3 (Nifty) on 30 December 2011. On 9
February 2013, the FM inaugurated the trading in
equity and equity derivative segment by MCX-SX
and the Exchange officially commenced trading in
these segments on 11 February 2013. Reinvigorated
foreign institutional investor (FII) inflows into the
country during the year 2012 helped the Indian
markets become one of the best performing in the
world in 2012, recovering sharply from their dismal
performance in 2011. At the end of December 2012,
1,759 FIIs were registered with SEBI, with the
number of registered sub-accounts increasing to
6,359. The total net FII flows to India in 2012 stood
at $ 31.01 billion. These flows were largely driven by
equity inflows (80% of total flows) which remained
buoyant, indicating FII confidence in the
performance of the Indian economy in general and
Indian markets in particular. Market turnover has
also increased during the current year accompanied
by a decline in volatility of both the Nifty and
Sensex.
On 23rd November 2012, the government notified
a new tax saving scheme called the Rajiv Gandhi
Equity Savings Scheme (RGESS), exclusively for
first-time retail investors in the securities market.
This scheme provides 50% deduction of the
amount invested from taxable income for that year
to new investors who invest up to 50,000 and
whose annual income is below 10 lakh. The
operational guidelines were issued by SEBI on 6
December 2012.
As regards FII investment in debt securities, there
has been progressive enhancement in the
quantitative limits for investments in various debt
categories. In June 2012, the FII limit for
investment in G-Secs (government securities) was
enhanced by $ 5 billion, raising the cap to $ 20
billion. The scheme for FII investment in long-term
infra bonds has been made attractive by gradual
reduction in lock-in and residual maturity periods
criteria. In November 2012, the limits for FII
investment in G-Secs and corporate bonds (non-
infra category) have been further enhanced by 5
Capital Market
Primary Market
Secondary Market
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billion each, taking the total limit prescribed for
FII investment to US$ 25 billion in G-Secs and
US$51 billion for corporate bonds (infra+non-
infra). FII debt allocation process has also been
reviewed for bringing greater certainty among
foreign investors and helping them periodically re-
balance their portfolios in sync with international
portfolio management practices.
India's sovereign debt is usually rated by six major
sovereign credit rating agencies (SCRAs). These are -
Fitch Ratings, Moody's Investors Service, Standard
and Poor's (S&P), Dominion Bond Rating Service
(DBRS), Japanese Credit Rating Agency (JCRA),
and Rating and Investment Information Inc.,
Tokyo (R&I). The government is taking a number
of steps to improve its interaction with the major
SCRAs so that they make informed decisions.
Since the opening up of the insurance sector, the
number of participants in the insurance industry
has gone up from seven insurers (including the Life
Insurance Corporation of India [LIC], four public-
sector general insurers, one specialized insurer, and
the General Insurance Corporation as the national
re-insurer) in 2000 to 52 insurers as on 30
September 2012 operating in the life, non-life, and
re-insurance segments (including specialized
insurers, namely the Export Credit Guarantee
Corporation and Agricultural Insurance Company
[AIC]). Four of the general insurance companies,
viz. Star Health and Alliance Insurance Company,
Apollo Munich Health Insurance Company, Max
BUPA Health Insurance Company, and Religare
Health Insurance Company function as standalone
health insurance companies. Of the 23 insurance
companies that have set up operations in the life
segment post opening up of the sector, 21 are in
joint ventures with foreign partners. Of the
21private insurers who have commenced
operations in the nonlife segment, 18 are in
collaboration with foreign partners.
From being the sole provider of life insurance till
financial year 1999-2000, LIC is today competing
in an industry with 23 private-sector insurers who
have commenced operations over the period 2000-
12. The industry reported an annual growth rate of
18.85% during 2001-2 to 2011-12. The life insurers
underwrote new business of 1,13,942 crore during
financial year 2011-12 as against 1,26,398 crore
during the year 2010-11, recording a decline of
9.85%. Of the new business premium
underwritten, the LIC accounted for 81,862.25
crore (71.85% market share) and private insurers
for 32,079.92 crore (28.15% market share). The
market share of these insurers was 68.84% and
31.16% respectively in the corresponding period of
2010-11.
The Non-life Insurance industry has reported
average annual growth of over 15% over the period
2001-2 to 2011-12. In addition, the specialized
insurers Export Credit Guarantee Corporation and
Sovereign Ratings assigned by Rating Agencies
as on 15.1.2013
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Foreign currency Local currencyRatingagency
Date of affirmation ofratings Ratings Outlook Ratings Outlook
JCRA November 30, 2012 BBB+ Stable No ratings were given for local currency
Moody’s November 26, 2012 Baa3 Stable Baa3 (upgraded from Ba1) Stable
R&I November 22, 2012 BBB (LT)a-2 (ST) Stable No ratings were given for local currency
DBRS August 6, 2012 BBB (low) (LT) Stable BBB (low) (LT) Stable
Fitch June 15, 2012 BBB-(LT)F3 (ST) Negative BBB- Stable
S&P April 25, 2012 BBB- (LT) A-3 (ST) Negative No ratings were given for local currency
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AIC are offering credit guarantee and crop
insurance respectively. The premium underwritten
by the nonlife insurers during 2011-12 was
52,875.8 crore as against 42,576.5 crore in 2010-
11, thus recording a growth of 24.19%. The growth
was satisfactory, particularly in view of the across-
the-board cuts in tariff rates. The private insurers
underwrote premium of 22,315.03 crore as against
17,424.6 crore in 2010-11, reporting growth of
28.07% vis-a-vis 24.67% in 2010-11. The public
sector insurers, on the other hand, underwrote a
premium of 30,560.74 in 2011-12 as against
25,151.8 crore in 2010-11, i.e. a growth of 21.5% as
against 21.84% in 2010-11. The market shares of the
public and private insurers are 57.80 and 42.20% in
2011-12 as against 59.07 and 40.93 in the previous
year.
The New Pension System (NPS) was introduced for
the new recruits who join government service on or
after 1 January 2004. Till 5 January 2013 a total of
42.17 lakh subscriptions have been enrolled with a
corpus of 26,189 crore. From 1 May 2009, the NPS
was opened up for all citizens in India to join on a
voluntary basis. A customized version of the core
NPS model, known as the NPS Corporate Sector
Model was also introduced from December 2011 to
enable organized-sector entities to move their
existing and prospective employees to the NPS
under its Corporate Model. All the PSBs have been
asked to provide a link on their website to enable
individual subscribers to open online NPS
Accounts.
India's BoP was under stress during 2011-12, as the
trade and current account deficit widened. Though
capital inflows increased, it fell short of fully
financing current account deficit, resulting in
drawdown of foreign exchange reserves. The trade
deficit increased to US$ 189.8 billion (10.2% of
GDP) in 2011-12 as compared to US$ 127.3 billion
(7.4%of GDP) during 2010-11. This increase of
49.1% in trade deficit in 2011-12 was primarily on
account of higher increase in imports relative to
exports. The current account deficit widened to
US$ 78.2 billion (4.2% of GDP) as compared with
US$ 48.1 billion (2.8% of GDP) in 2010-11.
Further, India's balance of payments continued to
be under stress during the H1 (April-September
2012) of 2012-13 with current account deficit
(CAD) widening to 4.6% of GDP in the first half of
2012-13, after touching 4.2% in 2011-12.
During H1 (April-September 2012) of 2012-13,
there was a steep decline in exports to US$ 146.5
billion, registering a 7.4% decline over US$ 158.2
billion in H1 of 2011-12. There was also a decline of
4.2% in imports to US$ 237.2 billion in H1 of 2012-
13 from US$ 247.7 billion during the
corresponding period in previous year, there by
widening the trade deficit to US$ 90.7 billion
(10.8% of GDP) in H1 of 2012-13 vis-à-vis US$ 89.5
billion (9.9% of GDP) in H1 of 2011-12. During H1
of 2012-13, net invisible balance declined to US$
51.7 billion (6.2% of GDP) from US$ 53.1 billion
(5.9% of GDP) in H1 of 2011-12, mainly due to
lower growth in exports of services, private
transfers and decline in investment income. Goods
and Services deficit stood at US$ 61.1 billion in H1
of 2012-13, an increase of 3.4% from US$ 59.1
billion during H1 of 2011-12.
India's CAD increased to US$ 39.0 billion (4.6% of
GDP) during H1 of 2012-13 as compared to US$
36.4 billion (4.0% of GDP) in H1 of 2011-12, on
account of global factors, slower GDP growth and
its contraction in dollar terms due to the
depreciation of rupee. However, as per the latest
data from the Ministry of Commerce, exports of
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Current Account
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US$ 214.1 billion during April-December 2012,
registered a decline of 5.5% over exports of US$
226.6 billion during the same period in 2011-12.
Imports of US$ 361.3 billion recorded a marginal
decline of 0.7% during April-December 2012 over
US$ 363.9 billion during the corresponding period
of previous year. As a result of steeper decline in
exports than imports, trade deficit increased by
7.2% to US$ 147.2 billion during April-December
2012 as compared to US$ 137.3 billion in April-
December 2011.
The pattern of capital inflows during H1 of 2012-13
has exhibited a mixed trend. The gross inflows of
US$ 219.5 billion and outflows of US$ 179.5
billion under the financial account were lower in
H1 of 2012-13 as compared with gross inflows of
US$ 246.4 billion and outflows of US$ 202.9
billion in the same period a year ago. The net
financial inflows also declined to US$ 40.0 billion
in H1 of 2012-13 as against US$ 43.5 billion in H1
of 2011-12. The net FDI (inward minus outward) to
India was US$ 12.8 billion during first half of 2012-
13 vis-à-vis US$ 15.7 billion during the
corresponding period of previous year. However, as
per the latest data on capital inflows, FDI flows to
India stood at US$ 22.2 billion during April-
December 2012, 22.1% lower than US$ 28.5 billion
during April-December 2011. Up to December
2012, net FII flows amounted to US$ 16.0 billion
(US$ 2.7 billion during the corresponding period
of 2011-12). FII flows in recent months witnessed
improvement, reflecting the impact of various
reform measures announced by the Government.
India's foreign exchange reserves comprise foreign
currency assets (FCA), gold, special drawing rights
(SDRs) and reserve tranche position (RTP) in the
International Monetary Fund (IMF). In 2012-13,
the reserves increased marginally by US$ 0.4 billion
from US$ 294.4 billion at end-March 2012 to US$
294.8 billion at end-September 2012. Of this total
increase, US$ 0.3 billion was on BoP basis and US$
0.1 billion was on account of valuation effect. In
the current fiscal, foreign exchange reserves on
month-on-month basis remained in the range of
US$ 286.0 billion (at end-May 2012) to US$ 295.6
billion (at end-December 2012). At end-December
2012, reserves stood at US$ 295.6 billion,
indicating a marginal increase of US$ 1.2 billion
from US$ 294.4 billion at end-March, 2012. FCAs,
a major constituent of India's foreign exchange
reserves, increased by US$ 1.7 billion from US$
260.7 billion at end March 2012 to US$ 262.4
billion at end-December 2012.
However, India continues to be one of the largest
holders of foreign exchange reserves. Country-wise
details of foreign exchange reserves reveal that
India is the eighth largest foreign exchange reserves
holder in the world, after China, Japan, Russia,
Switzerland, Brazil, Republic of Korea and China P
R Hong Kong at end-December 2012.
India's external debt stock at end-March 2012 stood
at US$ 345.4 billion ( 1,765,333 crore) recording
an increase of US$ 39.5 billion (12.9%) over end-
March 2011 level of US$ 305.9 billion ( 1,365,929
crore). Further, external debt stock increased by
about US$ 20.0 billion (5.8%) to US$ 365.3 billion
at end-September 2012 over the level at end-March
2012, largely due to higher NRI deposits, short-
term debt and commercial borrowings. The
maturity profile of India's external debt indicates
the dominance of long-term borrowings. Long-
term external debt at US$ 280.8 billion at end-
September 2012 accounted for 76.9% of the total
external debt, while 23.1% was short-term debt.
Capital and Financial Account
Foreign Exchange Reserves
External Debt
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The currency composition of India's total external
debt shows that the share of US dollar denominated
debt continued to be the highest in external debt
stock at 55.7% at end-September 2012, followed by
Indian rupee (22.9%), Japanese yen (8.6%), SDR
(8.1%) and euro (3.2%). Government (sovereign)
external debt was US$ 81.5 billion and accounted
for 22.3% of India's total external debt, while Non-
Government external debt amounted to US$ 283.9
billion and accounted for 77.7% of total external
debt at end-September 2012.
The widening of the trade deficit to more than 10%
of GDP and the CAD crossing 4% of GDP in 2011-
12 and H1of 2012-13 have been matters of concern.
In recent years, net invisible balance reduced the
need for financing, while capital inflows were
sufficient to finance the CAD safely. In the current
fiscal, the growth in invisibles is insufficient to
narrow the growing trade deficit. Besides, the CAD
is financed by volatile capital flows, which has led
to financial fragility and is reflected in rupee
exchange rate volatility.
Outlook
Balance of Payments: Summary (US$ million)
Sl.No.
Item 2007-08 2008-09 2009-10 2010-11PR 2011-12P2011-12 H1
(April-Sept.2011) PR
2012-13 H1(April-
Sept.2012) P
I Current Account
1 Exports 166,162 189,001 182,442 256,159 309,774 158,202 146,549
2 Imports 257,629 308,520 300,644 383,481 499,533 247,739 237,221
3 Trade Balance -91,467 -119,519 -118,203 -127,322 -189,759 -89,537 -90,672
4 Invisibles (net) 75731 91,604 80,022 79,269 111,604 53,103 51,699
A. Non-factor Services 38853 53,916 36,016 44,081 64,098 30,409 29,572
B. Income -5,068 -7,110 -8,038 -17,952 -15,988 -7,587 -10,510
C. Transfers 41,945 44,798 52,045 53,140 63,494 30,281 32,637
5 Goods and Services Balance -52614 -65603 -82187 -83,241 -125,661 -59,128 -61,100
6 Current Account Balance -15737 -27914 -38,181 -48,053 -78,155 -36,433 -38,973
II Capital Account
Capital Account Balance 106585 7,395 51,634 63,740 67,755 43,490 39,989
i. External Assistance (net) 2114 2439 2,890 4,941 2,296 640 15
ii. External Commercial Borrowings (net) 22609 7861 2000 12160 10344 8388 1726
iii. Short-term debt 15930 -1,985 7,558 12,034 6,668 5,940 9,511
iv. Banking Capital (net)] of which: 11759 -3245 2,083 4,962 16,226 19,714 14,899
Non-Resident Deposits (net) 179 4290 2,922 3,238 11,918 3,937 9,397
v. Foreign Investment (net) of which: 43326 8342 50,362 42,127 39,231 17,087 18,608
A. FDI (net) 15893 22,372 17,966 11,834 22,061 15,741 12,812
B. Portfolio(net) 27433 -14,030 32,396 30,293 17,170 1,346 5,796
vi. Other Flows (net) 10847 -6016 -13,259 -12,484 -7,008 -8,278 -4,769
III Errors and Omission 1,316 440 -12 -2,636 -2,432 -1,338 -653
IV Overall Balance 92,164 -20,080 13,441 13,050 -12,831 5,719 363
V Reserves change [Increase (-) / decrease (+)] -92164 20080 -13441 -13050 12831 -5719 -363
Source : RBI PR: Partially Revised P: Preliminary
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The room to increase exports in the short run is
limited, as they are dependent upon the recovery
and growth of partner countries, especially in
industrial economies. The main focus has to be on
curbing imports, mainly by making oil prices more
market determined, and curbing imports of gold.
At the same time, further measures to ease the
inflow of remittances and steps to diversify
software exports could help reduce financing
needs. Greater emphasis on FDI including opening
up sectors further can help increase the quantum of
safe financing. FII flows need to be targeted towards
longer term rupee instruments so as to minimize
the 'reversal' of capital during risk-off phases.
Finally, external commercial borrowing needs to be
monitored carefully so that entities without access
to foreign exchange revenues do not leave
significant exposures unhedged.
After recording impressive growth and surpassing
pre-crisis levels in 2011, the world trade in both
good and services witnessed a decline in 2012 on
account of deceleration in global economic growth.
Global merchandise trade activities decelerated
sharply at 2.8% in 2012 compared to 5.9% in 2011
and 12.6% in 2010. Both exports and imports
activity declined in 2012 across advanced
economies and emerging market & developing
economies. As per IMF's World Economic Outlook
Update: January 2013, the world trade is expected
to grow at 3.8% in 2013 and 5.5% in 2014.
Although emerging market & developing
economies outclassed advanced economies in both
exports' and imports' growth, the uncertainty
emanating from euro area crisis, pace of fiscal
withdrawal in the US, challenges to sustaining
growth from natural calamity of earthquake in
Japan and trade disruptions between Japan and
China is shadowing trade growth of emerging
market and developing economies (EDEs).
Merchandise trade was affected by the global
slowdown with sharp decline of 4.9% in exports
during April January 2012-13 compared to decline
of 3.5% recorded during the crisis year of 2009-10.
Factored by moderate export growth and high
import growth, trade deficit reached a peak of
$184.6 billion in 2011-12 from $118.6 billion in
2010-11 with the highest growth of 55.6% and led
to the highest-ever trade deficit in India since 1950-
01, contributing to a high current account deficit
(CAD) of 4.2 per cent of GDP. The trade deficit for
April January 2012-13 stood $167.2 billion, 7.9%
higher than $154.9 billion in the same period 2011-
12. Compositional profile of export basket shows
INTERNATIONAL TRADE
Trends in Growth in Trade Volumes (Percent Change)
Projections
Items 2011 2012 2013 2014
World Trade Volume (Goods & Services) 5.90 2.80 3.80 5.50
Imports
Advanced Economies 4.60 1.20 2.20 4.10
Emerging Market & Developing Economies 8.40 6.10 6.50 7.80
Exports
Advanced Economies 5.60 2.10 2.80 4.50
Emerging Market & Developing Economies 6.60 3.60 5.50 6.90
Source: IMF World Economic Outlook Update, January 2013
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significant changes with drastically decline in share
of manufacturing exports from 78.8% in 2000-01
to 66.1% in 2011-12 and further to 64.5% in April
November 2012-13 mainly on account of fall in
share of traditional items like textiles and
leather/leather manufactures. However, share of
petroleum, crude & products exports, which also
include refined items, increased from 4.3% in 2000-
01 to 18.3% in 2011-12 and 18.6% in April
November 2012-13. As percentage of GDP, India's
trade deficit with 10% is one of the highest in the
world. Export-import ratios - which reflect the
bilateral trade balance, show that among its top 15
trading partners, India had bilateral trade surplus
with only four countries (The UAE, the US,
Singapore and Hong Kong) in 2011-12. But in case
of China and Switzerland, trade deficit has growing
trend. In April November 2012-13, the export-
import ratio with China worsened further to 0.23
from 0.31% in 2011-12 indicating widening trade
deficit China.
On imports side, there have been some significant
compositional changes with rise in share of POL
from 28.7% in 2010-11 to 31.7% in 2011-12 and
34.6% in April November 2012-13. The share of
gold and silver imports also increased noticeably
from 9.3% to 2000 - 01 to 12.6% in 2011-12 with a
high import growth rate of 44.5 per cent. But, after
imposition of higher import duty, there was
moderation in gold and silver imports with decline
in share to 10.5% (with a negative growth of -
20.4%). The share of capital goods also raised to
14.1% in 2011-12 from 10.5% in 2000-01, thereafter
decline to 11.9% in April November 2012-13 with
a negative growth of - 6.5%. The poor industrial
activity affected imports of machinery except
electrical and machine tools, transport equipment,
project goods and electrical machinery.
India's trade witnessed significant market
diversification as India's exports to Europe and
America have declined, but its exports to Asia and
Africa have increased. However within Asia, the
share of North East Asia (consisting of China,
Hong Kong, Japan) and ASEAN (Association of
South East Asian Nations) fell from 14.8% and
12.0% in 2011-12 to 13.1% and 10.3% respectively
in April November 2012-13, though there was a
noticeable rise in the share of West Asia GCC (Gulf
Cooperation Council) countries from 14.9% to
17.7% in 2012-13 in the same period. The share of
India's imports from Europe declined to 16.7% in
April November 2012-13 from 27.6% in 2000-01,
while that from Asia increased substantially to
61.1% from 27.7% in the same period. The share of
imports from America also increased to 11.5%
from 7.9%. India's top 15 trading partners nearly
comprises 60% share in its trade and out of which
top three trading partners China, UAE and the US
contribute nearly half of this share. Iraq and
Kuwait are new entrants in top 15 trading partners
by replacing Iran and the UK in 2011-12.
Indian government was very sensitive towards trade
policy and doing policy reforms in phased manner.
In Union Budget 2012-13, many measures like -
concession/full exemption on import duty for
imports on equipments for fertilizer projects, coal-
mining projects, iron ore pellet plants; incentive on
incremental exports; Export Promotion Capital
Goods (EPCG) Scheme; support for export of green
technology products and for infrastructure for the
Agriculture sector; incentives for promoting
investment in labour-intensive Sectors; increase in
all-in cost ceilings for ECBs by the RBI were
initiated to improve exports and to smooth
imports norms. The government also granted
formal approvals for setting up of 579 SEZs which
are allowed for 100% FDI through automatic route.
Even with good policy measures, the prospects for
India's trade are still uncertain. There had been
some improvements with the import growth rates
of the world especially in India's important
trading partners - the USA, Japan, China, and
Hong Kong. The import moderation is still limited
despite fall in gold imports (as a result of the policy
measures taken by the government) due to high
international gold prices and above-$100 per barrel
oil prices which is major contributor of high trade
deficit, but services trade surplus is giving some
limited cushion for lowering the trade deficit. The
outlook for India's merchandise trade and
shipping services is still uncertain. However, there
are many challenges for India on the trade front
especially because of poor global slowdown, high
fiscal deficit and protectionist measures of trading
partners. Thus policy options left with the
government are at the micro level related to
infrastructure, trade facilitation, tax and tariffs,
and credit.
Agriculture, including allied activities, accounted
for only 14.1 per cent of the GDP in 2011-12, its
role in the country's economy is much bigger with
its share in total employment as high as 58.2 per
cent according to the 2001 census. The declining
share of the agriculture and allied sector in the
country's GDP is consistent with the normal
development trajectory of any fast growing
economy. Average annual growth of the agriculture
and allied sector during the Eleventh Five Year Plan
at 3.6 per cent fell short of the target of 4 per cent
but was higher than the average annual growth of
2.5 and 2.4 per cent achieved during the Ninth and
Tenth Plans respectively.
Declining per capita availability of food grains is
another major concern in India. For ensuring
nutritional security, it is not only important to
increase per capita availability of food grains but
also to ensure the right amounts of food items in
the food basket of the common man. Another
critical issue is supply-chain management in
agricultural marketing in India. There is need for
stable and consistent policies where markets play
an appropriate role, private investment in
infrastructure is stepped up, the public
distribution system (PDS) is revamped, food price
and food stock management improves, and a
predictable trade policy is adopted for agriculture.
The index of industrial production (IIP) with 2004-
5 as base is the leading indicator for industrial
performance in the country. IIP continued to
moderate from Q1 of 2011-12 with growth turning
negative in Q1 of 2012-13, before improving to 2.1
per cent in Q3 of 2012-13. The contraction in the
current year was largely because of decline in
natural gas and crude petroleum output.
Manufacturing, which is the dominant sector in
industry, also witnessed deceleration in growth, as
did the electricity sector. In terms of the use-based
classification of industries, the capital goods sector
sustained negative growth in the last six quarters.
Growth in the consumer durable sector continued
to fluctuate, turning negative in Q4 of 2011-12, 0.7
per cent in Q2 and 3.2 per cent in Q3 of 2012-13.
There was a sharp pick-up in growth in October 12,
with manufacturing growth improving to 9.8%
which was largely broad based with consumer
goods, capital goods, and intermediates showing
improvement in performance.
A G R I C U L T U R E A N D F O O D
MANAGEMENT
INDUSTRIAL PERFORMANCE
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The moderation in industrial growth, particularly in
the manufacturing sector, is largely attributed to
sluggish growth of investment, squeezed margins of
the corporate sector, deceleration in the rate of
growth of credit flows and the fragile global
economic recovery. Moderation in investment was
largely because of two factors: decline in profitability
and deceleration in the rate of growth of credit to the
industrial sector. Overall rate of growth of credit
flow to industry moderated from 26.48 per cent on
an average in 2010- 11 to an average15.52 per cent in
Q3 of 2012-13. The moderation in the growth was
even sharper for the construction sector with overall
growth in credit disbursement declining from 16.3
per cent in 2010-11 to 6.6 per cent in Q3 of 2012-13.
The slowdown in industrial production has affected
corporate performance. The rate of growth of sales of
the corporate sector particularly in respect of listed
manufacturing companies for the private sector,
declined from an average of 28.8 per cent in Q1 of
2010-11 to 11.4 per cent in Q2 of 2012-13. The
capital goods sector has continued to experience a
sustained recession and output in this sector has
contracted by 10.1% during April-December 2011.
Deceleration in investment, import substitution in
the machinery and electrical machinery segments,
and a decline in the number of new projects
adversely impacted the capital goods sector.
During April-November 2012-13, FDI inflow
(including equity inflows, reinvested earnings and
other capital) was US$ 24.65 billion. FDI equity
inflows were US$ 15.85 billion showing a decline of
43 percent as compared to the corresponding period
of the previous year. Cumulative FDI inflow from
April 2000 to November 2012 stood at US$ 277.86
billion.
There are mixed signals on the bottoming out of the
ongoing sluggishness. Factors like the decline in the
number of products with negative growth and the
moderately positive growth in the Q32011-12 RBI's
business optimism index suggest optimism on the
industrial front. However the downward
momentum of IIP, IIP manufacturing and credit
growth to industry also indicate that it is too early to
call a bottom to the industrial sector slowdown.
The services sector is the dominant sector in most
developed economies of the world and in some
developing economies such as India. The CAGR of
the services sector GDP was 10 per cent for the
period 2004-05 to 2011-12. It has clearly outgrown
both the industry and agriculture sectors. In 2011-12
and 2012-13, in tune with the general moderation in
the economy, the growth rate of the services sector
also declined.
SERVICES SECTOR
Source: indiabudget.nic.in
Growth Rate of Industry (percent)
2011-12 2012-13Weight 2010-11 2011-12
Q1 Q2 Q3 Q4 Q1 Q2 Q3
General 100 8.23 2.89 6.98 3.18 1.18 0.63 -0.28 0.41 2.13
Mining 14.16 5.23 5.23 0.65 -4.06 -4.22 -0.37 -1.53 -0.69 -3.25
Manufacturing 75.53 8.95 8.95 7.72 3.36 1.09 0.35 -0.84 0.25 2.61
Electricity 10.32 5.55 5.55 8.26 10.54 9.57 4.53 6.4 2.83 4.4
Basic Goods 45.68 5.97 5.97 7.47 7 4.36 3.41 3.31 2.21 2.72
Capital Goods 8.83 14.75 14.75 16.99 -5.84 -16.17 -6.85 -20.08 -8.06 -0.95
Intermediate Goods 15.69 7.39 7.39 1.83 -0.83 -2.9 -0.51 0.83 1.47 2.35
Consumer Goods 29.81 8.56 8.56 4.46 4.77 7.72 1.05 3.93 1.4 2.48
Consumer Durables 8.46 14.16 2.6 2.71 7.87 4.91 -4.13 8.07 0.07 3.17
Consumer Non-durables 21.35 4.26 5.86 5.93 2.05 10.09 5.28 0.58 2.61 1.92