[Economy] Current 2014 Feb Week 1: Fiscal Policy, Spectrum, Subsidies, LPG and Banking Sector (Part 1 of 3)

Interim budget

[Economy] Current 2014 Feb Week 1: Fiscal Policy, Spectrum, Subsidies, LPG and Banking Sector (Part 1 of 3)

  1. Prologue
  2. [Act I] Government side: Fiscal Policy, Macroeconomics
    1. India’s bogus GDP growth rate
    2. Fiscal deficit 4.8% target = Mission impossible #6?
    3. CAD & gold
    4. FATF: Desi Diamonds = Money laundering
    5. Interim budget/Vote on Account?
    6. [Subsidy] LPG: nau se baara (9 to 12)
    7. Kejriwal vs electricity companies vs NTPC
    8. [Subsidy] Fertilizer Subsidy
    9. [Auction] Spectrum 2014
    10. [Auction] NELP X (10) delayed
  3. [Act II] RBI, Banking, Monetary policy related
    1. #1: Fed Tapering
    2. #2: Rajan Wisdom on Monetary policy
    3. #3: Microfinance: RBI changes loan rate formula
    4. #3: Housing Start Up Index (HSUI)
    5. #4: Mobile Banking: new Committee
    6. #5: Banking Ombudsmen conference
    7. #6: Banking: Misc./Chillar topics

Prologue

Overview of Economy related Affairs during 1-7 Feb 2014. Total three parts:

  1. (you’re here) Part 1 of 3: fiscal policy, macroeconomics issue, subsidies, banking sector.
  2. Part 2 of 3: FDI, regulatory bodies and infrastructure.
  3. Part 3 of 3: bilateral, poverty-hunger-HRD, Agriculture-food processing and Persons in News (PIN).

[Act I] Government side: Fiscal Policy, Macroeconomics

Topics: GDP, Fiscal deficit, Interim Budget, Subsidy raj, Spectrum auction and NELP X.

India’s bogus GDP growth rate

GDP growth rate : CSO calculation/estimates year
4.5% (earlier thought it’d be 5%) 2012-13
4.9% 2013-14

CSO: other observations/analysis for FY13.

  • GDP will be 1.7 trillion US dollars. important: DONOT confuse GDP (absolute number in rupees or dollars) vs GDP growth Rate (percentage)
  • Per capita income will be ~75,500 rupees.
  • >4% growth in Agro and allied sector
  • Negative growth in Manufacturing, mining sector.
  • Household savings have decreased. (Because of inflation, people are able to save less money.)
  • Corporate savings have also decreased (meaning their profitability has decreased)
  • gross fixed capital formation (GFCF) has also decreased. (Meaning less money going towards investment in business.)
  • Cost of energy has increased. Because desi coal mining projects stalled by environment ministry and SC orders. As a result, we had to import ~25% of our coal requirements from abroad. + adding insult to injury, heavy floods in Australia last year= their own coal output delinked= coal prices increased.

Solution

  • @Government: Fast track clearance to infra-projects; decrease the excist duty; relax the strict environment rules over coal mining
  • @RBI: Reduce the cost of borrowing (=decrease Repo rate); relax the rules for ECB (External commercial borrowing from foreign countries)

Fiscal deficit 4.8% target = Mission impossible #6?

What is fiscal deficit, why is it bad? We just saw in last article of Urjit Patel Committee. Click me

Year Fiscal deficit as % of GDP
FY2012 4.9%
FY2013 Target 4.8% (this mean nearly 5.4 lakh crore rupees)
  • Why in news? Because we’ve already reached 95% of the limit in till December 2013.
  • Who calculated? Controller General of Account. (and not CAG).

Is it good or is it bad?

  • Imagine you’ve fixed a target “I’ll try to contain my household Expenditure to Rs.1 lakh for the FY13.” but you already spent Rs.95000 so far.
  • Then, for Jan, Feb, March= you can spend only Rs.5000 [if you want to stay within the target.] This is difficult especially during election year- subsidy bonanzas.

Why fiscal deficit is problem?

  • Even now, India’s fiscal deficit = highest among BRICS [Brazil, Rus, India, China and S.Africa]
  • If we cannot keep the 4.8% target, then S&P, Moody etc. will definitely cut down our rating to junk level=less FDI, FII= high CAD =weak rupee= inflation, and more economic problems.

Can we keep with 4.8% target? Is it possible?

Not possible (because of these outgoing money) Possible (because of this incoming money)
  • LPG subsidized cylinders increased
  • LPG distribution policy changed
  • Fertilize subsidy to be increased
  • Interest subvention for Women SHG.
  • NELP X(10) postponed (=money not coming)
  • In fact food-fuel-fertilizer subsidy alone costs near 3 trillion rupees for FY13 [our target was to keep it less than 2.3 trillion]
  • Government wanted to sell shares of a PSU called “Engineers India ltd.” but investors did not pay sufficient price for chillar company. (=less income than expected)
  • Gold import duty =10%; =>smuggling, government lost Revenue worth Rs.1 billion. (=less income than expected)
  • Income from Spectrum auction (>55k crores)
  • Dividend from Coal India (~15k crores)
  • Government decided to postpone the purchase of Rafael jets (~60k crore saved, for now.)

G-Sec auction cancelled

  • When government wants to borrow money, they release government securities (g-sec), with help of RBI.
  • Government was planning to borrow 15k crore rupees, through this. But Spectrum-2014 auction and selling the shares of Engineers India ltd. = Government  has got sufficient money, for now. Hence decided to postpone the G-sec auction.

CAD & gold

FY12 >88 Billion USD = rupee starts weakening against dollar.

  • To reduce this deficit, Chindu increased gold import duty to 10%.
  • RBI also imposed various restrictions on gold imports.
FY13 (expected) <50 Billion USD. Chindu says I’ll think about reducing gold duty after March 2014.
  • FY13: 200 tonnes of gold came in through the black market. Government has lost ~$1 billion (6,200 crore) worth  taxes because of this smuggling.
  • Government raised import duty on gold from 8% to 10%. (mind it: import duty, NOT excise duty).
  • Reserve Bank of India made it mandatory for jewelers to export 20 per cent of their gold jewelry before placing orders for fresh gold imports.  (also known as 80:20 rule)

Related topic

FATF: Desi Diamonds = Money laundering

  • FATF= Financial Action Task Force (HQ : Paris)
  •  inter-governmental body to fight money laundering.
  • Their latest report says Indian diamond trade is used for money laundering. How? The agents will overvalue the prices of low quality diamonds
Incoming diamonds Outgoing diamonds
  • Low quality  diamond from Africa=>UAE=>Indian businessman deliberately pays higher price.=>his (or someone else’s) black money goes from India to UAE then its invested in UAE/Swiz. Etc.
  • Money sent to Hong Kong and China also in the same way.
Indian trader will export low quality diamond @high prices=>foreigner sends more money=>black money comes back. => sent to “original” owner, via hawala operators.
  • Even terrorist financing is done via such overvaluation of bogus diamonds. After all UAE=>Paki=>Dawood & Co.
  • By the way, if diamonds are super-high quality then trades don’t import it officially (else they’ve to pay high taxes).  In case of high quality diamonds, they’re smuggled through Belgium.

Anyways, this is just an overview, you should prepare it in detail for GS Mains Paper 3 topic ” money-laundering and its prevention.”
Back to our original topic of fiscal policy cum firefighting cum subsidy-raj (=Chindunomics)

Interim budget/Vote on Account?

I’ve published separate article on interim budget – click me
Interim budget in past

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