Indian Budget 2007- Tarun Das

8/14/2019 Indian Budget 2007- Tarun Das

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Union Budget 2007-2008-

Objectives, Scope andMacroeconomic Impact

Presented by

Dr Tarun Das

Professor and Head(Economics)

IILM, New Delhi-110001.


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IILM,N.Delhi Budget 2007 by Tarun Das 2

Contents

1. Introduction

2. Economic and Fiscal Background

3. Scope & objectives of the budget

4. Fiscal Consolidation

5. Major Tax Reforms

6. Concluding Observations


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1. Union Budget 2007-08

I believe that, given a right mix of policies,the poor will benefit from growth that is

driven by savings and investment and that ismore inclusive. As Dr. Muhammad Yunus, theNoble laureate said, Faster growth rate isessential for faster reduction in poverty.

There is no other trick to it .______With these words Finance Minister P.Chidambaram commended his Budget to the Houseon the 28th February 2007.


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2.1 Macroeconomic Background:Indian economy is on rebound moodOverall GDP growth rate is expected to be 9.2%

in 2006-07 on top of 9% in 2005-06. India is the second fastest growing economyafter China among large economies in the world.

With these growth rates, the growth target of 8percent set for the Tenth Five Year Plan (2002-

2007) will be nearly achieved. Agriculture registered a growth of 2.7% and

industry 10% in 2006-07.Services are the fastest growing sectors with a

GR of 11.2% and contributed 55% to GDP. Industrial growth was led by growth in both

capital goods and consumer goods.


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2.2 Economic Background:Indian economy is on rebound mood

Per capita income in 2005-06, in real terms,increased by 7.4%.

Savings rate reached record level at 32.4% andthe investment rate at 33.8%.

Both exports and imports are buoyant andgrowing at rates exceeding 36

percent.Current account deficit is expected to increase

from 1.1% of GDP in 2005-06 to 1.6% of GDP in2006-07. But, it is not unmanageable.

Foreign exchange reserves at record level ofUS$190 billion, equivalent to 11 months ofimports.


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2.3Rising inflation is a matter of concern. Inflation hurts everybody particularly the poor

whose incomes are not indexed to prices.

High inflation also affects adversely bothsavings and investment.

The point-to-point WPI inflation rate isrunning around 6% in the current year.

Average WPI inflation rate in 2006-07 isestimated in the range of 5.2% to 5.4%compared to 4.4% in 2005-06.

Current inflation is combination of bothdemand-pull and cost-push inflation.

Growth in bank credits by 30% and moneysupply by 21.4% have also put pressure onprices.


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2.4Anti-Inflationary MeasuresHowever, high inflation is not wide spread

and is limited to few items such as minerals,steel, cement, edible oil, wheat, fruits andvegetables.

Containment of inflation remains high on theagenda of the government.

Anti inflationary measures taken by thegovernment include strict fiscal andmonetary discipline, liberal imports throughreduction of import duties, effective supply-demand management for essential items,

and stern actions against hoarders and blackmarketers.


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2.5 Fiscal BackgroundBoth tax and non-tax revenues performed

better in 2006-07 than BE due to higher

growth than expected earlier.But, capital receipts fell short of targets by

1.4% as a result of shortfall indisinvestment due to opposition by the

communists.Total expenditure exceeded BE by 3.1%.

While revenue expenditure exceeded BE by3.8%, capital expenditure fell short of BE by

1.2%.This kind of trend, visible in the last few

years, does not augur well for publicinvestment.


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2.6 Fiscal Background (as % of GDP)

Item 2005-06

Actual

2006-07

BE

2006-07

RE

2007-

08BE

1.Revenue

Deficit

2.6 2.1 2.0 1.5

2.FiscalDeficit

4.1 3.8 3.7 3.3

3.PrimaryDeficit

0.4 0.2 0.1 (-) 0.2


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3.1 Economic Objectives of Budget Strong commitment to sustained growth, fiscal

prudence, monetary and price stability.

Basic objective is to promote faster and moreinclusive growth, equity and social justice.

To provide universal access to basic education andhealth.

To generate gainful employment in all sectors and topromote investment.

To focus on agriculture and rural development forsustainable growth.

To emphasize development of education andphysical infrastructure for creating enablingenvironment for growth and development.


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3.2 Basic characteristics of Budget

On the whole the Union Budget for 2007-08 is :

A developmental budgetcovering widespectrum of sectors and industries.

An innovative budget, which goes beyondusual fiscal accounting and number crunching.

It encourages growth with inclusiveness. It is both savings andinvestment boosting.

It is both industry and agriculture friendly.

It is physical and social infrastructure friendly.

Above all, it ispeople friendly.


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3.3 Budget is Education andOther Social Sectors Friendly

Substantial increase in funds for Sarva

Shiksha Abhiyan, Mid-day Meal scheme,basic health care, drinking water,sanitation etc.

National Means-cum-Merit Scholarship

Scheme introduced to arrest drop outratio. Increase in provisions for Bharat Nirman

by 31.6%, education by 34.2% and healthand family welfare by 21.9%.

A Vocational Education Mission to start onthe basis of public-private partnership.

1396 IITs to be upgraded into centers ofexcellence in specific trades and skillsunder public-private partnership.


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3.4 Welfare Schemes for the Poor

National Rural Employment GuaranteeScheme (NREGS) is allocated Rs.12,000 crore

and coverage is expanded from 200 districtsto 330 districts.

Targeted PDS and Antyodaya Anna Yojanaschemes are retained. Review and evaluationproposed to strengthen these schemes.

Under the National Rural Health Mission, alldistricts to complete preparation of DistrictHealth Action Plans by March 2007.

To set up more hospitals for prevention ofHIV/ AIDS.

Integrated Child Development Services tocover all habitations and settlements duringthe Eleventh Plan.


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3.5 Welfare Schemes for theVulnerable and Weaker Sections

Substantial increase of funds for schemes

for the benefits of SCs/ STs/ minorities. An additional cess of 1% on all taxes is

levied to fund secondary education andhigher education and the expansion ofcapacity by 54% for reservation for sociallyand educationally backward classes.

Rural Infrastructure Development Fund isaugmented by 20 percent.

A new Social Security scheme for deathand disability insurance cover through LIC torural landless households is introduced.


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3.6 Welfare Schemes forthe Senior Citizens

Housing Loans: National HousingBank to introduce 'reversemortgage' under which a seniorcitizen owning a house can avail of

a monthly stream of incomeagainst mortgage of his/her house,throughout lifetime, withoutrepayment or servicing of the loan;

Insurance: Exclusive healthinsurance scheme for seniorcitizens offered by NationalInsurance Company

3 7 B d t i i lt


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3.7 Budget is agriculturefriendly.

Farm credit: Target of Rs.225,000 crore for2007-08 with an addition of 50 lakh newfarmers to the banking system.NABARD to augment its resources forrefinancing rural credits by issuing tax-freeGovernment guaranteed rural bonds.Integrated Oilseeds, Oil palm, Pulses & MaizeDevelopment programme to be expanded.

Priority for Accelerated Irrigation BenefitProgram, and Water Resources ManagementNational Agricultural Insurance Scheme to becontinued for Kharif and Rabi 2007-08Agriculture Technology Management Agency(ATMA) now in place in 262 districts to beextended to another 300 districts;

3 8 B d i i f


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3.8 Budget is infrastructurefriendly

National Highways: Provision for National

Highway Development Programme toincrease from Rs.9,945 crore to Rs.10,667crore.

Power: Seven more Ultra Mega Power

Projects under process.Public Private Partnership and

Viability Gap Funding: Revolving fundwith corpus of Rs.100 crore to be set up to

quicken project preparation. Innovative Financing forInfrastructure: Funds from National SmallSavings Fund may now be borrowed byIndia Infrastructure Finance CompanyLimited (IIFCL).

3 9 I ti f


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3.9 Innovative measure forinfrastructure financing

Govt. to examine Deepak Parikh Committee

suggestions for establishment of two wholly-owned overseas subsidiaries of IIFCL withobjectives to borrow funds from RBI and

(i) to lend to Indian companies implementing

infrastructure projects in India, or to co-financetheir ECBs for such projects, solely for capitalexpenditure outside India; and

(ii) to invest such funds in highly ratedcollateral securities and provide 'credit wrap'

insurance to infrastructure projects in India forraising resources in international markets .


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3.10 Budget is industry friendly.

Petroleum and Natural Gas: 162

production sharing contracts awarded;investment of Rs.97,000 crore made inexploration

Textiles: Provisions for Scheme for

Integrated Textiles Parks and TechnologyUpgradation Fund enhanced.

Additional 100-150 clusters forHandlooms

Increase in outstanding credit to SMEs Coir Industry: Scheme for

modernization and technologyupgradation


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3.11 Budget is Savings andInvestment friendly

Threshold limit of tax exemption is

raised by Rs.10,000 for all assesses; Surcharge on income tax on all firms

and companies with a taxable incomeof Rs.1 crore or less is removed.

Urban local bodies are allowed to issuetax-free bonds for infrastructuredevelopment.

A five year income tax holiday for two,three or four star hotels and for

convention centres with a seatingcapacity of not less than 3,000;

Urban local bodies are allowed to issuetax-fee bonds.

4 1 F sca onso at on


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4.1 F sca onso at oncontinues

Fiscal deficittargeted at 3.3% of GDP in 2007-08BE compared to 3.7% in 2006-07RE.

Revenue deficit targeted at 1.5% compared to 2%in 2006-07 RE.

Primary balance is expected to produce a surplusamounting to 0.2% of GDP in 2007-0 BE comparedto a deficit of 0.1% of GDP in 2006-07 RE.

An autonomous Debt Management Office (DMO) to

be set up with a Middle Office in first phase tofacilitate transition to a full-fledged DMO.

An India international development CooperationAgency to be set up to bring all developmentcooperation under one roof.


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4.2 Medium Term FiscalIndicators

Items 2006-07RE

2007-08BE

2008-09 Tar

2009-10 Tar

1.Revenue Deficit

as % of GDP

2.0 1.5 0.0 0.0

2.Fiscal Deficit

as % of GDP

3.7 3.3 3.0 3.0

3.Gross tax rev.

as % of GDP

11.4 11.8 12.3 12.7

4.Year-end debt

stock (% of GDP)

64.4 61.4 58.6 56.0

4 F sca onso at on at t e


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4. F sca onso at on at t eStates

Rs.110,268 crore of States' debt has beenconsolidated; twenty States have availed of

benefit of debt waiver of Rs.8,575 crore;

VAT, CST and a Roadmap towards GST:Agreement reached with State Governmentsto phase out CST; rate to be reduced from 4%

to 3% with effect from April 1, 2007;

A roadmap for introducing a national levelGoods and Services Tax (GST) with effectfrom April 1, 2010 to be prepared.


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5.1 Major Tax Reforms(a) Reduction in peak customs duty for non-

agricultural products from 12.5% to 10%.(b) Reduction of customs duties on most chemicalsand plastics, seconds and defectives of steel, cokingcoal, polyester fibres and yarns and raw-materials,polished diamonds, rough synthetic stones, unworkedcorals, drip irrigation systems, agricultural sprinklersand food processing machinery, medical equipment,edible oils.

(c) These measures are expected to reduce productioncost and moderate inflation.


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5.2 Other Tax Reforms(d) Imposition of of imports duty of 3% (WTObound rate) on all private import of aircrafts,

(e) Imposition of exports duty on iron oresand concentrates.(f) Excise duties: Reduction in ad valoremcomponent of excise duty on petrol anddiesel from 8% to 6%.

(g) Rate of dividend distribution tax is raisedfrom 12.5% to 15% on dividends distributedby companies; and to 25% on dividends paidby money market mutual funds and liquidmutual funds to all investors.


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5.3 Service Tax Reforms(h) Exemption limit for small service providers israised from Rupees four lakhs to Rupees eight

lakhs. (i) Service tax extended to:

Outsourcing for mining of mineral, oil or gas;

Renting of immovable property for use incommerce or business;

Supply of content for use in telecom andadvertising purposes;

Asset management services;

Design services;

Services involved in works contract

6 1 C l di k (1)


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6.1 Concluding remarks- (1) Budget makes a fine balance between growth

and distributive justice and between monetarydiscipline and fiscal prudence.

Budget is growth oriented, but takes care ofpeoples basic needs for housing, drinkingwater, education and health.

It is a developmental budgetleading tobalanced growth of agriculture and industry.

An innovative budgetwhich would stimulateboth consumer and investment demand.

Progressive Budgetwith special emphasis onthe development of both physical and socialinfrastructure.

Budget integrates both policies and programs ina well-defined sectoral framework.

6 2 C l di k (2)


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6.2 Concluding remarks- (2) Budget further deepens fiscal

consolidation at both centre and states.

Budget encourages private participationand public-private partnership ininfrastructure development.

Budget has sharp focus on sectors which

have high potentials for either growth oremployment generation.

Budget has a strong human face.

In brief, Budget is education and other

social sectors friendly, agriculture andrural development friendly, infrastructurefriendly, above all, people friendly.

Thank you


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Thank you Have a Good Day

Indian Budget 2007- Tarun Das

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