Mrunal Interim Budget 2014 - Plan Vs Non-Plan Expenditure

7/8/2014 Mrunal Interim Budget 2014: Plan vs Non-Plan Expenditure
http://mrunal.org/2014/02/budget-interim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-deficits-pdma-public-debt-management-agency.h 1/22
[Budget] Interim Budget 2014: Plan vs Non-Plan Expenditure, Subsidies,
Disinvestment, Deficits, PDMA Public Debt Management Agency
1. Prologue
2. Budget: Capital part: incoming (receipts)
1. [Table] Capital receipt
2. #EPICFAIL in disinvestment
3. Capital Expenditure
3. Plan vs Non Plan
1. Plan vs Nonplan budget: Incoming (Receipt) part
2. Plan vs Nonplan budget: Outgoing (Expenditure) part
3. [Table] Plan vs Non plan Expenditure in Interim Budget
4. [Table] Total Expenditure
5. [Table] Sub plans: Women, Children, SC/ST
6. [Table] Subsidies in Interim Budget 2014
4. Deficits
1. #1: Revenue Deficit and Effective Revenue Deficit
2. #2: Budgetary deficit
3. #3: Capital Deficit Surplus
4. Fiscal Deficit
1. Fiscal deficit targets and achievement
2. How did Chindu reduce fiscal deficit?
3. #1: increase incoming money
4. #2: Decrease outgoing money
5. Why did Chindu reduce fiscal deficit?
1. Main reason= to prevent Rating downgrade.
2. Consequences if Indias rating fell to junk status:
3. Secondary reasons= to save the economy
5. Primary deficit
6. [Table] Deficits Absolute figures
7. [Table] Deficits as % of GDP
5. PDMA: Public Debt Management Agency in Interim budget
6. Appendix
1. #1: FRBM: States succeed where Union fails
2. #2: Subsidies
3. #3: Structural deficit & Cyclic deficit
Prologue
so far in the [Budget] article series
1. Part I: Why interim budget, how is it different from vote on account, direct vs indirect
taxes, shortfall in their collection.
2. Part II: Revenue part of the budget: Receipt vs. Expenditure, Revenue deficit, effective
Revenue deficit.
3. Part III: (you are here) Capital part of the budget, plan vs non plan Expenditure,
Subsidies, all types of deficits.
4. Part IV: (soon)- in that last part, well see various schemes, funds, highlights of Budget
speech.
Budget: Capital part: incoming (receipts)
Two sub-types:
Debt Non-debt
because government has to repay
this money (with interest)
because government doesnt need to repay
Money borrowed internally (via
RBI, market stabilization scheme
MSS, treasury bills, Government
Securities G-Sec etc.)
loan (principal) recovered (e..g Mohan loaned Rs.1
lakh to modi @36%. After 1 year Modi repays
1,36,000=> 1 lakh (capital incoming) + 36000
interest (non-tax Revenue incoming)
Money borrowed externally (from
IMF, World Bank, ADB, Foreign
nations etc.)
proceeds from disinvestment e.g. Mohan sells his
shares of LIC/ONGC to private investors and earns
ca$h.
Money given by juntaa in small
savings, State provident fund
(Because government needs to
repay it at later stage)
[Table] Capital receipt

Capital receipt
BE
2013
RE
2013
BE
2014
Non-Debt 66468 36643 67452
Debt 542499 509539 528631
Total Capital
receipt
608967 546182 596083
1. Majority of the capital receipt comes from Debt.
2. Within debt: internal >> external.
#EPICFAIL in disinvestment
In above table, observe the BE2013 vs RE2013 non-debt. (66k vs 36k)
Why didnt Chindu earn as much capital money as he had expected? Because
disinvestment target (= non-debt Capital receipt) crore rupees
BE2013 (Chindu originally hoped to earn this much) 40k
RE2013 (he actually earned this much) 16k
BE2014 (still Chindu is optimistic next year!) 36k
So why didnt disinvestment fetch truckload of cash?
Chindu wanted to
disinvest
But #EPICFAIL because (Data of Dec 2013)
10% from Indian Oil
Corporation (IOC)
Moily (Petroleum minister) opposed. and while the file was
pending, IOCs share prices went down.
all the shares of Hindustan
Zinc and Balco
Mining ministry created obstacle about pricing mechanism.
Now the matter has been postponed till after election.
Coal India trade unions opposed
Bharat Heavy Electricals
Ltd (BHEL) & National
Hydroelectric Power
Corporation (NHPC)
Praful Patel (Ministry Heavy industries) opposed saying
shares of power companies are down at the moment. So even
if we sell, it dont fetch good prices. Better just wait and
watch for the sharemarket to go up.
Neyveli Lignite
Corporation (NLC), State
Trading Corporation
(STC), MMTC, and ITDC.
Lukewarm response from investors. Barely got ~1300 crores.
Important: Disinvestment matter falls under Department of Disinvestment under Finance
minister.
Capital Expenditure
Capital receipt (incoming) Capital Expenditure (outgoing)
Debt
internal
external
Non Debt
disinvestment
loan (principal) recovered
from State/UT/PSU/Foreign
nations
self-explanatory-
1. money spent on capital assets / goods
(buildings, machines etc.)- including Defense
assets.
2. loan (principal) given to State/UT/PSU/Foreign
nations
Within capital Expenditure, majority goes to Five year plans >> Defense >> loans (PSU,
State, UT)
Plan vs Non Plan
Until now, we learned the annual financial statement looks like this
Revenue Part Capital Part
Receipts (incoming) Expenditure (outgoing) Receipts (incoming) Expenditure (outgoing)
But in the late 80s, Government comes up with a new method to classify Expenditure
(outgoing money) => plan vs non-plan Expenditure. This new format of annual financial
statement, looks like this
total income (receipt) Total Expenditure
Revenue
(Receipt)
capital income
(Receipt)
Plan Expenditure Non Plan
Revenue
Expenditure
Capital
Expenditure
Revenue
Expenditure
Capital
Expenditure
Wait how can government change the format of annual financial statement?
Because as per Art. 112: AFS shall distinguish Expenditure on revenue part, from other
Expenditures.
Meaning you can present AFS in any format you wantas long as Revenue expenditure
is separately shown.
Therefore, even above plan vs non-plan format is valid (even through planning
commission itself is not a Constitutional body).
Plan vs Nonplan budget: Incoming (Receipt) part
The total income (Receipt) part is same earlier.
total income
Revenue (Receipt) capital income (Receipt)
Tax Non-tax Debt Non Debt
direct
indirect
Others (selling
goods/services)
dividend-profit
interest received
Grants received
internal
external
disinvestment
loan (principal)
recovered
The numbers, ascending descending order will remain same like earlier articles.
Plan vs Nonplan budget: Outgoing (Expenditure) part
Total Expenditure
Plan Expenditure Non plan
money given to Unions own five
year plans
money given to States five year
plans
anything that doesnt fall into left side part (plan
Expenditure)
we further classify this plan Expenditure into two parts
Total Expenditure
Plan Expenditure Non Plan
Revenue Expenditure Capital Expenditure Revenue Expenditure Capital Expenditure
xx xx xx xx
The component classification method is same like in DevAnands case study (And three
judaad principles). The only change is
Five year plan related Expenditure = you put on left side
Non-plan Expenditure= you put on right hand side.
Defense related capital Expenditure fall under NON-plan part.
PLAN Expenditure
NON-Plan Expenditure
Revenue Expenditure Capital Expenditure
1. Money spent on
Five year plans (of
Union)
2. Money given to
state/UT for their
Five year plans
(and their internal
classification as
Revenue vs. capital)
1. Interest paid (on whatever
loan Union had taken)
2. Subsidies, freebies, Debt
relief to farmers
3. Defense revenue
Expenditure (lightbill,
phonebill, diesel, bullets
etc.)
4. Salaries and pensions
5. Losses in Postal dept
(deficit)
6. Grants given to
States/UT/Foreign nations.
1. Defense capital
Expenditure (e.g. buying
machines, vehicles etc.)
2. Loans given to
PSUs/States/UT/Foreign
nations.
(Five year plan related matter
given after few paragraphs)
[Table] Plan vs Non plan Expenditure in Interim Budget
Expenditure BE 2013 RE 2013 BE 2014
Non-Plan 1109975 1114902 1207892
Plan 555322 475532 555322
Total 1665297 1590434 1763214
MCQ wisdom
1. Major portion of sarkaari money goes into non-plan Expenditure (and not in plan
Expenditure).
2. In 2013, the ministries failed to spend all of the plan Expenditure money given to them.
(How much? 555322-475532=nearly 80k crores. And that in turn, helped Chindu reduce
fiscal deficit- because outgoing money reduced!
3. Observe that in budget estimates (BE) of 2013 vs 2014, the total Expenditure has
increased but plan Expenditure remained the same (555322)=>Basic principles of CSAT
Paper II data interpretation: the % should have decreased. Observe the pie chart:
You can see, Plan Expenditure reduced from 33% to 31%. This is the main criticism given by
Opposition parties that Chindu reduced plan Expenditure => Congies dont care about the
growth and Development.
[Table] Total Expenditure
Expenditure Crores Sub part BE 2013 RE 2013 BE 2014
non-plan
Revenue 992908 1027689 1107781
Capital 117067 87214 100111
Total Non-plan Expenditure 1109975 1114903 1207892
plan
Revenue 443260 371851 442273
Capital 112062 103681 113049
Total plan Expenditure 555322 475532 555322
Total Budget Expenditure (Plan+non) 1665297 1590435 1763214
MCQ Wisdom: majority of government money goes into revenue Expenditure (be it out of
plan or non plan or total Expenditure.)
[Table] Sub plans: Women, Children, SC/ST
Plan Expenditure thousand crores BE 2013 BE 2014
ST subplan 24 30
SC subplan 41 48
Child 77 80
Gender 97 97
MCQ wisdom: Highest amount of plan Expenditure goes to: Gender >>Child>>SC>>ST.
Well see the schemes in next article.
[Table] Subsidies in Interim Budget 2014
Subsidies fall under non-plan Revenue Expenditure.
subsidy provision in Interim budget 2014
Fuel 65k crore
Fertilizer 68k [within thatDesi Urea>>Imported Urea>>non-urea.]
Food 1.15 lakh cr (within that88k for Food security Act)
other Hardly ~200 crore.
Total 2.5 lakh cr.
MCQ wisdom:
1. Almost all of the subsidies go to NON-Merit goods. [what are non-merit goods?
explained in the appendix].
2. Within Non-merit goods subsidies: food >> fertilizer >> fuel.
Well see about the schemes and subsidies in fourth article. Lets move to deficits.
Deficits
#1: Revenue Deficit and Effective Revenue Deficit
Already covered in last article, click me
#2: Budgetary deficit
This is the difference between total incoming money vs. total outgoing money
= Total expenditure MINUS total receipts
= (Revenue expenditure + Capital Expenditure) MINUS (Revenue receipt + Capital receipt)
official numbers: BE 2013 RE 2013 BE 2014
Total Receipts 1665297 1590434 1763214
Total Expenditure 1665297 1590434 1763214
Budget deficit 0 0 0
In ALL of above cases, budgetary deficit is ZERO. Because total income is same as total
Expenditure. How is this possible?
Recall that all the loans borrowed by government are counted as capital incoming
(Capital receipts).
So, even if governments outgoing money (revenue + capital) is large, theyll borrow
enough money (capital receipt) to fill up this pothole => total receipt will equal total
expenditure.
still doubt? Read the next topic..
#3: Capital Deficit Surplus
Take the difference between outgoing vs incoming.
If this was a negative number, wed call it Deficit. (2-4=-2)
If this is positive number, wed call it surplus. (4-2=+2)
in the capital part, weve Surplus (Because all the market borrowing/loans are counted
as incoming capital receipts)
http://mrunal.org/2014/02/budget-interim-budget-2014-plan-vs-non-plan-expenditure-subsidies-disinvestment-deficits-pdma-public-debt-management-agency. 10/22
Crore Rs. BE 2013 RE 2013 BE 2014
Capital Deficit SURPLUS +379838 +370288 +382923
Revenue deficit (RD) -379838 -370288 -382923
Observe in above table, every year Revenue deficit = Capital Surplus. Thats why Budget
deficit is ZERO.
To put this mathematically
Budget deficit
= total Expenditure MINUS total receipt
= [Revenue Expenditure + capital Expenditure] [Revenue receipt + Capital receipt]
=[Revenue Expenditure Revenue receipt] + [capital Expenditure capital receipt]
=Revenue deficit + capital deficit
But in case of capital part, weve as much surplus, as the deficit in Revenue part. thats why
budget deficit becomes ZERO.
Fiscal Deficit
Since budgetary deficit is ZERO, it doesnt show us the true picture of governments
financial health.
Therefore, in late 90s: Sukhmoy Chakravarti Committee recommends new type of
deficit, called..
Fiscal deficit
= Budget deficit + Borrowing
= (Total Expenditure Total Receipts) + Borrowing
= (Total expenditure + borrowing) [Total Receipt]
= (Total expenditure + borrowing) [Revenue Receipts + Capital Receipt]
Fiscal deficit targets and achievement
Fiscal deficit is expressed in two ways
Absolute number 100 crore, 200 crore etc.
As % of GDP 4.8% of GDP
Absolute number doesnt give us a big picture, doesnt help us compare two years or two
countries objectively. Hence experts prefer second method (GDP%) for doing the analysis,
projections and ratings.
Anyways, lets check the numbers
official numbers (Actual) 2012-13 BE 2013 RE 2013 BE 2014
Fiscal Deficit in Crores 490597 542499 524539 528631
Fiscal deficit as % of GDP 4.9 4.8 4.6 4.1
from the above table, we can see that during Feb 2013, Chindu had estimated our fiscal deficit
would be 4.8% of the GDP. But in Feb 2014, when he revised that estimate. Now it turns out
fiscal deficit for the year 2013-14= 4.6% of the GDP.
for GDP growth rate bigger number is better for the economy e.g. 10%>9%
for Fiscal deficit, smaller number is better for economy e.g. 4.6 better than 4.8.
So million dollar question is: how did Chindu manage to perform so excellently despite all
the policy paralysis, shortfall in tax collection, shortfall in disinvestment targets- and overall
high level of inflation and subsidies?
How did Chindu reduce fiscal deficit?
There are two ways to reduce fiscal deficit:
1. Increase incoming money (tax, non-tax revenue, disinvestment etc.)
2. Decrease outgoing money (revenue and capital Expenditure)
Lets check how Chindu used these three methods to bring fiscal deficit to 4.6% of GDP:
#1: increase incoming money
Part Receipt detail
did it
help
reducing
fiscal
deficit?
Revenue
TAX
Weve already seen, there was shortfall in the
collection of direct taxes and indirect taxes.
NO
Non TAX
Chindu had ordered the PSUs to declare special
dividends. e.g. Coal India gave Rs.29 dividend on 10
rupees share => Government earned ~15k crores from
Coal Indias dividend alone. Same case with other PSUs.
YES
Capital Disinvestment
Chindu was hoping to get 40,000 Crore rupees through
disinvestment (i.e. selling his shares from PSUs to
private investors). But in reality, he managed to get
barely 16k cores.
NO
#2: Decrease outgoing money
Expenditure sub-type detail
money
saved Cr.
Plan
Ministries failed to spend some of the money, returned
back.
80k
non plan
Revenue
Austerity measures on foreign travel, 5 star hotel
conference, vehicle purchases.
20k
Postponed Oil subsidy payment 35k
Direct benefit transfer (DBT) prevented leakages ??
capital Defense ministry postponed the purchase of Rafael jet 60k
Thus, with many such measures, Chindu managed to reduce the fiscal deficit (@4.6% GDP)
even better than his original target (4.8% GDP).
For the next financial year (1
st
April 2014 to 31
st
March 2015) he has made even more
ambitious target: to bring down fiscal deficit to only 4.1% of GDP. Will he (or the successive
government) achieve it? Critiques say 4.1%= Mission Impossible. Because
1. Chidu already milked the PSUs by seeking special dividend. Next government cannot do
the same (else PSUs will be left with no money to expand business.)
2. Chindu postponed the subsidy payment to oil companies. Next government will have to
pay it sooner or later, else those companies will go out of business.
3. Moily increased subsidized LPG cylinders from 9 to 12. This is effective from Feb
2014 (hence its negative impact doesnt show on the accounts between 31/3/2013 to
31/1/2014). But next government will be forced to continue this 12 cylinder game (To
keep vote bank happy). But in their case, subsidy bill will be high for the entire financial
year from 1/4/2014 to 31/3/2015.
4. Some of the Sarkaari banks are loss making, and its beyond their aukaat to comply
with BASEL-III norms without government help. e.g. United Bank of India needs 1000
crore. IF economy doesnt improve in 2014-15, the NPA will rise, more of the public
sector banks will fall in this danger zone=Government will have to dollout truckload of
cash to save them.
anyways, So far, we learned:
1. What is fiscal deficit?
2. How did Chindu manage to reduce fiscal deficit?
Now the third question:
Why did Chindu reduce fiscal deficit?
Agreed that fiscal deficit is bad for economy, but if fiscal deficit had increased from 4.8
to 4.9% .then world wasnt going to end next day.
Besides, poor junta doesnt understand fiscal deficit. He could simply launch another
scheme named after **you know who**, to attract the voters during election year.
So, Why did our finance minister make conscious attempts to reduce the fiscal deficit
(remember- his official target was 4.8% but he performed even better 4.6%.)
why? why? why?
Main reason= to prevent Rating downgrade.
Every Saturday, Indianexpress gives Rating to movies:
good
5/5
4/5
3/5
bad
2/5
1/5
0/5
Lower the rating => less people likely to watch the movie. Similarly, Standard and Poor(S&P),
Moody, Macgrawhill give ratings to companies and countries. Lower the rating=>less
investors coming.
Standard and Poors (S&P) ratings
Investment Grade from AAA, AA,to BBB-
Non-investment grade (junk status) from BB, B, CCC, C.
In the recent months, Indias rating = BBB-
That is just one rank above the junk status (Starting from BB).
So, what will happen if Indias rating is reduced to BB (junk status)
Consequences if Indias rating fell to junk status:
Foreign investors will pull out their money from India. (Especially the FIIs).
But non-investment grade= High risk = high reward, right? Then why will foreign
investors pull out money?
Because, Most of these foreign investors dont bring money from their pockets. They
also gather it from foreign junta e.g. American Pension fund company who collects
monthly payments from nurses and teachers.
The (SEBI like) regulatory bodies in US, Japan, EU etc. have made specific norms that
prevent such FIIs from investing clients money into non-investment grade countries
(BB and lower).
Had Chindu over crossed the fiscal deficit target (e.g. 4.9% or 5% instead of 4.8%) then S&P
would have reduced our rating to junk status (BB) = foreign investors will have to pull out
money from Indian market.
Therefore, to specifically appease S&P and other foreign rating agencies, Chindu made
conscious efforts to keep fiscal deficit lower than 4.8%. He even gave ambitious 4.1% target
for 2014-15. (In hope that S&P is impressed and increases our rating from BBB to A =>
more investment can come.).
Secondary reasons= to save the economy
In the current situation of Indian economy, if fiscal deficit is lowered, itll give us positive
impact because
1. Lot of tax payer money wasted in non-productive subsidy (and its leakage). When
government cuts down subsidies, implements DBT = saves tax payers money (That can
be used for other developmental work- such as new roads, bridges, schools and
universities)
2. Subsidy leakage prevented= less corruption money going into gold and real estate
=>demand lower=>prices go down. Gold demand reduced=>CAD reduced=>Rupee
strengthens =>Petrol cheaper.
3. Less fiscal deficit => S&P, Moody et al will give us better rating => more foreign
investment => business expansion => more jobs =>social harmony, higher GDP.
4. More foreign investment => more demand of rupees (compared to dollars)=> rupee
strengthens against dollar => crude oil import becomes less expensive => inflation
lowered.
5. more foreign investment=> business expansion =>More jobs=>more income for
middle class=>more demand of consumer goods and services=> higher collection of
indirect taxes.
6. More demand of consumer goods/services=> more profit for companies => higher
collection of corporate tax. Recall that maximum amout of governments direct tax
revenue comes from corporate tax.
7. More profit for companies => less NPA for banks => banks can re-loan the recovered
money to other needy entrepreneurs and families.
8. and so on.
Anyways enough of Fiscal deficit. Lets move to the last topic of todays article
Primary deficit
Primary deficit = fiscal deficit MINUS interest on previous loans.
ya, but why do we need to find primary deficit?
fiscal
deficit
interest payment on previous
loans
primary deficit
100 40 100-40=60
comment:
You must to pay this part, even if
you dont like. This part is beyond
your control.
This part is where you can try to fix the
mess. You have to take maximum effort to
decrease this figure via
1. increasing your income
2. decreasing your expenses
Lets check official data:
Crore Rs. BE 2013 RE 2013 BE 2014
A.Fiscal Deficit 542499 524539 528631
B. Interest paid on previous loans 370684 380066 427011
Primary Deficit (A minus B) 171814 144473 101620
Primary deficit as % of GDP 1.5 1.3 0.8
hmm.Primary deficit is decreasing. so is it good or bad?
It is bad because interest payment has increased- observe 370*** to 427***. Whats the
wisdom for MCQ?
A falling level of primary deficit implies that new borrowings are being used to
meet old debt liabilities. (Hence the rise in interest payment).
[Table] Deficits Absolute figures
Crore Rs. BE 2013 RE 2013 BE 2014
Capital SURPLUS +379838 +370288 +382923
Primary Deficit (FD-interest) -171814 -144473 -101620
Effective Revenue deficit (RD-capital grant) -205182 -249005 -236342
Revenue deficit (RD) -379838 -370288 -382923
Fiscal Deficit (FD) -542499 -524539 -528631
lowest to highest= budget deficit << PD << ERD << RD <<FD.
Note:
1. To show deficit, Ive used (-) sign in front of them. otherwise, in Absolute figures: you
can fiscal deficit is highest.
2. we cannot find total deficit here (i.e. BD+RD+ effective RD+FD+PD) because those
numbers are implicitly counted / subtracted from each other. if we simply add them all
up, itll lead to double / triple counting.
Again, observe that Revenue deficit = capital surplus (in every cell of above table). Why?
Because government borrowed that much money (=incoming capital receipt) to fillup up the
revenue deficit. thats why Budgetary deficit became ZERO. (total expenditure-total income).
[Table] Deficits as % of GDP
Crore Rs. BE 2013 RE 2013 BE 2014
Capital SURPLUS +3.3 +3.3 +3
Primary Deficit (FD-interest) -1.5 -1.3 -0.8
Effective Revenue deficit (RD-capital grant) -1.8 -2.2 -1.8
Revenue deficit (RD) -3.3 -3.3 -3
Fiscal Deficit (FD) -4.8 -4.6 -4.1
Again, observe Capital surplus = Revenue Deficit. e.g. for BE 2014, theyre +3% and -3%
respectively.
PDMA: Public Debt Management Agency in Interim budget
@present, RBI is the debt manager of the Government. = Conflict of interest. How?
GOVERNMENT RBI
borrows money from market via issuing Government-securities (G-
sec). This is one type of bond e.g. pay me 1000, Ill pay 8% interest for
next ten years, then Ill repay entire principal.
RBI uses the same
G-sec to control
money supply.
Government release Government securities (G-Sec) to borrow money from market. RBI uses
the same G-sec to control money supply.
Example
1. Repo rate: recall that G-sec are used as collateral, so money can be recovered incase the
client doesnt pay.
2. OMO (Open market operation): Here RBI buys/sells G-sec in open market, to control
money supply. (RBI buying G-sec from juntaa = money supply increased in juntaas
hand, and vice versa).
3. SLR: RBI requires the banks to invest part of their money in G-sec.
Therefore, monetary policy maker and debt manager should be two separate persons. Else
there is conflict of interest, clouding of judgment. Although experts are divided
Argument: RBI should continue as Debt manager
because
1. Only RBI has the necessary expertise, staff and tools to make macro-assessments about
the debt management (and its impact on money supply, banking and finance sector,
foreign exchange rates etc). While An independent agency will not have the same level
of expertise. Their mindset will be narrow.
2. only RBI can harmonise the Debt management of union and State governments- and their
impact on the economy. While the separate debt management office will only focus on
union government but not on the state governments. => this lack of coordination will
have negative impact on money supply
3. Even a separate debt management office cannot stop conflict of interest. Because
government is the majority shareholder in public sector banks. (e.g. Government can
order its puppet Board of Directors in SBI, PNB etc to buy government securities
beyond the SLR requirement and thus government gets money.)
4. So far, RBI has effectively carried out that Debt management operation without problem.
So why waste time in Trial n Error with a separate debt Management office?
Argument: RBI should not continue as debt manager
because:
1. Because there is conflict of interest (as explained in the beginning).
2. 13
th
Finance Commission (Vijay Kelkar) has recommended there should be separate
National debt Management agency.
3. In most of the advanced economies, monitoring policy and debt management are carried
out by two different agencies.
4. Since late 80s- Sweden, New Zealand have separate offices for Public debt Management
(outside their RBI but inside their finance ministry).
5. Germany and Denmark are even one step ahead- they have separate financial companies
to look after the public debt management. (outside their RBI and finance ministry)
If those economies can run smoothly, then Indian economy can also run smoothly by having a
separate debt management office.
Timeline: PDMA
2007: FM makes announcement in the budget, well setup a statutory body for public
debt management. (meaning theyll pass a law to create this body)
2011: Public Debt Management Agency Bill
2012: bill not passed
2013: bill not passed
2014, Feb: Interim Budget. Chindu says, no worries, well set up a NON-Statutory
Public Debt Management Agency (PDMA), theyll look after debt Management from
2014-15 (i.e. 1/4/2014 to 31/3/2015).
Note: at the moment, PDMA = non statutory, just like UIDAI. (Because there is no law/act
behind them).
Appendix
Some topics/issues related to the matter at hand.
#1: FRBM: States succeed where Union fails
2003: Fiscal Responsibility and Budget Management (FRBM) Act was enacted.
FRBM gave following TARGETs to the Finance minister:
deficit target
Revenue deficit eliminate (0%) by 31/3/2008
fiscal deficit reduce it to 3% of GDP by 31/3/2009
2010: New concept of Effective revenue deficit introduced in the budget.
2012: Chindu realizes, It is beyond my aukaat to eliminate revenue deficit. So, he
amends the FRBM target. Ill not eliminate revenue deficit, Ill eliminate Effective
revenue deficit.
deficit targets amended
EFFECTIVE Revenue deficit eliminate (0%) by 31/3/2015
fiscal deficit reduce it to 3% of GDP by 31/3/2017
FRBM: Success by State governments
while union government is yet to reach its targets,
target already achieved by
Revenue deficit = 0% Gujarat
Fiscal deficit = less than 3% of the states GDP Gujarat, MP, Odisha, Bihar and WB
#2: Subsidies
Back in the mid-90s, Chindu himself classified Subsidies in three types
#Type 1: Public Goods
Services given to everyone- be it rich or poor: Police, Defense, Judiciary etc.
Any money spent on these public goods = not be counted under subsidies because
these are essential services.
Example, if government announced free electricity to all police station, or free
uniforms/shoes to all army personnel, we donot call it Subsidy.
#Type 2: Merit goods
Polio Vaccination, Primary Education, forest plantation, roads, bridges, R&D on Agro-
Space-public Health, renewable energy etc.
These have positive externality E.g. polio vaccine + free edu. =kid is saved, and 20
years later, companies get healthier-more skilled labor force.
Similarly, forest plantation = environment saved, wildlife saved. And simultaneously,
more oxygen => healthier population =>more productive labour force=>higher GDP.
In short, society at large, benefits. Therefore, subsidies given to Merit goods =not evil.
Theyre justified. Government should give subsidies to merit goods as and when
possible.
#Type 3: Non-Merit Goods
Method example
Direct Cash
Pension given to elder/widows.
Wage payments under MNREGA
Subsides In
Kind
Instead of giving cash, government gives some item (Goods) to
beneficiary. example
Cow, tractor, Diesel pumpset to small/marginal farmer
Free wheelchair to physically challenged.
Free laptops/tablets to college students. (subsidy beyond primary
education, is considered non-merit)
taxi to unemployed youth
Procurement
Government declares Minimum support price (MSP) for wheat.
if (private) trader offers less price, then farmer can sell wheat to FCI
@MSP
Government pays for the losses to FCI (for buying wheat @prices
higher than market level).
Price
Regulation
when government fixes the price e.g. (subsidized) LPG, Kerosene,
fertilizer, electricity (to farmers)
then oil/fertilizer/electricity company is forced to sell their product
@cheap price and government pays for their loss.
Interest
Relief
farmer, student, small businessman takes bank loan.
Government pays a part of his loan interest rate.
Tax Relief
Tax exemption given to BCCI and other cricket boards (hoping theyll
use the money thus saved, in the promotion of sports.)
These are called non-merit goods because society pays and individual benefits.
Where do these fall in the budget? Revenue Expenditure or capital Expenditure? Obviously
subsidies= Revenue Expenditure.
(Free market) economists hate them because
#1: Non-merit subsides = negative externality.
Diesel subsidy (meant for farmers): jeep & SUV-owners also get cheap diesel =>
pollution (+ accidents from drunk driving)
excessive use of diesel pumpsets= ground water depletion
Fertilizer subsidy => farmers use excessive amount of urea => soil fertility decline,
water-pollution after monsoon.
#2: Non-Merit subsidies =often diverted & misused
MNREGA Bogus job cards, Sarpanch chows down the money.
Subsidies LPG
beneficiaries give them to restaurants and 5 star hotels @black
market
Subsidized kerosene
PDS owner sell it to rickshaw-walla rather than poors
=>misuse + pollution.
Food subsidies Black marketeering by PDS shop owner.
Fertilizer subsidy, free
electricity
Most of the benefit goes to big farmers. The small marginal
farmer doesnt get them.
#3: Non-Merit subsides =cascading effect
Government pays subsidy to oil/fertilizer/electricity companies to give cheap diesel,
urea and electricity to Farmer.
Government pays FCI to procure wheat from farmer @MSP (usually above the market
prices)
Government also gives wheat/rice to the poor @cheap/free price.
Result? lot of overlapping, lot of leakage. But still, majority of the subisides go in the non-
merit goods food>> fertilizer >> fuel
#3: Structural deficit & Cyclic deficit
Not given in the budget, but for stupid MCQs, weve to prepare. Because once in a while,
Montek mentions it.
Suppose, we consider year1 as standard.
year Year1
total income 100
total Expenditure 110
deficit 10
In year2, there is recession like scenario. Governments tax-income decreases, And
governments expenditure will increase (Because of various social security / unemployment
allowance/ MNREGA type schemes) to help the people during slowdown.
year Year1 year2 (downturn in economy)
total income 100 80
total Expenditure 110 120
deficit 10 40 (this is Cyclical deficit)
In year3, economy recovers and there is FULL employment (Every person has got job).
Economist believe that IF a country has FULL employment, then governments tax Revenue
will automatically improve and there will be no deficit (in fact there will be surplus).
But in real life, even if there will full employment, still there will be deficit
year Year1
year2 (downturn in
economy)
year3 (economy recovers, full
employment)
total income 100 80 100
total
Expenditure
110 120 105
deficit 10
40 (this is Cyclical
deficit)
5 (this is structural deficit)
why? because government still running some populist scheme/subsidies to farmers, fertilizer
companies, LPG to middle class and so on. This type of deficit, which exists EVEN during full
employment = is called structural deficit. Structural deficit results when government is giving
unnecessary subsidies and freebies- despite full employment.
Visit Mrunal.org/Economy For more on Money, Banking, Finance, Budget, Taxation and
Economy.
URL to article: http://mrunal.org/2014/02/budget-interim-budget-2014-plan-vs-non-plan-
expenditure-subsidies-disinvestment-deficits-pdma-public-debt-management-
agency.html
Posted By Mrunal On 26/02/2014 @ 15:33 In the category Economy

Mrunal Interim Budget 2014 - Plan Vs Non-Plan Expenditure

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