the union budget 2004-05 context and impact presentation at delhi school of economics july 30, 2004
TRANSCRIPT
The Union Budget 2004-05Context and Impact
Presentation at
Delhi School of Economics
July 30, 2004
2
Structure of Presentation
The Macroeconomic Context of the Budget
Impact on Key Macro Indicators
3
Overall GDP Growth
4.84.4
5.8
4.0
6.5
8.2
6.1
0
1
2
3
4
5
6
7
8
9
1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04
Per
cen
t
Overall GDP Grow th
4
Sector-wise GDP Growth
-5.5
-3.5
-1.5
0.5
2.5
4.5
6.5
8.5
10.5
1999-00 2000-01 2001-02 2002-03 2003-04
Per
cen
t
Agriculture Industry Services Overall GDP Grow th
5
Drivers of Industrial Recovery
Critical background developments
Structural changes in interest rates
Revival of public capital spending
Retail Finance
Construction
Investment Upturn
6
PPF and G-sec Rates
Interest Rates
4.8
5.8
6.8
7.8
8.8
9.8
10.8
11.8
FY
98
FY
99
FY
00
FY
01
FY
02
FY
03
FY
04
Per
cent
1-yr 5-yr 10-yr PPF
7
PLR and Housing Finance Rates
Lending Rates
9.0
10.0
11.0
12.0
13.0
14.0
15.0
16.0
Per
cen
t
PLR Housing Finance Rate
8
Capital Outlay as % of Total Exp (Centre)
7.66.7
8.1 7.6 7.3 7.5
9.6
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1997-98 1998-99 1999-00 2000-01 2001-02 2002-03(RE)
2003-04(BE)
Revival in Public Capex
9
Capital Outlay as % of Total Exp (States)
10.08.7 8.1
9.0 9.5 10.1
0.0
2.0
4.0
6.0
8.0
10.0
12.0
1997-98 1998-99 1999-00 2000-01 2001-02(RE)
2002-03(BE)
Revival in Public Capex
10
Growth drivers: From Auto and Construction to Capital Goods
Manufacturing Sector Growth
2.61 2.52.9
3.35
4.07
6.91
6.08
6.90
5.95
7.577.95
7.52
-1.00
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
Q1FY02 Q2FY02 Q3FY02 Q4FY02 Q1FY03 Q2FY03 Q3FY03 Q4FY03 Q1FY04 Q2FY04 Q3FY04 Q4FY04
%
Basic Chemicals & Chemical Products Non-metallic Mineral ProductsBasic Metals Machinery and EquipmentTransport Equipment OthersManufacturing Sector
11
Budget 2004-05:Main Impressions
Clear signals of persistence with reforms
Major rural focus, with objective of de-risking agriculture
Revenue increases appear highly optimistic
Intent to address investment, competitiveness and subsidy issues in February 2005
12
Rise in Plan Spending
Growth in Plan Outlay
3.66.8
0.4
15.5
20.6
10.0
0.0
5.0
10.0
15.0
20.0
25.0
Total Budgetary Support IEBR
2003-04RE 2004-05BE
13
Growth in Plan Infra Spending 2004-05 BE (Budget Support + IEBR)
62.8
41.629.8
19.39.1
-5.8-20.0
0.0
20.0
40.0
60.0
80.0
14
Foreign Direct Investments—current status
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04
US
$ b
illi
on
15
FDI – Expanding Space
Announcement to raise FDI limits in telecom , insurance unanticipated and a positive surprise.
Expected to enhance FDI inflows not just to these sectors but other sectors as well.
However, unless other bottlenecks for investment such as power costs, administrative delays resolved, sharp jump in FDI inflows unlikely.
16
What does all this mean for growth?
In the short run, no significant triggers for acceleration, but no impediments either
Direct tax changes – higher threshold, but education cess – may neutralize each other as far as consumption spending goes
Increased spending will not have much impact in the remaining months of 2004-05
Current momentum in industry and services sustainable
GDP growth for 2004-05 6-6.5%; Non-agri GDP 8% +
17
What does all this mean for growth?
In the long run:
Expanding plan expenditure on infrastructure will clearly contribute (even in medium term, as spending begins)
Roads programme continues, with sightly expanded allocation for the year
De-risking agriculture critical to stabilizing the contribution of this sector to growth
Hope from concerted thrust on investment climate and manufacturing competitiveness
18
Revenue Arithmetic
% Share Growth
2003-04 2004-04BE
Gross Tax revenue 100.0 17.9 24.6
Union Excise 36.2 12.2 18.2
Corporation Tax 24.7 36.4 40.4
Customs 19.4 10.0 9.9
Income Tax 15.8 9.3 26.5
Service Tax 3.3 101.4 70.5
Other Tax 0.6 23.3 -61.9
:
19
Room for Slippage
ITEM SLIPPAGE (Rs crore) COMMENT
Tax Revenue 20,000
(After factoring in 100 in new taxes)
Unrealistic Tax Arithmetic. Premised on recovery of arrears
Expenditure Nil Non-Plan Expenditure reduction Target Ambitious
Fiscal Deficit 0.6 of GDP
20
The Industry – Revenue Nexus
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
1998-99 1999-00 2000-01 2001-02 2002-03 2003-04RE
Ind
. G
row
th
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
Tax R
even
ue G
row
th
IIP Grow th Tax Revenue Grow th
21
What does this mean for the Fiscal Deficit?
Budgeted Fiscal Deficit of 4.4% of GDP as per the requirements of the Fiscal Responsibility and Budget Management Act
Our analysis shows that this is premised on highly optimistic revenue projections
Possibility of slippage of 0.6 per cent of GDP
22
Inflation: Inching Up
6.6
6.6
5.4
4.7
3.9
4.9 5.1 5.4 5
.8
6.5
6.1
4.8
4.5 4.6
5.8
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Apr-
03
May-0
3
Jun-0
3
Jul-03
Aug-0
3
Sep-0
3
Oct-
03
Nov-0
3
Dec-0
3
Jan-0
4
Feb-0
4
Mar-
04
Apr-
04
May-0
4
Jun-0
4
23
Inflation: Sectoral Trends
0.0
2.0
4.0
6.0
8.0
10.0
12.0A
pr-
03
May
-03
Jun
-03
Jul-
03
Au
g-0
3
Sep
-03
Oct
-03
No
v-03
Dec
-03
Jan
-04
Feb
-04
Mar
-04
Ap
r-04
May
-04
Jun
-04
Primary Fuel Mfg
24
Inflation Prospects
Inflation firming up in fuel and manufacturing; direct impact of budget marginal
Result of both demand and supply factors Fuel and metal prices the cost push factors Recovery in manufacturing is the demand pull factor
Prospects of inflation staying in the band of 5- 5.5 per cent.
International crude prices - a risk factor, but current outlook moderate
25
Domestic interest rates—pulls and pressures
‘Push’ factors Harder US rates Sustained demand for
domestic credit Slowdown in forex
inflows affecting domestic liquidity.
Anticipation of overrun in fiscal deficit
‘Pull’ factors RBI’s policy bias
towards keeping rates low
Current high levels of liquidity –estimated at Rs 75000 cr and Rs 90000 cr
Moderate core inflation
26
The interest rate momentum
40
55
70
85
100
115
Basis
po
int
4.50
5.00
5.50
6.00
Per ce
nt
Yield Spread 10-yr Govt Security Yield
27
The interest rate view
Potential fiscal deficit overshoot of Rs 20000 crores and slowdown in forex inflows to drive interest rates up.
100 bps increase in 10 year yields, 20-30 bps at the short end projected by year-end
Turnover tax on debt transactions to push up short-run volatility, reduce volumes
28
The Rupee
US interest rate hike to drive re-alignment of global capital flows
Export growth prospects good, but domestic recovery also causing acceleration of imports
Rate of net forex inflows will slow Rupee to remain stable in 45-46/US$ range for
rest of the year
29
Conclusions
Relief: Reforms are still on track, for now
Concerns: Unrealistic revenue expectations Criticality of delivery mechanisms
Hopes: Concrete solutions for investment, competitiveness and subsidy issues
De-risking agriculture