Indian Economy -STUDY MATERIAL

Indian Economy -STUDY MATERIAL


13th Finance Commission's Functions and the Implications of its Moves
What is the role of the commission? The Constitution provides that certain tax revenues of the Union government be shared between the Centre and the states. President constitutes the finance commission under Article 280 of the Constitution to recommend what percentage of such revenues should go to the states and also how the funds are shared among the states.
Why the resources are shared between the Centre and states? This is necessary due to the fact that the bulk of taxation powers are with the Centre, but expenditure is in the domain of states. In fact, most federal systems need a mechanism to address the issue of vertical distribution of resources. Canada has a federal system very similar to that of India. There, too, a mechanism is in place to address the issue of vertical imbalance and horizontal equity — how the resources are shared amongst states themselves. Australia is another such federal setup.
What are the other key responsibilities? Finance commission is also required to lay down the principles governing the grants-in-aid to states out of the consolidated fund of India. It should also suggest measures to augment the resources of states to supplement the resources of panchayats and municipalities. At times the government can also ask the finance commission to make suggestions on specific issues. The Thirteenth Finance Commission was asked to make recommendations on accounting of off budget subsidies.
Are the recommendations of finance commission binding? The recommendations of the finance commission are not binding on the government. But, the recommendations have the force of precedent and governments generally go by the suggestions. The recommendations relating to distribution of Union taxes and duties and grants-in-aid can be implemented by a presidential order.
When was the First Finance Commission appointed? What is the timeline for recommendations? The First Finance Commission was constituted on 22 November 1951 under the chairmanship of KC Neogy. Thirteen finance commissions have been appointed so far at five-year intervals. Recommendations are valid for a period of five years. The recommendations of the current finance commission will be for the five year period beginning April 1, 2010.
13 finance commission report
The 13th Finance Commission (TFC), whose report was tabled in Parliament recently, has
broken new ground by building incentives into the transfer mechanism. Most of its key recommendations have been accepted by the government.
The States stand to get a larger share of central taxes than before.
Apart from increasing their share of the divisible pool of tax revenues from 30.5 per cent to 32 per cent, the Commission has proposed an additional 2-2.5 per cent for local bodies. Grants-in-aid to States are projected at Rs.315,581 crore over the next five years. The shared taxes and central grants together will take the overall devolution to States from 37.6 per cent to 39 per cent of the central divisible tax revenues.
The TFC does not want any inconsistency between the amounts released to the States and the percentage share in the net tax revenues recommended by it. The States have been impressed upon to comply with the norms set by the Commission if they are to avail themselves of the full benefit of certain transfers. It has called upon the Centre not to lean heavily on surcharges and cesses since collections under these heads are not shared with the States.
The transfer formula, which emphasises fiscal discipline on the part of the States, has been so worked out that non-Plan revenue grants will be made available to fewer States.The system of incentive-based transfer seeks to reward States that comply with the norms prescribed by the TFC.
The Commission has earmarked Rs.50,000 crore of central grants to compensate States for any revenue shortfall on account of switching to the Goods and Services Tax. The compensation will be available even if there is no shortfall, provided the State concerned adopts the GST model the TFC has prepared. This however is going to prove contentious. The empowered committee of State Finance Ministers has worked out its own model wherein tax rates are higher than in the TFC's version. The States want a much higher share of the divisible tax receipts to be transferred to them. Nor will they be happy that the Commission has remained silent on their long standing demands, namely decision-making powers in respect of centrally-sponsored schemes. The government has accepted its suggestion to put a cap on the combined debt of the Centre and the States at 48 per cent of the GDP that is to be achieved by 2014-15.
Budget &survey
1. The three challenges identified by the finance minister in his recent budget

The first, widely noted and much applauded by corporate India, concerned finding means to cross the ‘double-digit growth barrier’.
The second, less glamorous and hence less discussed, is in harnessing economic growth to make development more inclusive.
The third, which attracted little notice and comment, relates to ‘weaknesses in government systems, structures and institutions’ that he recognised as a ‘bottleneck of our public delivery mechanisms’.
2. Coveted position in forex, gold

In its efforts to improve foreign exchange reserves, India has now become the 10th largest gold-holding nation in the world.
It has also emerged as the fourth-largest foreign exchange reserves holder only after China, Japan and Russia, says the Economic Survey 2009-10.
3. A critical area

By allocating 46 per cent of the total plan expenditure to infrastructure development,
Finance Minister Pranab Mukherjee has clearly shown how imperative this is to return to a higher growth trajectory.
That highways, railways, and power got a lion's share of the allocations for 2010-11 signals a clear priority to connectivity and electricity. Rural roads too got a quantum jump in funding.
No less significant is the government's commitment to involving the private sector all the more in infrastructure development. Witness Mr. Mukherjee's statement: “With development and economic reforms, the focus of economic activity has shifted towards the non-governmental actors, bringing into sharper focus, the role of government as an enabler.” So, the objective seems to be to create an “enabling ethos” for Public Private Partnership (PPP).
Going by the Rs.1,73,552 crore allocation for upgrading both urban and rural infrastructure, it is evident that the government wants to accelerate development of high quality physical infrastructure such as roads, ports, airports, railways and power.
In this mix, the road and energy sectors come in for special attention for two reasons — some of the ongoing programmes are critical and there has been a perpetual shortfall in the achievement of targets over successive Five-Year Plan periods.
The last two years have seen a substantial increase in investment in infrastructure, but as a proportion of the GDP the figure is just around six per cent, three per cent short of the requirement.
The Finance Minister has raised the budget allocation for the road transport sector from Rs.17,520 crore to Rs. 19,894 crore — a 13 per cent increase. The government, notably the Highways, and the Planning Commission have targeted a construction pace of 20 kilometres-a-day of the National Highways.
Though a massive highways upgradation and expansion programme was launched way back in 1999 and subsequently revamped in 2006, the progress has not been satisfying. Litigation and implementation delays continue to hamper the effort.
Similarly, on the power front, there has been a major shortfall in reaching the targets for the 8th, 9th, and 10th Five-year Plans. Even the 11th Plan target is unlikely to be reached. The allocations for the power sector have been doubled for the coming year, and a major impetus given to new and renewable energy.
It is not enough for governments to just allocate funds. Infrastructure projects must be made attractive for private and foreign investors, and the States need to be fully involved in implementing and monitoring them.
4. MSMEs & the budget

Firstly, the outlay for the MSME sector has been enhanced by around Rs 600 crore to Rs 2,400 crore, presumably to implement recommendations of the prime minister’s taskforce.
Secondly, the policy of 2% interest subventions for exports announced last year for MSMEs and certain employment-intensive sectors such as handicrafts, carpets, etc, have been extended for one more year.
Thirdly, it is announced that the Reserve Bank of India is considering more licences to banks including non-banking finance companies. Such a move would eventually benefit MSMEs the most.
Fourthly, an amendment is proposed whereby an eligible small scale industry (SSI) unit can avail cenvat credit against purchase of capital goods in full (100%) in the same financial year of receipt of such capital goods (earlier, it was 50% in the year of receipt and rest was allowed in subsequent year only).
Fifthly, SSIs are allowed to pay the duty on the goods cleared by them once in a quarter instead of the monthly basis.
Finally, the proposed independent evaluation office under the deputy chairman of the Planning Commission might as well bring in the much-needed transparency and result-orientation in promotional policies. Currently, implementation of most of the schemes is in a mess, including those meant for MSMEs.
5. PSUs to buy 20% from small units

The government is reportedly considering a proposal whereby all public sector companies, including railways and entities under the defence ministry, will have to procure 20% of their total requirements from MSEs. The size of public procurement in India is huge and it could provide a fillip to the sector.
The policy will cover a wide range of supplies, services and works required by governments, local authorities and public organizations. According to estimates, MSEs are set to benefit from a Rs 34,000 crore windfall annually once the policy comes into effect.
Currently, there are about 26 million micro, small and medium enterprises in the country, which contribute about 45% of the country’s total manufactured output and about 40% of the export income. The sector employs over 42 million people.
Panel on BSNL submits report
The Sam Pitroda-led high-level committee, formed to suggest the restructuring of Bharat Sanchar Nigam Limited (BSNL) has submitted a detailed report to Prime Minister Manmohan Singh.
The report is said to comprise suggestions on BSNL's controversial IPO issue and the 9.3-crore GSM line tender, which has been put on hold following a directive from the Central Vigilance Commission
Kobelco sets up facility at Sri City
Kobelco Construction Equipment India Pvt. Ltd., a subsidiary of Kobelco Group of Japan, is setting up an equipment machinery facility at the fast coming up multi-product special economic zone (SEZ) of Sri City at Tada in Andhra Pradesh.
The SEZ with a domestic tariff zone (DTZ) is coming up on 6,000 acres.
the proposed plant will have a local content of 70 per cent. It will import critical items such as engines, hydraulic pumps and the like.
Banks can lend below base rate too
Loans against fixed deposits, loans given by a bank to its own employees, as well as restructured loans, where borrowers get more time and pay lower rates to avert defaults, can be given at interest rates that are below the base rate — the new benchmark rate for pricing loans.
While allowing these exemptions, RBI has also deferred the date for implementation of the base rate by banks to July 1. Earlier, RBI had said the base rate system would come into effect from April 1 — a deadline, which most banks found difficult to meet.
The regulator has, however, ruled out any lending to corporates below the base rate.
For a bank, the base rate will be its minimum cost at which it can lend and the risk premium on a loan would be the mark up over the base rate. The base rate, which will replace the prime lending rate (PLR), is aimed at bringing more transparency in loan pricing. At present, around 70% of the loans are below PLR which ranges between 11.75% and 12.25%.
The base rate should be calculated by banks taking into account the cost of deposits, profit margin and establishment cost among other things.
Jaipur to have country's first low-cost airport
India's first low-cost airport is all set to come up near Jaipur in Rajasthan. The civil aviation ministry has cleared a proposal to set up the airport 60 km off Jaipur. The no-frills facility is expected to cost just Rs 500 crore and have a 7000 ft runway in the first phase.
The proposed airport is only 12 km from National Highway 8, which connects Jaipur to Delhi. The promoter of the airport, Rajasthan Aviation Infrastructure (India), has tied up with Fraport AG of Germany for technical consultancy and is planning to get the airport up and running by 2014.
What is the share of Indian Railways in the country's traffic?
It currently has a low share of 30% of country’s freight market and an insignificant 16-18% of total passenger business.
Government to infuse 35K crore into banks over two years
The central government has reportedly chalked out a two-year plan to infuse around Rs 35,000 crore of capital in public sector banks to enable them to meet the economy’s credit requirement.
Banks’ capital structure consist of Tier-I and Tier-II capital. The major components of Tier-I capital are equity share capital, equity share premium and statutory reserves. It is not just these, there can be innovative forms of Tier I capital too such as perpetual debt instruments, or perpetual non-cumulative preference shares etc.
According to Basel-II requirements, banks need to maintain a CAR of 12%, including Tier-I and Tier-II capital.
Core capital
THIS is the term that is used to describe a bank’s net-owned funds. Each bank is required to have a certain amount of capital in relation to loans and investments that it makes during the course of its business. The extent of capital required is prescribed in the form of a capital adequacy ratio (capital: loans and investments) This capital adequacy can be achieved through a combination of equity and subordinated debt. The equity portion (paid-up capital and reserves) cannot be less than half of the prescribed minimum capital adequacy requirement. Internationally too, after the financial crisis, the focus is shifting from capital requirement to ‘Tangible Common Equity’ which excludes any form of debt.
Business deals beckon firms at Hyderabad civil aviation exhibition
HYDERABAD:
The stage is set for the commencement of India Aviation 2010, the second edition of the international civil aviation exhibition and conference, at the Begumpet airport .
After the success of the first edition in October 2008, India Aviation 2010 will include static and flying display of over 40 aircraft, providing an ideal platform for companies to further their commercial aircraft activities and support services.
Eurocopter, Pawan Hans to form venture
Eurocopter, world's leading helicopter manufacturer announced that it would form ventures with Pawan Hans Helicopters for maintenance repair and overhaul (MRO) and training facilities either in Mumbai or Delhi.

Union Budget, 2010
On February 26, 2010, Finance Minister Pranab Mukherjee presented a Budget that broadly focused on fiscal stabilization. The Union Budget was presented at a time when the Indian economy was on the path of revival and almost all demand indicators had turned significantly positive. Investment and consumption demand was also on a revival mode. The buoyancy in the manufacturing sector and up-tick in import and export were also working well for economic growth prospects. In the current economic scenario, what was required from the Budget was a further push for consumption and investment. The Budget announcements tried to do just that.

Highlights:

Additional Rs 1,65,000 cr for bank re-capitalisation
Rs 3000 cr for agricultural impetus
Farm loan payments to be extended for six months
Fertilizer subsidy to be reduced
Rs 100 cr woman farmer fund scheme
Coal regulatory authority to be set up
Clean energy fund to be established
Interest subvention of 2% to be extended for handicrafts and SMEs
Rs 200 cr for Tamil Nadu textile sector
Interest subvention for housing loans up to 1 lacs
Allocation to defence raised to Rs 1.47 lakh cr
Defence capex raised to Rs 60,000 cr
Divestment target of Rs 25,000 cr
Rs 1200 cr assistance for drought in Bundelkhand
Rs 48000 cr for Bharat Nirman
NREGA scheme allocation raised to Rs 41,000 cr
Allocation to health Rs 22,300 cr
Allocation for school education up from Rs 26,800 cr to Rs 31036 cr
Allocation to power sector at Rs 5130 cr
Rs 10,000 cr allocated for Indira Awaas Yojna
Social Security Fund to have corpus of over Rs 1000 cr
Rs 2400 cr for MSMEs
Government to contribute Rs 1000 per month for pension security
Rs 5400 cr allocated for urban development
Rs 66100 cr allocated for rural development
Rs 1900 cr allocated for UID project
Gross tax receipts Rs 7.46 lakh cr
Government to set up National Mission for delivery of justice
15% rise in planned expenditure
Fiscal deficit target of 5.5% in FY11
Excise on all non smoking tobacco raised
Televisions to be costlier
Mobile phones to become cheaper
Cement to be costlier
Refrigerators to be costlier
Jewellery to be more expensive
Monorail granted project import status
CDs to be cheaper
Excise duty on CFL halved to 4%
Bank farm loan target: Rs 3.75,lakh crore
Nutrient based fertiliser subsidy scheme to come into force from April 1, 2010
To build 20 km of highway every day
Income tax on income upto Rs 1.6 lakh: Nil
Income tax on income above Rs 1.6 lakh and upto Rs. 5 lakh: 10 per cent
Income tax on income above Rs.5 lakh and upto Rs. 8 lakh: 20 per cent
Income tax on income above Rs. 8 lakh: 30 per cent
Economic Survey 2010

Economy likely to grow by up to 8.75 per cent in 2010-11.
Full recovery; return to 9 per cent growth in 2011-12.
Broad recovery gives scope for gradual stimulus roll back.
High double-digit food inflation in 2009-10 major concern.
Signs of food inflation spreading to other sectors.
Farm & allied sector production falls 0.2% in 2009-10.
Need serious policy initiatives for 4% agriculture growth.
Moots direct food subsidy via food coupons to households.
Favours making available food in open market.
Favours monthly ration coupons usable anywhere for poor.
Gross fiscal deficit pegged at 6.5 pc of GDP in 2009-10.
India 10th largest gold holding nation at 557.7 tonnes.
Exports in April-December 2009 down 20.3 per cent.
Imports in April-December 2009 down 23.6 per cent.
Trade gap narrowed to USD 76.24 bn in April-December.
32.5% savings & 34.9% investment (of GDP in 2008-09) put India in league of world's fastest growing nations.
Government initiates steps to boost private investment in agriculture.
Wants credit available at reasonable rates on time for private sector to invest in agriculture.
Slowdown in infrastructure that began in 2007, arrested.
Domestic oil production to rise 11 per cent in 2009-10.
Gas output up 52.8 per cent to 50.2 billion cubic meters with RIL starting production.
India world's 2nd largest wireless network with 525.1 million mobile users.
Virtually every second Indian has access to phone.
Auction for 3G spectrum to provide existing and foreign players to bring in new technology and innovations.