The Big Picture

1. What are GDP and GDP growth rate?

Gross Domestic Product is the value of a country’s total economic output produced in a particular period. For example, if in India in a particular year, 10 chairs worth Rs. 15 each and 100 bags worth Rs. 47 each are produced and services amounting to Rs. 10000 are given, the total GDP of India is = 150+4700+10000, which is Rs. 14850.

GDP growth rate is the rate at which GDP is increasing over a year. So, if the GDP of last year was Rs. 500 and GDP of current year is Rs. 650, we can say that GDP growth rate is 30%. Now, the problem is, if we compare GDP of a year with GDP of some previous years, results may be misleading. This is so because GDP is directly affected by inflation/deflation. In case of inflation, the value of GDP will rise because prices increase. Now, even if our economic output remains the same (10 chairs, 100 bags etc), our GDP is shown to be increasing. To counter this problem, the concept of “Real GDP” is used. Real GDP is the GDP which is affected by economic output but not by price. This is calculated by fixing a particular year as “base year” and using prices of that year to determine GDP of the present year (taking output of present year). Growth rate is calculated in terms of Real GDP and is called “Real GDP growth rate”. In general, economic and political discussions, the word “GDP” is used to represent Real GDP. So, whenever you hear someone talking about GDP, they are actually talking about “Real GDP”. Even in our articles, the same practice is followed.

2. Explain “Direct Tax” and “Indirect Tax”.

Direct tax is the tax which is paid and borne by the same person. That is, he cannot recover that amount of tax from someone else. India follows progressive direct-tax structure under which, a person earning more, pays more tax and vice-versa.

Indirect tax is the tax which is paid by a person but he recovers the tax from his customer. For example, service tax is charged from us when we eat in a restaurant. The tax is paid to the govt by the owner of the restaurant but he recovers the same from us. The burden of Indirect taxes like VAT, service tax, customs, excise etc falls almost equally on everyone, irrespective of their income.

3. What is “disinvestment”?

In simple terms, disinvestment is selling an asset. Generally, this word is used when govt sells its assets.

 

The Big picture from the Union Budget 2016-

  • Total Plan expenditure for the year 2016-17 is estimated to be Rs. 5,50,010 crores, an increase of 18.21% from the last budget. Total Non-plan expenditure is estimated to be Rs. 14,28,050 crores, a corresponding increase of 8.83%. Total expenditure is increased by 11.28%, and is now Rs. 19,78,060 crores.
  • Total receipts are estimated at Rs. 16,30,888 crores (an increase of 12.5%), out of which, share of states and UTs is Rs. 5,70,337 crores. Non-tax revenue receipts are Rs. 3,22,921 crores.
  • Market loans taken by govt will fall by 6.85% and are estimated at Rs. 4,25,181 crores while short-term borrowings are Rs. 16,649 crores, a reduction of 44.62%.
  • Analysing our estimated tax revenue, we find that service tax and custom duty receipts are estimated to increase by 10.12% and 10.4% respectively. The estimated receipts from the two sources are Rs. 2,31,000 crores and Rs. 2,30,000 crores, respectively. Income tax receipts are scheduled to increase by 6.15%, to Rs. 8,47,098 crores.
  • It must be noted that, as per recommendations of 14th Finance Commission, share of central govt in tax revenue is now decreased from 68% to 58%. At the same time, recommendations of 7th Pay Commission and OROP scheme have caused a significant dent in govt finances.
  • Government is planning major disinvestments this year to raise funds. It is planning to sell its stake (shares) in a few Public Sector Undertakings. However, considering the regular decline in the stock markets, meeting the targets seems unlikely.
  • Our (Real) GDP rate is 7.6% while Fiscal Deficit for the year 2016-17 is estimated to be 3.5% of GDP (it was estimated at 3.9% last year). Fiscal deficit, in absolute terms as well, is expected to fall from Rs. 5,35,090 crores to Rs. 5,33,904 crores.
  • From next year, Fiscal Deficit will be estimated as a range (e.g. 3.3-3.7%), instead of an absolute number (like 3.4%). This will give the govt more breathing space and allow making changes according to the situation and circumstances.
  • As next year will also be the last year of the 12th Five-Year Plan and Planning Commission is no longer operational, the classification of expenditure on the basis of “Plan” and “Non-Plan” will be discontinued from next year. Instead, classification as “Capital expenditure” and “Revenue Expenditure” will be done.
  • Aadhar card will get a statutory status, so that the benefits of subsidies can be directly transferred to people.

Implications-

  • The decline in loans and borrowings of the govt are positive signs. Moreover, fall in Fiscal Deficit, in absolute and relative terms, is really encouraging.
  • Increase in Custom duty receipts is largely due to increase in import duties. Though this will help the local producers (as imported items will get expensive), India will face problems in World Trade Organisation. WTO tries to facilitate easy trade across countries and this move by India will be taken as “imposing trade restrictions and hampering competition”.
  • Increasing the effective rate of service tax from 14.5% to 15% is contrary to govt objectives. The govt has increased service tax from 12.36% to 15% in the last 1 year. It must be understood that indirect taxes are borne by everyone. So, when the govt is trying to take measures to help the poor, the increased service tax will be a big complication. Service tax increases prices of almost all goods and services, so, the resultant inflation will severely affect the poor.
  • While the Goods and Services Tax (GST) bill is stuck in Parliament, the govt should focus on the Insolvency and Bankruptcy Code. This Code is actually a lot more important and beneficial than GST. It will promote investments and liquidity, develop credit markets and encourage entrepreneurship. Postponing major Banking reforms till next year is also a mistake.

We hope you liked this article. If you have any questions, please do ask via comments. We will be very happy to get back to you with all the answers! From the next article, we will be discussing the impact of the budget on a group of related sectors of the economy. Our next article will be released tomorrow. Happy learning!

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