Demand conditions in the economy remained tepid during Q2 of 2012-13. Private consumption,
the mainstay of aggregate demand, continued to decelerate, reflecting the impact of high
inflation. However, government consumption accelerated during the first half of the year.
The envisaged fiscal correction now underway is expected to improve demand management.
Steps to contain subsidies need to be persisted with and expedited so that fiscal imbalance is
reduced and resources are freed to step up capital expenditure next year. There was a marginal
sequential rise in investment in Q2 of 2012-13, as reflected in a modest increase in gross fixed
capital formation as also the sanctioned project assistance during the quarter. A turnaround in
the investment cycle, which has been in downturn for two years, crucially hinges on increased
public investment to crowd in private investment and resolution of power and road sector
bottlenecks.
Expenditure side of GDP continued to
show weak demand
II.1 Growth in GDP at market prices
decelerated sharply to 2.8 per cent in Q2 of
2012-13 from 6.9 per cent in the corresponding
period of 2011-12, the lowest in the previous
13 quarters (Table II.1). Though private final
consumption expenditure (PFCE) continues to
be the major driver of growth, its contribution
to growth has declined since Q4 of 2011-12
(Table II.2).
II.2 During H1 of 2012-13, growth in GDP
at market prices was significantly lower than
that at factor cost due to lower growth in net
indirect taxes. The deceleration was reflected
in all components except government final
consumption expenditure (GFCE). Growth in
private consumption moderated due to high
inflation coupled with lower income growth
during 2012-13 so far. Net exports growth
continued to be negative partly due to weak
external demand. This is in line with the record
current account deficit observed during Q2 of
2012-13.
II.3 Going forward, possible moderation
in inflation would support private final consumption. The announced efforts towards
fiscal consolidation could also restrain
government final consumption somewhat.
More definitive indication of a pick-up in
gross fixed capital formation is yet to be seen.
On the whole, the growth process during
2012-13 would be largely driven by private
consumption.
Problems facing infrastructure sector still
constraining investment
II.4 As on November 1, 2012, out of 563
central sector projects (of `1.5 billion and
above), largely concentrated in five sectors,
viz., road transport and highways, power,
petroleum, railways and coal, nearly half were
reported to be delayed. As a result, there were
significant cost overruns in many of these
projects. The major factors reported for the
time overruns were delays in land acquisitions/
environmental clearances/tie-up of project
financing/finalising of engineering designs,
lack of infrastructure support and linkages,
change in scope and other contractual issues.
The maximum number of delays was reported
for two key infrastructure sectors – power, and
road transport and highways.
Table II.1: Expenditure Side GDP (2004-05 prices) |
(Per cent) |
Item |
2010- 11* |
2011- 12# |
2011-12 |
2012-13 |
2011-12 |
2012-13 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
HI |
HI |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
10 |
11 |
Growth Rates |
Real GDP at market prices |
9.6 |
6.9 |
9.0 |
6.9 |
6.2 |
5.6 |
3.9 |
2.8 |
7.9 |
3.4 |
Total Consumption Expenditure |
8.1 |
5.4 |
4.9 |
4.9 |
6.1 |
5.8 |
4.7 |
4.4 |
4.9 |
4.6 |
(i) Private |
8.1 |
5.5 |
4.9 |
4.6 |
6.4 |
6.1 |
4.0 |
3.7 |
4.7 |
3.8 |
(ii) Government |
7.8 |
5.1 |
4.9 |
7.2 |
4.7 |
4.1 |
9.0 |
8.7 |
6.0 |
8.8 |
Gross Fixed Capital Formation |
7.5 |
5.5 |
14.7 |
5.0 |
-0.3 |
3.6 |
0.7 |
4.1 |
9.7 |
2.3 |
Change in Stocks |
37.4 |
2.4 |
7.1 |
2.8 |
0.4 |
-0.4 |
-1.2 |
-0.1 |
5.0 |
-0.7 |
Valuables |
32.4 |
7.9 |
9.8 |
9.4 |
2.9 |
9.3 |
-55.4 |
-27.9 |
9.6 |
-41.5 |
Net Exports |
5.5 |
-30.7 |
-23.2 |
-46.7 |
-117.9 |
117.8 |
-2.1 |
-11.6 |
-35.5 |
-7.5 |
Discrepancies |
38.9 |
-112.7 |
-51.8 |
-119.6 |
-152.0 |
-124.0 |
-123.7 |
51.1 |
-88.0 |
-276.3 |
Relative Shares |
Total Consumption Expenditure |
70.1 |
69.1 |
70.1 |
70.8 |
72.7 |
63.6 |
70.6 |
71.9 |
70.4 |
71.3 |
(i) Private |
58.7 |
57.9 |
59.5 |
60.3 |
60.4 |
52.2 |
59.5 |
60.8 |
59.9 |
60.2 |
(ii) Government |
11.4 |
11.2 |
10.6 |
10.5 |
12.3 |
11.4 |
11.1 |
11.1 |
10.5 |
11.1 |
Gross Fixed Capital Formation |
32.5 |
32.0 |
33.9 |
33.4 |
30.3 |
30.9 |
32.8 |
33.8 |
33.6 |
33.3 |
Change in Stocks |
3.7 |
3.5 |
3.7 |
3.6 |
3.4 |
3.4 |
3.5 |
3.5 |
3.7 |
3.5 |
Valuables |
2.4 |
2.4 |
2.6 |
2.7 |
2.1 |
2.2 |
1.1 |
1.9 |
2.7 |
1.5 |
Net Exports |
-6.0 |
-7.3 |
-8.6 |
-11.3 |
-11.1 |
0.6 |
-8.5 |
-12.3 |
-10.0 |
-10.4 |
Discrepancies |
-2.5 |
0.3 |
-1.7 |
0.8 |
2.6 |
-0.6 |
0.4 |
1.2 |
-0.4 |
0.8 |
Memo: |
|
|
|
|
|
|
|
|
|
|
Real GDP at market prices
(` billion) |
52,368 |
55,959 |
13,174 |
13,111 |
14,377 |
15,296 |
13,693 |
13,480 |
26,285 |
27,173 |
*: Quick Estimates. #: Revised Estimates.
Source: Central Statistics Office |
II.5 The problems in the power sector are yet
to be fully resolved despite concerted efforts
by the government. On the coal linkage issue,
while power producers have started signing
new fuel supply agreement with Coal India
Limited that commits supply of 65 per cent of the assured coal quantity through domestic
sources and another 15 per cent in the form of
imported coal, the key issue of price pooling
remains unresolved. Given the large price
differential between domestic and imported
coal, the understanding on price pooling is essential to bridge the demand-supply gap
through imports. Also, adequate response
from state governments on the discom
restructuring package is not forthcoming. The
state governments and their state electricity
boards need to quickly commit themselves to
the restructuring of their debt with all attendant
requirements.
Table II.2: Contribution-Weighted Growth Rates of Expenditure-Side GDP
(2004-05 Prices)* |
(Per cent) |
|
2011-12 |
2012-13 |
Q1 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
1. Private Final Consumption Expenditure (PFCE) |
3.0 |
2.8 |
3.9 |
3.2 |
2.4 |
2.2 |
2. Government Final Consumption Expenditure (GFCE) |
0.5 |
0.8 |
0.6 |
0.5 |
1.0 |
0.9 |
3. Gross Fixed Capital Formation (GFCF) |
4.7 |
1.7 |
-0.1 |
1.1 |
0.2 |
1.4 |
4. Change in Stocks (CIS) |
0.3 |
0.1 |
0.0 |
0.0 |
0.0 |
0.0 |
5. Valuables |
0.3 |
0.2 |
0.1 |
0.2 |
-1.5 |
-0.8 |
6. Net Exports (i + ii) |
-1.8 |
-3.8 |
-6.4 |
4.0 |
-0.2 |
-1.3 |
(i) Exports |
3.9 |
4.4 |
1.5 |
4.6 |
2.4 |
1.1 |
(ii) Imports |
5.7 |
8.2 |
7.9 |
0.6 |
2.6 |
2.4 |
7. Sum (1 to 6) |
7.0 |
1.8 |
-2.0 |
9.0 |
1.9 |
2.4 |
8. Discrepancies |
2.0 |
5.1 |
8.2 |
-3.4 |
2.1 |
0.4 |
9. GDP at Market Prices (7+8) |
9.0 |
6.9 |
6.2 |
5.6 |
3.9 |
2.8 |
*: Contribution-weighted growth rate of a component of expenditure side GDP is obtained as follows:
(Y-o-y change in the component ÷ Y-o-y change in GDP at constant market prices) × Y-o-y growth rate of GDP at constant market prices.
Source: Central Statistics Office. |
II.6 In the road sector, the record tendering
by the National Highways Authority of India
awarding 6,491 kilometres of road projects
in 2011-12 has not helped in reversing the
declining investment in this sector as a very
large number of these projects have not
achieved environmental clearances. Some
projects are also stuck due to land acquisition
issues. In addition, firms engaged in these
projects are finding it difficult to achieve
financial closure. Investment in road sector
has collapsed in 2012-13, with scant interest in
new projects, large delays and poor execution
in existing projects. Even the projects being
awarded on engineering, procurement and
construction (EPC) basis, where the state bears the cost, are making little headway.
This is because the new legal framework
necessitates upfront environmental clearances
for even small stretches of land, before private
contractors execute the project.
Sales growth moderates further, indicating
slack demand
II.7 Sales growth for listed non-government
non-financial (NGNF) companies moderated
and reached its lowest level in three years in
Q2 of 2012-13 (Table II.3). The deceleration in
sales was spread across manufacturing, IT and
non-IT services sectors, all size groups and all
use-based groups, except intermediate groups,
with sharper deceleration in motor vehicles,
iron and steel, and textiles. However, net profits
recorded a growth of more than 25 per cent in
Q2 of 2012-13 reversing the declining trend
of the previous four quarters. The growth in
profits was on a low base and reflected support
from other income and lower rate of growth in
interest payments. Resultantly, profit margins
also improved during the quarter (Table II.4).
Inventory accumulation, reflected in the change in stock-to-sales ratio, went up during
the quarter but remained below the recent peak
observed in Q3 of 2011-12 (Chart II.1).
Table II.3: Corporate Sector- Financial Performance |
Indicator |
Q2:2011-12 |
Q3:2011-12 |
Q4:2011-12 |
Q1:2012-13 |
Q2:2012-13 |
1 |
2 |
3 |
4 |
5 |
6 |
No. of Companies |
2,241 |
|
Growth Rates (Y-o-y growth in per cent) |
Sales |
18.8 |
19.7 |
15.5 |
13.2 |
11.1 |
Expenditure, of which |
21.9 |
25.3 |
16.7 |
15.5 |
11.9 |
Raw Material |
23.0 |
25.4 |
16.6 |
13.2 |
14.1 |
Staff Cost |
16.5 |
18.7 |
14.4 |
17.6 |
14.8 |
Power and fuel |
31.4 |
30.5 |
25.4 |
17.7 |
13.9 |
Operating Profits (EBITDA) |
0.2 |
-5.1 |
-1.0 |
-4.0 |
10.9 |
Other Income* |
41.9 |
67.1 |
51.4 |
29.0 |
50.9 |
Depreciation |
11.7 |
10.5 |
11.0 |
9.9 |
9.4 |
Gross Profits (EBIT) |
2.8 |
-2.0 |
3.7 |
-3.0 |
19.0 |
Interest |
58.5 |
44.4 |
36.9 |
37.0 |
11.4 |
Tax Provision |
5.1 |
-1.6 |
2.5 |
-4.5 |
10.4 |
Net Profit |
-14.2 |
-29.7 |
-5.8 |
-10.3 |
25.8 |
|
Select Ratios (in per cent) |
Change in stock# to Sales |
0.6 |
2.2 |
0.9 |
1.0 |
1.5 |
Interest Burden |
29.1 |
28.1 |
26.3 |
32.3 |
27.2 |
EBITDA to Sales |
13.1 |
12.6 |
13.1 |
12.8 |
13.1 |
EBIT to Sales |
11.9 |
11.2 |
12.5 |
11.5 |
12.7 |
Net Profit to Sales |
6.3 |
5.0 |
7.0 |
6.1 |
7.1 |
#: For companies reporting this item explicitly.
*: Other income excludes extraordinary income/expenditure if reported explicitly |
Table II.4: Corporate Sector Financial Performance (Q-o-q growth in per cent) |
Indicator |
2011-12 |
2012-13 |
Q2 |
Q3 |
Q4 |
Q1 |
Q2 |
1 |
2 |
3 |
4 |
5 |
6 |
No. of Companies |
2,241 |
Sales |
2.8 |
6.4 |
8.6 |
-4.7 |
0.9 |
Expenditure, of which |
4.1 |
8.5 |
6.7 |
-4.1 |
0.9 |
Raw Material |
0.9 |
8.3 |
9.5 |
-5.4 |
1.7 |
Staff Cost |
5.6 |
4.3 |
1.2 |
5.6 |
3.1 |
Power and fuel |
0.9 |
3.7 |
5.5 |
6.6 |
-2.3 |
Operating Profits (EBITDA) |
-10.3 |
2.3 |
13.0 |
-7.4 |
3.7 |
Other Income |
21.5 |
-7.8 |
50.0 |
-23.3 |
42.2 |
Depreciation |
2.3 |
2.2 |
8.3 |
-3.0 |
1.8 |
Gross Profits (EBIT) |
-9.1 |
0.4 |
20.8 |
-12.1 |
11.5 |
Interest* |
15.5 |
-3.1 |
13.3 |
8.1 |
-6.0 |
Tax Provision |
-10.8 |
-4.8 |
14.6 |
-1.9 |
3.2 |
Net Profit |
-16.0 |
-15.4 |
52.7 |
-17.4 |
17.8 |
*: Some companies report interest on net basis. |
II.8 Early results of 166 companies for Q3 of
2012-13 indicate continued moderation in sales.
Expenditure growth also decelerated further
and profit margins remained almost intact.
However, the early results are from a small set
of companies which are not representative of
the overall corporate sector.
Marginal increase in envisaged project
expenditure
II.9 Based on data received from 39 banks/
financial institutions as also on financing from
external commercial borrowings (ECB) and foreign currency convertible bonds (FCCB),
there was a small increase in the total cost of
projects sanctioned in Q2 of 2012-13. However,
the amount of sanctioned assistance was much
lower than during the corresponding quarter of
the previous year (Chart II.2).
Fresh policy measures helping fiscal
consolidation
II.10 In October 2012, the government
announced a revised fiscal roadmap following
the recommendations of the Report of
the Committee on Roadmap for Fiscal
Consolidation (Chairman: Dr. Vijay L. Kelkar).
As per the revised roadmap, the gross fiscal
deficit (GFD) for 2012-13 is estimated at 5.3 per cent of GDP compared with the budget
estimate of 5.1 per cent. The government’s
fiscal consolidation plan envisages fiscal
deficit to decline to 4.8 per cent of GDP in
2013-14 and by 0.6 percentage points every
year thereafter to reach 3.0 per cent of GDP
in 2016-17.
![2](../scripts/images/03AD251013MD_2.gif)
II.11 The government has taken several steps
to curtail deficit and put government finances on
a more sustainable path. In a significant move,
in January 2013, the government partially
deregulated the prices of diesel, allowing full
adjustment of prices for bulk consumers and
a staggered increase for others. On the other
hand, the annual supply of subsidised LPG
cylinders per household has been increased
to nine, from the cap of six announced in
September 2012. These measures on the whole
constitute an important signal to address fiscal
imbalances, though its impact in the current
fiscal year is expected to be negligible.
II.12 Renewed thrust to disinvestment of
public sector undertakings so as to meet the
budgetary target, cut-back in both plan and
non-plan expenditure and increased reliance
on direct cash transfers to cut leakages in
subsidies also constitute important steps in
reducing fiscal deficit. The government has,
however, committed to retaining allocations to
all flagship schemes to protect the poor. On tax
reforms, it has committed to introducing the
goods and services tax (GST) and reviewing
the Direct Tax Code (DTC). More recently,
the government has reiterated its stance of
restricting expenditure in the last quarter of
the financial year to 33 per cent of the budget
estimates, and that during March to 15 per cent,
to curb the bunching of expenditure towards
the close of the financial year.
II.13 Further fiscal consolidation measures
would be necessary in near term. The Kelkar
committee has recommended several steps
in this direction. For instance, over the next
two to three years, resources could be raised by monetising government’s unutilised and
under-utilised land resources. These resources
could be used to finance infrastructure needs
particularly in urban areas. Such innovative
measures would need to be examined though,
as such asset sales do not support a structural
correction in the fiscal position
Fiscal deficit remains high as slowdown
impacts revenues
II.14 During the first eight months of the
current year, the fiscal deficit amounted to 4.1
per cent of GDP or 80.4 per cent of the budget
estimates (Table II.5). Revenue deficit, at
3.1 per cent of GDP, was marginally lower
than in the corresponding period of the previous
year. Given the current trends, significant
shortfall in tax revenues and some shortfall
in budgeted spectrum receipts is likely.
Realisation of budgeted disinvestment proceeds
crucially hinges on market conditions.
However, the government is working to
achieve the revised fiscal deficit target of 5.3
per cent with containment of both plan and
non-plan expenditure during the last quarter of
the year.
Growth slowdown remains a drag on
revenue collections
II.15 Revenue collections remained sluggish
at 47.6 per cent of budget estimates during
April-November 2012 (49.7 per cent in the
previous year). The growth in collection of
corporation tax and excise duties remained
modest due to continued growth moderation,
while customs duty collections were adversely
impacted, reflecting the deceleration in
imports. Collections under personal income
tax, however, remained buoyant partly due
to lower refunds compared to previous year.
Non-tax revenue receipts, at 46.3 per cent
of budget estimates, were also significantly
lower than the receipts of 57.7 per cent during
the corresponding period of the previous
year due to the poor response to spectrum auction and the reported staggering of auction
receipts.
Table II.5: Central Government Finances during April-November 2012 |
(` billion) |
Item |
2012-13
Budget
Estimates |
April-November |
Percentage to
Budget Estimates |
Growth Rate
(Per cent) |
2011-12 |
2012-13 |
2011-12 |
2012-13 |
2011-12 |
2012-13 |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
1. Revenue Receipts (i+ii) |
9356.9 |
3928.1 |
4458.2 |
49.7 |
47.6 |
-17.6 |
13.5 |
i) Tax Revenue (Net) |
7710.7 |
3204.7 |
3696.0 |
48.2 |
47.9 |
8.0 |
15.3 |
ii) Non-Tax Revenue |
1646.1 |
723.4 |
762.2 |
57.7 |
46.3 |
-59.8 |
5.4 |
2. Non-Debt Capital Receipts |
416.5 |
145.1 |
89.0 |
26.4 |
21.4 |
-47.1 |
-38.7 |
3. Non-Plan Expenditure |
9699.0 |
5394.2 |
6242.6 |
66.1 |
64.4 |
12.4 |
15.7 |
of which |
|
|
|
|
|
|
|
i) Interest Payments |
3197.6 |
1659.1 |
1828.6 |
61.9 |
57.2 |
23.3 |
10.2 |
ii) Food Subsidies |
750.0 |
440.7 |
620.0 |
72.8 |
82.7 |
-12.3 |
40.7 |
iii) Fertiliser Subsidies |
609.7 |
450.4 |
552.9 |
90.1 |
90.7 |
17.7 |
22.8 |
iv) Petroleum Subsidies |
435.8 |
233.0* |
403.0 |
98.4 |
92.5 |
49.1 |
72.9 |
4. Plan Expenditure |
5210.3 |
2212.8 |
2433.9 |
50.1 |
46.7 |
4.9 |
10.0 |
5. Revenue Expenditure |
12861.1 |
6732.7 |
7653.2 |
61.4 |
59.5 |
9.1 |
13.7 |
6. Capital Expenditure |
2048.2 |
874.2 |
1023.3 |
54.4 |
50.0 |
18.4 |
17.0 |
7. Total Expenditure |
14909.3 |
7606.9 |
8676.5 |
60.5 |
58.2 |
10.1 |
14.1 |
8. Revenue Deficit |
3504.2 |
2804.6 |
3195.0 |
91.3 |
91.2 |
100.1 |
13.9 |
9. Gross Fiscal Deficit |
5135.9 |
3533.7 |
4129.3 |
85.6 |
80.4 |
89.5 |
16.9 |
10. Gross Primary Deficit |
1938.3 |
1874.6 |
2300.7 |
129.4 |
118.7 |
260.7 |
22.7 |
*: Refers to non-plan expenditure in respect of Ministry of Petroleum and Natural Gas which primarily includes post-APM subsidies and compensation made to oil marketing companies for under-recoveries on account of sale of sensitive petroleum products, apart from marginal amount for other non-plan expenditure.
Source: Controller General of Accounts, Ministry of Finance. |
Non-plan expenditure continues to exert
pressure despite a moderation in total
expenditure
II.16 During April-November 2012, the total
expenditure of the government was lower at
58.2 per cent of the budget estimates (60.5 per
cent in the previous year). The deceleration in
expenditure has been more pronounced since
September 2012, with a narrowing down in
the differential between the current year’s
expenditure (as per cent of budget estimate)
and the respective three-year average (as per
cent to actual), indicating the government’s
efforts to rein in expenditure (Chart II.3).
II.17 The total expenditure of the government
during 2012-13, however, is likely to exceed
budget estimates mainly on account of nonplan
revenue expenditure. At 16.7 per cent, the growth in non-plan revenue expenditure during
April-November 2012 was significantly higher
than the budgeted growth of 6.1 per cent.
Quality of fiscal adjustment remains a
concern
II.18 Significant cut-backs in plan and capital
expenditure and reliance on non-durable
receipts such as disinvestment proceeds could compromise the quality of fiscal adjustment.
During April-November 2012, plan expenditure
and capital expenditure as percentages to
budget estimates were significantly lower than
those in the preceding year. Plan expenditure as
a percentage of budget estimate was lower for
major departments/ministries such as power,
road transport and highways, rural development
and women and child development. Lower
public investment in crucial infrastructure
would have implications for growth. While
the quality of expenditure remains an area of
concern, fiscal augmentation through increased
recourse to disinvestment proceeds and oneoff
receipts such as spectrum auctions may not
be sustainable.
Additional market borrowing likely to be
averted this year, but further steps needed
II.19 The government announced the first
supplementary demand for grant, which entails
a net cash outgo of `308 billion mainly to
provide part compensation for estimated under-recoveries
to oil marketing companies (`285
billion) and infusion of equity in Air India
(`20 billion). This additional expenditure may
not entail any additional market borrowings.
However, the subsidy provision made so far
appears inadequate.
Reviving investment demand is the key to
economic turnaround
II.20 The government has made a commitment
to bring down the level of the fiscal deficit.
However, if the compression in government
expenditure is mainly from plan/capital heads,
it raises concerns relating to quality of the fiscal
consolidation. As the reforms announced by
the government take effect, the improvement
in investment climate would help in reviving
growth. Increased public investment to crowdin
private investment along with removal
of structural impediments slowing private
investment is needed to pull the economy out
of the current slowdown.
|