MEBE-Case1 (AggregateDemand)

8/12/2019 MEBE-Case1 (AggregateDemand)

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Case-1: Dynamics of Aggregate Demand in India

Reserve Bank of India undertook first quarterly review of monetary policy for 2012-13. It also publised its

assessment of !"acroeconomic and "onetary #evelopments$ in te % tquarter of fiscal 2012-13 alon& wit te

quarterly review. 'tatus of a&&re&ate demand as been presented in a separate section of te report. ()tracts are

reproduced ere.

Aggregate demand continued to remain weak

*e e)penditure-side +#, indicates tat te a&&re&ate demand of te Indian economy durin& % of 2012-13

remained slack *able 1/. ,rivate final consumption e)penditure wic is te principal component of +#, at

market prices continued to decelerate durin& te quarter on te back of weak a&ricultural production and

persistent i& consumer price inflation. (ven so it remains te lar&est contributor to &rowt in a&&re&ate

demand *able 2/. *e &rowt rate of &overnment final consumption e)penditure also moderated durin& % reflectin&

fiscal consolidation efforts. (ven tou& te &rowt rate of fi)ed investment durin& % of 2012-13 was sli&tly

i&er tan in te correspondin& quarter of te previous year a&&re&ate fi)ed investment in te full year

decelerated furter.

Initiatives have started addressing infrastructure bottlenecks, although progress is slow

Infrastructure bottlenecks ave been a maor factor in India$s low &rowt. ,roect implementations are &ettin&

delayed due to delays in land acquisition forestenvironment clearances insur&ency problems in minin& belts

&eolo&ical surprises contractual issues etc. s on "ay 1 2013 nearly alf of 455 central sector proects of

Rs.1.4 billion and above/ &ot delayed due to tese problems for wic cost overruns are estimated to be around

16.2per cent.

*o address tese issues te &overnment as taken several initiatives. 7or speedy clearance of proects in

addition to te 8abinet 8ommittee on Infrastructure 88I/ a ,roect "onitorin& +roup ,"+/ as been set up

by te ,rime "inister$s 9ffice ,"9/ wit te obective of resolvin& urdles facin& me&a proects above Rs. 10

billion/.

In te power sector te &overnment as initiated several measures suc as renovation and

moderni:ation of old power plants improvement of coal and &as supplies and &reater empasis on power

&eneration from renewable sources. *e &overnment as also set up a committee under te cairmansip of #r.;iay it re&ard to road proects te response to te ,,, mode of road buildin& remained poor. 'everal proects

ave not elicited bids. *e developers ave been facin& a severe sorta&e of equity and consequently are unable

to raise te required debt. *e &overnment as decided to adopt te (n&ineerin& ,rocurement and 8onstruction

(,8/ mode for national i&ways wic are not viable on a ,,, basis. ?owever te 8abinet 8ommittee on

(conomic ffair$s 88(/ decisions in @une 2013 to facilitate armonious substitution of concessionaire in

on&oin& and completed Aational ?i&way proects and insulatin& te Aational ?i&way utority of India

A?I/ from eavy financial claims and unnecessary disputes are likely to e)pedite te implementation of road

proects.

>it te cancellation of 2+ licenses in 7ebruary 2012 te telecommunications sector as been

stru&&lin& wit a noticeable decline in investor interest. ?owever investor interest is e)pected to improve once

te recent decision by te *elecom 8ommission approvin& 100 per cent 7#I in te sector &ets ratified.

Corporate investment intentions remain subdued

8orporate investment intentions remain subdued. dditionally some of te institutionally assisted proects wic

received sanction in 2010-11 and 2011-12 ave been cancelled. *e a&&re&ate proect cost envisa&ed from new

proects for wic assistance was sanctioned by maor banks7Is a&&re&ated Rs. 2.0 trillion in 2012-13 and

remained almost at te same level as tat of te previous year Rs.1. trillion/ but si&nificantly below tat in

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2010-11 Rs. 3.6 trillion/. n industry-wise analysis revealed tat durin& % of 2012-13 te sare of envisa&ed

e)penditure on new proects is te i&est in te metal = metal products sector 45.0 per cent/ followed by te

power industry 30.0 per cent/.

Sales growth remained sluggish during Q4 of 202!"

'ales &rowt for listed Aon-+overnment Aon-7inancial A+A7/ companies decelerated furter in % of 2012-13

to %.1 per cent *able 3/. *e decline in sales was more distinct in te case of motor veicles electricity &eneration

and supply iron = steel and real estate. In tandem wit te slow &rowt in sales net profits went down in % of2012-13 due to i&er employee e)penses and lower support from oter income. 'equentially q-o-q/ owever

net profit recorded an improvement in % *able %/. 7urter profitability in terms of (BI*# and (BI* mar&ins

improved mar&inally in % in comparison wit te previous quarter. *e net profit mar&in owever recorded a

mar&inal decline. Inventory accumulation as reflected in can&e in stock-in-trade to sales ratio/ wic went up in

2 of 2012-13 as reverted to earlier levels. (arly results for 1 of 2013-1% su&&est tat sales &rowt as

decelerated furter.

Corporate leverage has increased graduall#

*e levera&e of te corporate sector at te a&&re&ate level as measured by te total borrowin& to equity ratio

increased in 2011-12 reversin& a &radual and declinin& trend in te previous two years. Based on te availableannual results of 521 non&overnment non-financial public limited companies levera&e is observed to ave

increased furter in 2012-13.

$iscal consolidation resumed during 202!" mainl# through e%penditure cutbacks

*e central &overnment restricted its &ross fiscal deficit +7#/ to %. per cent of +#, durin& 2012-13 less tan te

bud&et estimate of 4.1 per cent. *e containment in +7# despite lower ta) and non-ta) revenues was acieved

mainly trou& a cutback in plan e)penditure. Aon-plan e)penditure on te oter and was i&er due to a sarp

increase in e)penditure on te revenue account. 'ubsidies on food fertili:ers and petroleum accounted for 2.4 per

cent of +#, as a&ainst te 1.6 per cent tat ad been bud&eted for te year. 9verall te revenue e)penditure as a

proportion of +#, was lower tan te bud&et estimate by 0.3 percenta&e points altou& it could not offset te

sortfall in revenue receipts wic resulted in a i&er revenue deficit.

&a% collection remains weak during 20"!4 so far#urin& pril-"ay 2013 key deficits of te 8entre as percenta&es to bud&et estimates were i&er tan in te

correspondin& period of last year. *e widenin& of te revenue deficit and i&er capital e)penditure resulted in a

i&er &ross fiscal deficit durin& pril-"ay 2013 tan a year a&o.

*e revenue deficit as a percenta&e to bud&et estimate durin& pril-"ay 2013 was i&er due to bot

i&er revenue e)penditure and lower ta) revenues. +ross ta) revenue in absolute terms declined mainly due to a

decline in revenues from corporation ta) and union e)cise duties. *e collection of income ta) and service ta) as

percenta&es to bud&et estimates were also lower tan a year a&o.

*otal e)penditure as a percenta&e of te bud&et estimate in te first two monts pril-"ay/ of 2013-1%

was i&er tan a year a&o mainly due to i&er plan and capital e)penditure wic re&istered &rowt rates of 42.5

per cent and %6. per cent respectively over pril-"ay 2012. 9n te oter and despite i&er payments of

subsidies non-plan e)penditure in te revenue account was lower tan in te correspondin& period of te

previous year.

If te &overnment$s revenues fall sort of te tar&et due to slowdown in &rowt a cutback in e)penditure

will be required to acieve te bud&eted fiscal deficit. It is terefore important to contain subsidies and re-

prioriti:e e)penditure towards plan and capital e)penditures tereby enancin& te &rowt prospects of te

economy.

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Statefinancese%pectedtoremainonthe consolidation track

#espite an increase in te consolidated +7#-+#, ratio in 2012-13 R(/ over te previous year te +7#-+#,

ratio was witin te tar&et set by te *irteent 7inance 8ommission. *e revenue account at te consolidated

level recorded a surplus in 2012-13 R(/ albeit lower tan bud&eted.

*e consolidated position of te state &overnments for 2013-1% is bud&eted to sow an increase in te

revenue surplus-+#, ratio and a mar&inal improvement in te +7#-+#, ratio. *e surplus in revenue account

would be acieved by a reduction in te revenue e)penditure-+#, ratio wile te revenue receipts-+#, ratio isbud&eted to remain uncan&ed from te previous year$s level. *e e)penditure pattern of te states sows tat

wile te development e)penditure-+#, ratio is bud&eted to decline te non-development e)penditure-+#,

ratio is bud&eted to increase mar&inally durin& 2013-1%. ?owever te capital outlay-+#, ratio is bud&eted to be

i&er in 2013-1% tan in 2012-13 R(/.

Combinedgovernmentfinancesbudgeted to improve in 20"!4

#ata on combined finances sow tat te revenue deficit and fiscal deficit as ratios to +#, in 2012-13 R(/ were lower

by 0.5 percenta&e points and 0.2 percenta&e points respectively over te previous year. *e decline in te

combined +7#-+#, ratio was entirely on account of te lower fiscal deficit of te 8entre. In 2013-1% te

combined fiscal position is bud&eted to improve furter on account of fiscal plans of bot te 8entre and te

states.

'eed to keep the momentum of the fiscal consolidation and increase government investment in

productive sectors

*e &overnment$s fiscal consolidation process as contributed to improvin& te state of public finances in India at

a critical uncture. *e low collection of bot ta) and non-ta) revenue durin& 2012-13 complicated te task of

reducin& fiscal imbalances. *us te containment of +7# in 2012-13 was brou&t about by e)penditure

compression on plan revenue account and also plan and non-plan capital account. *e cuts in union &overnment$s

capital e)penditure were undertaken at a time wen private investment ad already decelerated. *is raised concerns

about te quality of fiscal consolidation. It is terefore important for te 8entre to take steps to contain its non-

plan revenue e)penditure witin te limit set in te Cnion Bud&et 2013-1% trou& subsidy reforms. 'tayin& on

te pat of fiscal consolidation in te current year owever remains callen&in&. "oderation in a&&re&ate

demand poses risks to bud&etary proections for revenue. *e recent e)can&e rate depreciation as compounded teproblems in restrainin& subsidies. t te present uncture it is important tat te &overnment restrains its subsidy

commitments strikes a udicious balance under its various bud&etary eads by increasin& investment in te

productive sectors so as to crowd-in private investments. *a) reforms also need to be e)pedited to improve te

ta)+#, ratio.

Conclusion&&re&ate demand as reflected on te e)penditure side of +#, remained slu&&is durin& % of 2012-13. part

from investment private consumption decelerated addin& to te dra& on demand durin& 2012-13. #epressedprivate consumption to a lar&e part as been te result of i& consumer price inflation. 8orporate investment

intentions also remained lan&uid reflectin& te overall ne&ative business sentiment arisin& from slack cyclical

conditions and structural factors. 8orporate sales decelerated durin& % of 2012-13 wile earnin&s contracted.*is in turn may ave an adverse impact on new investment. In tis situation te key to turnin& around te

economy will be re-balancin& &overnment spendin& from current to capital e)penditures wit a view to

!crowdin&-in$ private investment.

Table 1: Expenditure Side GD !"##$-#% prices&

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,er cent/

Item 2011-12D 2012-13E 2011-12 2012-13

1 2 3 % 1 2 3 %

Gro't( )ates

+#, at market prices 5.3 3.2 6.3 5.% 4.6 4.2 3.% 2.4 %.1 3.0

*otal 8onsumption ()penditure 6.1 3. 5. F.0 .0 .3 %.F %.0 3.6 3.3

i/ ,rivate 6.0 %.0 5.5 5.3 .2 .F %.3 3.4 %.2 3.6

ii/ +overnment 6.5 3. 6.% 10.F 6.1 F.5 F.2 5. 2.2 0.5

+ross 7i)ed 8apital 7ormation %.% 1.F 13. 3.6 -1.F 2.5 -2.2 1.1 %.4 3.%

8an&e in 'tocks -30.5 F3.% -2F.4 -30.% -32.0 -32.% 5.6 F1.F F4.6 F5.0

;aluables 5.5 -12.0 15.1 -13.3 6.% 15.0 -20. %.3 -5. -20.2

Aet ()ports -%2.4 -1F.3 -1%.6 -1F.F -62.1 -63.3 -5.F -21.% -23.F -15.%

)elati*e s(ares

*otal 8onsumption ()penditure F0.4 F1.0 F1.2 F1.6 F3.F 54.F F2.1 F2.6 F3.4 54.

i/ ,rivate 4.2 4.5 50.5 51.2 51.% 4%.3 51.1 51.6 51.% 4%.F

ii/ +overnment 11.3 11.3 10.5 10.4 12.3 11.4 11.0 11.0 12.1 11.2

+ross 7i)ed 8apital 7ormation 33.F 33.2 34.F 34.1 31.6 32.4 33.6 3%.5 32.0 32.5

8an&e in 'tocks 2.3 3.6 2.% 2.% 2.2 2.2 3. %.0 3.F 3.6

;aluables 2.% 2.0 2.6 2.1 2.2 2.3 2.1 2.2 2.0 1.6

Aet ()ports -6.6 -10.0 -.3 -.3 -.4 -F.% -.5 -11.0 -11.3 -6.%

GD at mar+et prices !)s, %.1$ %/1.0 1."%" 1."#0 1$$0. 1%./" 1.0#" 1.%. 1%#" 1%/.

2irst re*ised estimates3 4 ro*isional Estimates

Table ": Contribution-5eig(ted Gro't( )ates of Expenditure-Side GD !"##$-#% rices&6

,er cent/

Item 2011-12 2012-13

1 2 3 % 1 2 3 %

1. ,rivate 7inal 8onsumption ()penditure %.1 3. 4.% 4.0 2.5 2.2 2.5 2.1

2. +overnment 7inal 8onsumption ()penditure 0. 1.1 1.0 0. 0.6 0.F 0.3 0.1

3. +ross 7i)ed 8apital 7ormation %.F 1.% -0.5 0. -0.6 0.% 1.% 1.1

%. 8an&e in 'tocks -1.0 -1.1 -1.1 -1.1 1.F 1.F 1.F 1.F

4. ;aluables 0.% -0.3 0.2 0.3 -0.5 0.1 -0.2 -0.4

5. Aet ()ports -1.3 -1.4 -%.5 -3.5 -0.5 -2.0 -2.3 -1.2i/ ()ports %.3 %.3 2.% 3.1 3.0 1.2 -0. -0.2

ii/ Imports 4.5 4.6 5. 5.5 3.5 3.2 1.% 1.1

F. 'um 1 to 5/ F.6 3.% 0.% 2.% 3.0 3.1 3.4 3.2

6. #iscrepancies 0.4 3.0 4.% 2.F 0.% -0.5 0.5 -0.3

. +#, at "arket ,rices 6.3 5.% 4.6 4.2 3.% 2.4 %.1 3.0

GH 8ontribution-wei&ted &rowt rate of a component of e)penditure-side +#, is obtained as followsH -o-y can&e in te component J -o-y

can&e in +#, at constant market prices/ K -o-y &rowt rate of +#, at constant market prices.

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Table .: erformance of 7on-Go*ernment 7on-2inancial Companies

,er cent/

% of2011-12

1 of2012-13

2 of2012-13

3 of2012-13

% of 2012-13

7o, of companies "$18

Gro't( )ates !y-o-y&

'ales 14.5 1%.0 11.F .% %.1

;alue of ,roduction 1%.1 13.% 12.% 6.1 %.0

()penditure of which 15.F 15.% 12.5 6.2 %.F

Raw "aterials 15.F 13.5 1%.5 .3 2.5

'taff 8ost 1%.3 1F.F 14.3 13.1 13.4

,ower = 7uel 30.5 25.2 20. 11.0 3.4

9peratin& ,rofits (BI*#/ -0.F -3.% 11.3 F. -0.2

9ter IncomeG %.% 26.% %.2 0.3 -1.%

#epreciation 10.F 10.% 10.1 10.3 6.%

+ross ,rofits (BI*/ %.0 -2.4 16. 4.5 -2.F

Interest %0.2 36.% 11.3 1F.1 11.1

*a) ,rovision 1.2 -3.% 11.0 4.1 -2.F

Aet ,rofits witout A9,/ -5.F -16.4 25.2 -0.F -.2

Aet ,rofits -5.% -.F 23.1 2%.3 -14.4

Select )atios

8an&e in stock to 'ales E 0. 0.6 1.% 0.6 0.

Interest Burden 25.5 32.4 2F.2 33.1 30.4

(BI*# to 'ales 13.3 12. 13.2 12.5 12.F

(BI* to 'ales 12.5 11.5 12.6 11.3 11.6

Aet ,rofit to 'ales F.1 5.1 F.1 4.6 4.F

EH 7or companies reportin& tis item e)plicitly

GH 9ter income e)cludes e)traordinary incomee)penditure if reported e)plicitly

Table $: erformance of 7on-Go*ernment 7on-2inancial

Companies !Se9uential Gro't(&

-o-L per cent/Indicator 7umber of Companies: "$18

2011-12 2012-13

;$ ;1 ;" ;. ;$

'ales .4 -%.4 0.F 3.6 %.%

;alue of ,roduction 6.% -%.5 1.2 3.2 %.%

()penditure of which F.F -%.2 0. 3. %.%

Raw "aterials 10.0 -5.1 1. 3.6 3.0

'taff 8ost 2.1 5.0 3.% 1.3 2.%

,ower = fuel 3.% .F -3.2 0.1 -2.%

9peratin& ,rofits 13.F -F.3 3.% -0. %.(BI*#/

9ter IncomeGG 30.3 -22.5 %1.1 -2F. 23.2

#epreciation 5.2 -1.F 1.6 3.F 3.1

+ross ,rofits (BI*/ 1.2 -12.1 11.0 -6.F .0

InterestG F.5 F.3 -F.1 10. 0.F

*a) ,rovision 14.3 -0. 3.% -11.0 5.4

Aet ,rofits 42.0 -1F.6 1F.0 -14.0 3.1

GH 'ome companies report on net basis

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GGH 9ter income e)cludes e)traordinary incomee)penditure if reported e)plici tly

;uestions for discussion

1. >at were te key reasons of slowdown in a&&re&ate demand in India durin& te %tquarter of te year 2012-13M

2. ?ow did it impact te businessM

3. ?ow will increase in &overnment e)penditure on infrastructure boost te a&&re&ate demand and ence te +#,M

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Documents

MEBE-Case1 (AggregateDemand)