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2 February 2017 Question Bank

 

2nd FEBRUARY 2017

QUESTION BANK

(1 Question)

Answer questions in NOT MORE than 200 words each. Content of the answer is more important than its length.

Links are provided for reference. You can also use the Internet fruitfully to further enhance and strengthen your answers.

GS III: ECONOMY  BUDGET

1.     Discuss Budget 2017-18. 

http://www.thehindu.com/opinion/lead/Politics-trumps-ideology/article17128893.ece

http://www.thehindu.com/opinion/columns/Readying-for-the-long-road/article17128740.ece

http://www.thehindu.com/opinion/op-ed/A-Budget-few-can-quarrel-over/article17128752.ece

http://www.thehindu.com/opinion/op-ed/The-message-in-the-median/article17128738.ece

  • Stating that the Budget represented the philosophy of his government to ‘Transform, Energise and Clean’ India, the Finance Minister has presented a Budget that is in many ways quite impressive.
  • Mr. Jaitley has steered clear of populist giveaways in the run-up to Assembly elections. There are no farm loan waivers, no transfer of demonetisation gains to Jan-Dhan accounts, no announcement of a universal basic income.
  • The Budget assumes nominal GDP growth of 11.75% for 2017-18 which, according to the Economic Survey, translates into real growth of 6.75-7.25%. This will come on the heels of growth of under 7% in 2016-17.
  • The Budget could be called in economics a Pareto-optimal state, which benefits some and hurts none.
  • The highlight is a greater than 25% increase in capital spending and a substantial increase in the transfer to the States. These indicate the need to stimulate the economy and to cultivate a more healthy federal relationship, respectively.
  • The Budget limits to Rs2,000 the maximum amount of cash donation that any political party can receive. Whether this will materially change illicit donations can be debated.

Plan & non-plan distinction abolished:

  • The abolition of the Plan and Non-Plan distinction, which in fact was the recommendation of the Expert Committee on Efficient Management of Public Expenditure in 2013, helps to look at each of the sectors in a holistic manner and avoids distortions in allocating resources between maintenance of existing assets and creation of new assets.

Fiscal consolidation:

  • Despite the hectoring by professional economists and his political rivals to stick to the path of fiscal consolidation aimed at capping the fiscal deficit at 3% of GDP, Mr. Jaitley has shown nerve to step on the brake and glide it down to 3.2% for now. While the exact figure may be a point of discussion, it is to be hoped that the fixation with a fixed target for the fiscal deficit is now a thing of the past. The Budget is to be balanced over the cycle, i.e., expanded as the economy slows and contracted as it quickens, the rest is merely ideology.
  • Mr. Jaitley has met the fiscal deficit target of 3.5% for 2016-17 in spite of exceeding the expenditure targets on both the revenue and capital accounts. This is in refreshing contrast to the past when the fiscal deficit target was met through cuts in capital expenditure.
  • Mr. Jaitley has managed his feat thanks to buoyant tax revenues, both direct and indirect, for the second year in succession. These have offset the shortfalls on account of spectrum sale and disinvestment.
  • Customs duty has disappointed but excise duty and personal and corporate tax have contributed significantly.
  • The government has taken advantage of low international oil prices to raise the excise duty on petroleum products.

Tax-to-GDP ratio:

  • The tax-to-GDP ratio has risen to 11.3% of GDP, compared to the Budget estimate of 10.8%. This is the first time since 2007-08 that the tax-to-GDP ratio has crossed the 11% mark; it had stagnated at around 10% since 2008-09.
  • At the same time, the expenditure-to-GDP ratio has declined over the years.
  • These are structural changes that will boost confidence in the Indian economy.

Meeting revenue targets

  • For 2017-18, the fiscal deficit and revenue deficit are projected to decline to 3.2% and 1.9% respectively, compared to the targets laid out earlier of 3% and 1.8% laid out in last year’s budget.
  • Investors will not mind these slippages, given that the government is using the extra fiscal space to enhance capital expenditure by 25.4% over 2016-17.
  • There could have been a greater effort to trim the revenue deficit; at least a statement of the intention of eliminating it altogether in the future.
  • A revenue deficit implies that we are borrowing to consume.

Income Tax and Corporate Tax:

  • The Finance Minister has cut the personal tax rate from 10% to 5% for individuals in the income slab of Rs2.5-5 lakh.
  • He has also offered a uniform rebate of Rs12,500 to those in the higher tax slabs.
  • A surcharge of 10% is proposed on those earning between Rs50 lakh and 1 crore.
  • The present 15% surcharge on those earning more than Rs1 crore will continue.
  • There is no reduction in the corporate tax rate at 30%, except for only companies with an annual turnover of up to Rs50 crore, for whom it would be 25%.
  • He has also not yielded to the clamour to abolish the Minimum Alternate Tax — he has only allowed companies to carry forward MAT credit for 15 years instead of the 10 years allowed at present.

UIB and subsidies:

  • He has also not ventured into the much-advocated universal basic income primarily because it is not easy to cut subsidies and transfers commensurately to release resources for the purpose.
  • At the same time, it must be stated that he has done little to rationalise explicit subsidies which at Rs2.7 lakh crore constitute 1.6% of the GDP.
  • In fact, subsidies claim as much as what has been allocated to defence and are just a little lower than capital expenditures
  • Food and fertilizer subsidies alone constitute Rs2.4 lakh crore.

MGNREGA

  • It has done the right thing in raising the allocation for the Mahatma Gandhi National Rural Employment Scheme by over 25%
  • The allocation of Rs48,000 crore for this employment guarantee scheme is the highest in the history of this scheme.
  • It is important to ensure that beneficiaries receive their full payment on time and that the expenditure is targeted on asset-building to the extent feasible.

Rural orientation:

  • There is the impressive target of achieving 100% electrification by 2018. The benefits of the latter would go disproportionately to rural India, and this is overdue.
  • There are also incentive schemes for the attainment of open-defection-free villages in the form of the supply of arsenic- and fluoride-free piped water to them.
  • Panchayati Raj institutions are to receive assistance to raise their level of human resource endowment.
  • A special fund for irrigation has been created, to be operated by NABARD (National Bank for Agriculture and Rural Development).
  • It is suggested that agriculture will continue to grow by 4.1%. This induces incredulousness as such a rate has not been consistently attained in the country.
  • Secondly, there is a plan to lift 50,000 gram panchayats out of poverty. We are yet to be told how these will be chosen and, more to the point, given an idea of the plan.

The growth picture

  • As the latest Economic Survey points out, for India to grow at 8% in the next decade, exports would have to grow at 15%.
  • Until a couple of years ago, we could hope that export growth would revive once the global economy gathered steam.
  • Now, we are faced with a more fundamental constraint: the world, led by the U.S., seems to be turning its back on globalisation.
  • Taking growth up to 8% in the changed global scenario will now require relying more on internal sources of growth.
  • There is only so much fiscal space for increasing public investment.
  • Private investment is not picking up because leading corporates are saddled with too much debt.
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