Indian Economy Concepts & Understanding Budget

India is developing into an open-market economy, yet traces of its past autarkic policies remain.
Economic liberalization, including industrial deregulation, privatization of state-owned enterprises, and reduced controls on foreign trade and investment, began in the early 1990s and has served to accelerate the country's growth, which has averaged more than 7% per year since 1997.
India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services.
Slightly more than half of the work force is in agriculture, but services are the major source of economic growth, accounting for nearly two-thirds of India's output, with less than one-third of its labor force.
India has capitalized on its large educated English-speaking population to become a major exporter of infor'mation technology services and software workers.
In 2010, the Indian economy rebounded robustly from the global financial crisis - in large part because of strong domestic demand - and growth exceeded 8% year-on-year in real terms.
However, India's economic growth began slowing in 2011 because of a tight monetary policy, intended to address persistent inflation, and a decline in investment, caused by investor pessimism about domestic economic reforms and about the global situation.
High international crude prices have exacerbated the government's fuel subsidy expenditures, contributing to a higher fiscal deficit and a worsening current account deficit.
In late 2012, the Indian Government announced reforms and deficit reduction measures to reverse India's slowdown.
The outlook India's medium-term growth is positive due to a young population and corresponding low dependency ratio, healthy savings and investment rates, and increasing integration into the global economy.
India has many long-term challenges that it has not yet fully addressed, including poverty, inadequate physical and social infrastructure, limited non-agricultural employment opportunities, inadequate availability of quality basic and higher education, and accommodating rural-to-urban migration.
CONCEPTS OF NATIONAL INCOME
- National income is the measurement of flow of services and goods in economic system.
- The national wealth is the measurement of present assets available on a given time while the National income is the measurement of the production power of economic system in a given time period.
- The figures of National income are based on the financial year (i.e. from 1st April to 31st March).
- The base of one year is taken for calculating National income which is called base year, as all the seasons come in a year.
- The data of estimation of India's National income are issued by Central Statistical Organisation (CSO).
The important concepts of national income are:
Gross Domestic Product (GDP)
Gross National Product (GNP)
Net National Product (NNP) at Market Prices
Net National Product (NNP) at Factor Cost or National Income
Personal Income
Disposable Income
Let us explain these concepts of National Income in detail.
1. Gross Domestic Product (GDP):
- Gross Domestic Product (GDP) is the total market value of all final goods and services currently produced within the domestic territory of a country in a year.
- Four things must be noted regarding this definition.
- First, it measures the market value of annual output of goods and services currently produced.
- This implies that GDP is a monetary measure.
- Secondly, for calculating GDP accurately, all goods and services produced in any given year must be counted only once so as to avoid double counting. So, GDP should include the value of only final goods and services and ignores the transactions involving intermediate goods.
- Thirdly, GDP includes only currently produced goods and services in a year.
- Market transactions involving goods produced in the previous periods such as old houses, old cars, factories built earlier are not included in GDP of the current year.
- Lastly, GDP refers to the value of goods and services produced within the domestic territory of a country by nationals or non-nationals.
2. Gross National Product (GNP):
- Gross National Product is the total market value of all final goods and services produced in a year.
- GNP includes net factor income from abroad whereas GDP does not. Therefore,
- GNP = GDP + Net factor income from abroad.
- Net factor income from abroad = factor income received by Indian nationals from abroad - factor income paid to foreign nationals working in India.
Parameter
GDP
GNP
Stands for
Gross Domestic Product
Gross National Product
Definition
An estimated value of the total worth of a country's production and services, calculated over the course on one year
GDP (+) total capital gains from overseas investment (-) income earned by foreign nationals domestically
Layman Usage
Total value of products & Services produced within the territorial boundary of a country
Total value of Goods and Services produced by all nationals of a country (whether within or outside the country)
Formula for Calculation
GDP = consumption + investment + (government spending) + (exports - imports)
GNP = GDP + NR (Net income form assets abroad (Net Income Receipts)
Uses
Business, Economic, Economic Forecasting
Business, Economic Forecasting
3. Net National Product (NNP) at Market Price:
- NNP is the market value of all final goods and services after providing for depreciation.
- That is, when charges for depreciation are deducted from the GNP we get NNP at market price. Therefore'
- NNP = GNP - Depreciation
- Depreciation is the consumption of fixed capital or fall in the value of fixed capital due to wear and tear.
4. Net National Product (NNP) at Factor Cost (National Income):
- NNP at factor cost or National Income is the sum of wages, rent, interest and profits paid to factors for their contribution to the production of goods and services in a year. It may be noted that:
- NNP at Factor Cost = NNP at Market Price - Indirect Taxes + Subsidies.
- Factor Cost: Factor cost is the sum total of amount paid to four main factors of production viz; land (rent), labour, capital and entrepreneurship (profit). It is exclusive of taxes or subsidies.
- National Income at current prices: If goods and services are valued at current prices i.e. prices prevailing in the market in the particular year, we get the National Income at current prices.
- National Income at constant prices: When National Income is calculated at constant prices i.e., prices prevailing in a particular year, called the 'Base Year', we get National Income at constant prices.
- This method offsets the impact of inflationary tendency, in price level on economic growth and reflects the real National Income. In India the base year for constant prices is presently taken as 2004-05.
Per Capita Income: This is derived by dividing the total National Income of a country by its total population.
- Therefore, an increase in National Income in real terms does not necessarily mean an increase in the per capita income, as it is inversely proportional to the rate of growth of population.
5. Personal Income:
- Personal income is the sum of all incomes actually received by all individuals or households during a given year.
- In National Income there are some income, which is earned but not actually received by households such as Social Security contributions, corporate income taxes and undistributed profits.
- On the other hand there are income (transfer payment), which is received but not currently earned such as old age 'pensions, unemployment doles, relief payments, etc.
- Thus, in moving from national income to personal income we must subtract the incomes earned but not received and add incomes received but not currently earned. Therefore,
- Personal Income = National Income - Social Security contributions - corporate income taxes - undistributed corporate profits + transfer payments.
- Disposable Income: From personal income if we deduct personal taxes like income taxes, personal property taxes etc. what remains is called disposable income. Thus,
- Disposable Income = Personal income - personal taxes.
- Disposable Income can either be consumed or saved. Therefore,
- Disposable Income = consumption + saving.
MEASUREMENT OF NATIONAL INCOME
- Production generate incomes which are again spent on goods and services produced. Therefore, national income can be measured by three methods:
Output or Production method
Income method, and
Expenditure method.
Let us discuss these methods in detail.
1. Output or Production Method:
- This method is also called the value-added method.
- This method approaches national income from the output side.
- Under this method, the economy is divided into different sectors such as agriculture, fishing, mining, construction, manufacturing, trade and commerce, transport, communication and other services.
- Then, the gross product is found out by adding up the net values of all the production that has taken place in these sectors during a given year.
- In order to arrive at the net value of production of a given industry, intermediate goods purchases by the producers of this industry are deducted from the gross value of production of that industry.
- The aggregate or net values of production of all the industry and sectors of the economy plus the net factor income from abroad will give us the GNP.
- If we deduct depreciation from the GNP we get NNP at market price.
- NNP at market price - indirect taxes + subsidies will give us NNP at factor cost or National Income.
- The output method can be used where there exists a census of production for the year.
- The advantage of this method is that it reveals the contributions and relative importance and of the different sectors of the economy.
2. Income Method:
- This method approaches national income from the distribution side.
- According to this method, national income is obtained by summing up of the incomes of all individuals in the country.
- Thus, national income is calculated by adding up the rent of land, wages and salaries of employees, interest on capital, profits of entrepreneurs and income of self-employed people.
- This method of estimating national income has the great advantage of indicating the distribution of national
income among different income groups such as landlords, capitalists, workers, etc
3. Expenditure Method:
- This method arrives at national income by adding up all the expenditure made on goods and services during a year.
- Thus, the national income is found by adding up the following types of expenditure by households, private business enterprises and the government: -
Expenditure on consumer goods and services by individuals and households denoted by C. This is called personal consumption expenditure denoted by C.
Expenditure by private business enterprises on capital goods and on making additions to inventories or stocks in a year. This is called gross domestic private investment denoted by I.
Government's expenditure on goods and services i.e. government purchases denoted by G.
Expenditure made by foreigners on goods and 'services of the national economy over and above what this economy spends on the output of the foreign countries i.e. exports - imports denoted by (X - M). Thus, GDP = C + I + G + (X - M).
FISCAL POLICY
- Fiscal Policy is the policy relating to public revenue and public expenditure and allied matters.
- Government spending policies that influence macroeconomic conditions.
- These policies affect tax rates, interest rates and government spending, in an effort to control the economy.
- Fiscal policy is the means by which a government adjusts its levels of spending in order to monitor and influence a nation's economy.
Fiscal policy and Monetary policy go hand in hand with each other. Both are interdependent on each other.
Tax System
- A compulsory contribution given by a citizen or organisation to the Government is called Tax, which is used for meeting expenses on welfare work.
- Tax imposing and Tax collecting is at three levels in India - Central level, State level and Locallevel.The distribution of tax between Centre and State has been clearly mentioned in the provisions of Indian Constitution.
- For rationalising it from time to time, Finance Commission has been constituted. The tax system has been divided into two parts:
(1) Tax by Central Government - Custom Duty, Income Tax and Corporate Tax etc.
(2) Tax by State Government - The state government has right to collect all the taxes in this category and to spend them.
- There are two types of taxes: 1. Direct Taxes 2. Indirect Taxes:
Direct Taxes-The taxes levied by the central government on incomes and wealth are important direct taxes. The important taxes levied on incomes are-corporation tax and income tax. Taxes levied on wealth are wealth tax, gift tax etc.
Indirect Taxes-The main forms of indirect taxes are customs and excise duties and sales tax. The central government is empowered to levy customs and excise duties (except on alcoholic liquors and narcotics) whereas sales tax is the exclusive jurisdiction of the state governments.
- However, the union excise duties form the most significant part of central taxes.
- The major tax revenue sources for states are their shares in union excise duties and income tax, commercial taxes, land revenue, stamp duty, registration fees, state excise duties on alcohol and narcotics etc.
- Sales tax forms the most important component of commercial taxes.
Progressive Tax-A tax that takes away a higher proportion of one's income as the income rises is known as progressive tax. Indian Income Tax is a progressive and direct tax.
R. Chelliah Committee was constituted in August 1991 for suggesting reforms in Tax Structure.
Chelliah Committee recommended Income Tax for agricultural income of more than Rs. 25,000 p.a. Chelliah Committee also recommended for lowering down the tax rates and reducing the tax slabs.
K.L. Rekhi Committee was constituted in 1992 for suggesting uniform regulations for indirect taxation (Custom Duty and Excise Duty).
- Finance Commission
Finance Commission is constituted by the President under Art 280 of the constitution. Since Independence, 11 Finance Commissions have submitted their reports.
1st Finance Commission was constituted under chairmanship of Prof. K.C. Pant while 11th Finance Commission was constituted under chairmanship of Prof. A. M. Khusro. The recommendations of 11th Finance Commission cover period 1st April, 2000 to 31st March, 2005.
12th Finance Commission was constituted under chairmanship of Dr. C. Rangarajan. The commission has submitted its final report.
13th Finance Commission has been constituted in November, 2007 with Dr. Vijay L. Kelkar as the Chairman.
Mr. Y V Reddy, Former governer of RBI has been appointed as the Chairman of 14th Finance Commission Chairman.
- Important Taxes Imposed in India
Tax on Income and Wealth - The central government impose different types of tax on income and wealth, viz, income tax, corporate tax, wealth tax and gift tax. Out of them income tax and corporate tax are more important from the revenue point of view.
Personal Income Tax - Personal income tax is generally imposed on an individual combined Hindu families and total income of people of any other cQmmunities.
In addition to tax, separate surcharges are also imposed some times.
Agricultural income in India is free from income tax.
Corporate Tax - Corporate Tax is imposed on Registered Companies and Corporations.
The rate of corporate tax on all companies is equal. However, various types of rebates and exemptions have been provided.
Custom Duties - As per the Constitutional provisions, the central government imposes import duty and export duty both. Import and Export duties are not only sources of income but with the help of it the central government regulates the foreign trade.
Import Duties - Generally import duties are ad-velorem in India. It means import duties are imposed on the taxable item on percentage basis.
Export Duties - Export Duties are more important, compared to Import Duties in terms of revenue and regulation of foreign trade.
Excise Duties - Excise duties are commodity tax as it is imposed on production of an item and it has no relevance with its sale. This is the largest source of revenue for the Central Government.·
Except liquor, opium and other drugs, production of all the other items is taxable under Central Excise Duties.
To develop Social Accounting method of National income - Richard Stone.
One Coin & One Rupee note belong to "Legal Tender Money" category.
M1 is known as Narrow Money.
M3 is known as Broad Money.
- Types of Tax
Direct Tax
income Tax, Property Tax, Gift Tax etc.
Indirect Tax
Sales Tax, Excise Duty Custom Duty etc.
Taxes imposed by the Central Government
Income Tax, Corporate Tax, Property Tax, Succession Tax, Wealth Tax, Gift tax, Custom Duty Tax on agricultural wealth etc.
Taxes imposed by the
Land revenue tax, Agricultural incometax, Agricultural Land Revenue, State Excise
State Government
Duty, Entertainment Tax, Stamp duty, Road Tax, Motor Vehicle Tax etc.
Budget
- The core of the budget is called the Annual financial statement, This is the main budget document, Under article 112 of the constitution, a statement of estimated receipts and expenditure of the Govt. of India has to be laid before the parliament in respect of every financial year running from april 1 to March 31 while under article 2.02 of the cost a statement of estimated receipts and expenditures of the state Government has to be laid before the house of the state legislature concerned. This statement shows the receipts and payments of Govt. under the three parts in which Govt. accounts are kept; (1) Consolidated Fund, (2) Contingency Fund and (3) Public Account.
The Annul Budget of the Central Government provide estimates of receipts and expenditures of the Government. The Budget consists of two parts viz; (1) Revenue Budget (2) capital Budget.
Revenue Budget - all "current" 'receipts' such as taxation, surplus of Public enterprises, and 'expenditures' of the Government.
Capital Budget - all "Capital" 'receipts' and 'expenditure' such as domestic and foreign loans, loan repayments, foreign aid etc.