Approach Paper for the Twelfth Five Year Plan - of Planning ...

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Macro-Economic Framework 25 (iv) The fiscal deficit is expected to be lowered from 4.6 per cent of GDP to 3.0 per cent of GDP in line with the Government’s fiscal consolidation plan. 2.31 The net effect of the above trends it that although net tax revenues will be higher by about 1.51 per centage points of GDP, aggregate resources for the Centre (item 5 of Table 2.4) will actually fall from 14.01 per cent of GDP in 2011-12 (BE) to 13.11 per cent of GDP in 2016-17. 2.32 Thus, while the total availability of resources is expected to fall as a per centage of GDP, the size of GBS is projected to increase, because non-Plan expenditure is projected to fall as a per centage of GDP from 9.09 in 2011-12 to 7.36 per cent in 2016-17. The assumptions underlying the projected decline in Non-Plan Expenditure are obviously crucial for financing the public sector plan. Non-Plan Expenditure 2.33 As mentioned before, the Non-Plan Expenditure in the above projections declines from 9.09 per cent of GDP in the base year of the Twelfth Plan (2011-12) to 7.36 per cent of GDP in the final year of the Twelfth Plan (2016-17). This implies an average annual growth of around 10.0 per cent in nominal terms (or about 5.0 per cent in real terms). Non-Plan Expenditure consists of interest payments, defence expenditure, pay and allowances, pensions, subsidies and others. The specific assumptions in these categories are as follows: (i) Interest payment is forecast on the basis of projected growth of debt with interest rate 8.7 per cent on annual incremental borrowings keeping in mind the target for the reduction of fiscal deficit. (ii) Defence expenditure is projected to fall from 1.83 per cent of GDP in the base year to 1.56 per cent of GDP in the final year. This is based on defence revenue and defence capital expenditure increasing annually, in nominal terms, by about 7.5 per cent and 15.0 per cent respectively. Since defence expenditure is already very low as a per centage of GDP, this projection may be conservative. (iii) Pay and allowances are projected to grow at an annual rate of 7.0 per cent in nominal terms as there will be little expansion in government employment, and there may not be any impact of the new Pay Commission over this period. (iv) Pension expenditure is projected to grow at an annual rate of 9.0 per cent, which is the level assumed by the 13th Finance Commission. (v) Subsidies account for 18.8 per cent of the total projected Non-Plan Expenditure during the Twelfth Plan and are projected to decline from an estimated 1.6 per cent of GDP in 2011-12 (BE) to 1.24 per cent of GDP in the final year. The ability to reduce subsidies is critical from the resource point of view, since in the past, subsidies have been rather high as a per centage of GDP. They increased from 2.27 per cent of GDP in 2006-07 to 4.04 per cent of GDP in 2008-09, partly because of nonadjustment of oil prices and clearing of part dues. Subsidies in 2011-12 (BE) are expected to be 1.6 per cent of GDP, but it is possible that the BE estimate may exceed the target, if oil prices are not adjusted further. If the subsidy figures in 2011-12 do exceed the budget estimates, the projected reduction over the Twelfth Plan would be much sharper. 2.34 It is evident from the above that effective targeting of subsidies so as to contain them is going to be critical for achieving the Plan resource target. The only alternative would be to raise additional tax resources so as to achieve a tax-GDP ratio higher than average 12.0 per cent of GDP, as implied in the above projections. This task is not very difficult to achieve given what we have achieved in the past (see figure 2.1 below):
26 Approach to the Twelfth Five Year Plan Figure 2.1: Trends in Tax Revenues at the Centre (1990 to 2017, including projections) Projections for Twelfth Plan 2.35 Gross Tax Revenues of the Centre were 10.6 per cent of GDP in 1990-91, but declined for several years as custom duties and income tax rates were lowered. However, they rose again after 2001-02, reaching a peak of 11.9 per cent in 2007-08. The tax ratio declined thereafter, because of the tax reduction introduced as part of the stimulus reaching 9.5 per cent of GDP in 2009-10. However, the trend has reversed again, and the gross tax-GDP ratio at the Centre was 10.0 per cent in 2010-11, further projected to be 10.36 per cent of GDP in 2011-12. This positive trend is expected to continue over the Twelfth Plan period. The projections therefore, involve going above the previous peak of 11.9 per cent in 2007-08, albeit moderately so. If we want a larger Plan size, we could perhaps aim at a tax rate of 13.0 per cent of GDP. This could be achieved if critical tax-reforms in the pipeline become a reality in the coming years. The Goods and Services Tax, in particular, could also make the economy more competitive and help accelerate growth to the levels being targeted in the Twelfth Plan. Financing Private Investment 2.36 Since more than two-thirds of the investment in the economy is by private sector (households and corporate), it is necessary to ensure that the financial system is able to translate the otherwise favourable macroeconomic investment-savings balances into effective financing of the private sector investment needed for 9.0 per cent GDP growth. For this, we need a financial system capable of mobilising household savings and allocating them efficiently to meet the equity and debt needs of the fast expanding private corporate sector. This depends upon the efficiency of the financial system as a whole, which at present consists of a large number of financial institutions, such as banks, non-bank finance companies, mutual funds, insurance companies, pension funds, private equity firms, venture capital funds, angel investors, micro-finance institutions etc. 2.37 Special attention must be paid to the financing needs of private sector investment in infrastructure. Infrastructure investment (defined as electricity, roads and bridges, telecommunications, railways, irrigation, water supply and sanitation, ports, airports, storage and oil-gas pipelines) will need to increase from about 8.0 per cent of GDP in the base year (2011-12) of the Plan to about 10.0 per cent of GDP in 2016-17. The total investment in infrastructure would have to be over Rs. 45 lakh crore or $ 1 trillion during the Twelfth Plan period. Financing this level of investment will require larger outlays from the
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10 Education and Skill Development
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11 Social and Regional Equity 11.1
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12 Challenge of Urbanisation Rising
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15 Governance 15.1 With rapid expan
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