Union Budget 2007-2008-

Objectives, Scope and

Macroeconomic Impact

Presented by

Dr Tarun Das
Professor and Head
(Economics)
IILM, New Delhi-110001.
 Contents

1. Introduction
2. Economic and Fiscal Background
3. Scope & objectives of the budget
4. Fiscal Consolidation
5. Major Tax Reforms
6. Concluding Observations

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 1. Union Budget 2007-08
“I believe that, given a right mix of policies,
the poor will benefit from growth that is
driven by savings and investment and that is
more inclusive. As Dr. Muhammad Yunus, the
Noble laureate said, ‘Faster growth rate is
essential for faster reduction in poverty.
There is no other trick to it ‘.”
______ With these words Finance Minister P.
Chidambaram commended his Budget to the House
on the 28th February 2007.

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 2.1 Macroeconomic Background:
Indian economy is on rebound mood
 Overall GDP growth rate is expected to be 9.2%
in 2006-07 on top of 9% in 2005-06.
 India is the second fastest growing economy
after China among large economies in the world.
 With these growth rates, the growth target of 8
percent set for the Tenth Five Year Plan (2002-
2007) will be nearly achieved.
 Agriculture registered a growth of 2.7% and
industry 10% in 2006-07.
 Services are the fastest growing sectors with a
GR of 11.2% and contributed 55% to GDP.
 Industrial growth was led by growth in both
capital goods and consumer goods.

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 2.2 Economic Background:
Indian economy is on rebound mood
 Per capita income in 2005-06, in real terms,
increased by 7.4%.
 Savings rate reached record level at 32.4% and
the investment rate at 33.8%.
 Both exports and imports are buoyant and
growing at rates exceeding 36
percent.
 Current account deficit is expected to increase
from 1.1% of GDP in 2005-06 to 1.6% of GDP in
2006-07. But, it is not unmanageable.
 Foreign exchange reserves at record level of
US$190 billion, equivalent to 11 months of
imports.

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2.3 Rising inflation is a matter of concern.
 Inflation hurts everybody particularly the poor
whose incomes are not indexed to prices.
 High inflation also affects adversely both
savings and investment.
 The point-to-point WPI inflation rate is
running around 6% in the current year.
 Average WPI inflation rate in 2006-07 is
estimated in the range of 5.2% to 5.4%
compared to 4.4% in 2005-06.
 Current inflation is combination of both
demand-pull and cost-push inflation.
 Growth in bank credits by 30% and money
supply by 21.4% have also put pressure on
prices.

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 2.4 Anti-Inflationary Measures
 However, high inflation is not wide spread
and is limited to few items such as minerals,
steel, cement, edible oil, wheat, fruits and
vegetables.
 Containment of inflation remains high on the
agenda of the government.
 Anti inflationary measures taken by the
government include strict fiscal and
monetary discipline, liberal imports through
reduction of import duties, effective supply-
demand management for essential items,
and stern actions against hoarders and black
marketers.

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 2.5 Fiscal Background
 Both tax and non-tax revenues performed
better in 2006-07 than BE due to higher
growth than expected earlier.
 But, capital receipts fell short of targets by
1.4% as a result of shortfall in
disinvestment due to opposition by the
communists.
 Total expenditure exceeded BE by 3.1%.
 While revenue expenditure exceeded BE by
3.8%, capital expenditure fell short of BE by
1.2%.
 This kind of trend, visible in the last few
years, does not augur well for public
investment.
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2.6 Fiscal Background (as % of GDP)

Item 2005-06 2006-07 2006-07 2007-

Actual BE RE 08
BE
1.Revenue 2.6 2.1 2.0 1.5
Deficit
2.Fiscal 4.1 3.8 3.7 3.3
Deficit
3.Primary 0.4 0.2 0.1 (-) 0.2
Deficit

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3.1 Economic Objectives of Budget
 Strong commitment to sustained growth, fiscal
prudence, monetary and price stability.
 Basic objective is to promote faster and more
inclusive growth, equity and social justice.
 To provide universal access to basic education and
health.
 To generate gainful employment in all sectors and to
promote investment.
 To focus on agriculture and rural development for
sustainable growth.
 To emphasize development of education and
physical infrastructure for creating enabling
environment for growth and development.

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3.2 Basic characteristics of Budget
On the whole the Union Budget for 2007-08 is :
 A developmental budget covering wide
spectrum of sectors and industries.
 An innovative budget , which goes beyond
usual fiscal accounting and number crunching.
 It encourages growth with inclusiveness.
 It is both savings and investment boosting.
 It is both industry and agriculture friendly.
 It is physical and social infrastructure friendly.
 Above all, it is people friendly.

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 3.3 Budget is Education and
Other Social Sectors Friendly
• Substantial increase in funds for Sarva
Shiksha Abhiyan, Mid-day Meal scheme,
basic health care, drinking water,
sanitation etc.
• National Means-cum-Merit Scholarship
Scheme introduced to arrest drop out
ratio.
• Increase in provisions for Bharat Nirman
by 31.6%, education by 34.2% and health
and family welfare by 21.9%.
• A Vocational Education Mission to start on
the basis of public-private partnership.
• 1396 IITs to be upgraded into centers of
excellence in specific trades and skills
under public-private
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partnership.
Budget 2007 by Tarun Das 12
 3.4 Welfare Schemes for the Poor
• National Rural Employment Guarantee
Scheme (NREGS) is allocated Rs.12,000 crore
and coverage is expanded from 200 districts
to 330 districts.
• Targeted PDS and Antyodaya Anna Yojana
schemes are retained. Review and evaluation
proposed to strengthen these schemes.
• Under the National Rural Health Mission, all
districts to complete preparation of District
Health Action Plans by March 2007.
• To set up more hospitals for prevention of
HIV/ AIDS.
• Integrated Child Development Services to
cover all habitations and settlements during
the Eleventh Plan.

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 3.5 Welfare Schemes for the
Vulnerable and Weaker Sections
• Substantial increase of funds for schemes
for the benefits of SCs/ STs/ minorities.
• An additional cess of 1% on all taxes is
levied to fund secondary education and
higher education and the expansion of
capacity by 54% for reservation for socially
and educationally backward classes.
• Rural Infrastructure Development Fund is
augmented by 20 percent.
•   A new Social Security scheme for death
and disability insurance cover through LIC to
rural landless households is introduced.

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 3.6 Welfare Schemes for
the Senior Citizens

• Housing Loans: National Housing

Bank to introduce 'reverse
mortgage' under which a senior
citizen owning a house can avail of
a monthly stream of income
against mortgage of his/her house,
throughout lifetime, without
repayment or servicing of the loan;
• Insurance: Exclusive health
insurance scheme for senior
citizens offered by National
Insurance Company
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 3.7 Budget is agriculture
friendly.
Farm credit: Target of Rs.225,000 crore for
2007-08 with an addition of 50 lakh new
farmers to the banking system.
NABARD to augment its resources for
refinancing rural credits by issuing tax-free
Government guaranteed rural bonds.
Integrated Oilseeds, Oil palm, Pulses & Maize
Development programme to be expanded.
Priority for Accelerated Irrigation Benefit
Program, and Water Resources Management
National Agricultural Insurance Scheme to be
continued for Kharif and Rabi 2007-08
Agriculture Technology Management Agency
(ATMA) now in place in 262 districts to be
extended to another 300 districts;

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 3.8 Budget is infrastructure
friendly
 National Highways: Provision for National
Highway Development Programme to
increase from Rs.9,945 crore to Rs.10,667
crore.
 Power: Seven more Ultra Mega Power
Projects under process.
 Public Private Partnership and
Viability Gap Funding: Revolving fund
with corpus of Rs.100 crore to be set up to
quicken project preparation.
 Innovative Financing for
Infrastructure: Funds from National Small
Savings Fund may now be borrowed by
India Infrastructure
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Finance Company
Budget 2007 by Tarun Das 17
Limited (IIFCL).
 3.9 Innovative measure for
infrastructure financing
 Govt. to examine Deepak Parikh Committee
suggestions for establishment of two wholly-
owned overseas subsidiaries of IIFCL with
objectives to borrow funds from RBI and
 (i) to lend to Indian companies implementing
infrastructure projects in India, or to co-finance
their ECBs for such projects, solely for capital
expenditure outside India; and
 (ii) to invest such funds in highly rated
collateral securities and provide 'credit wrap'
insurance to infrastructure projects in India for
raising resources in international markets .

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3.10 Budget is industry friendly.
• Petroleum and Natural Gas: 162
production sharing contracts awarded;
investment of Rs.97,000 crore made in
exploration
• Textiles: Provisions for Scheme for
Integrated Textiles Parks and Technology
Upgradation Fund enhanced.
• Additional 100-150 clusters for
Handlooms
• Increase in outstanding credit to SMEs
• Coir Industry: Scheme for
modernization and technology
upgradation Budget 2007 by Tarun Das
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 3.11 Budget is Savings and
Investment friendly
• Threshold limit of tax exemption is
raised by Rs.10,000 for all assesses;
• Surcharge on income tax on all firms
and companies with a taxable income
of Rs.1 crore or less is removed.
• Urban local bodies are allowed to issue
tax-free bonds for infrastructure
development.
• A five year income tax holiday for two,
three or four star hotels and for
convention centres with a seating
capacity of not less than 3,000;
• Urban local bodies are allowed to issue
tax-fee bonds.       
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 4.1 Fiscal Consolidation
continues
• Fiscal deficit targeted at 3.3% of GDP in 2007-08
BE compared to 3.7% in 2006-07RE.
• Revenue deficit targeted at 1.5% compared to 2%
in 2006-07 RE.
• Primary balance is expected to produce a surplus
amounting to 0.2% of GDP in 2007-0 BE compared
to a deficit of 0.1% of GDP in 2006-07 RE.
• An autonomous Debt Management Office (DMO) to
be set up with a Middle Office in first phase to
facilitate transition to a full-fledged DMO.
• An India international development Cooperation
Agency to be set up to bring all development
cooperation under one roof.

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 4.2 Medium Term Fiscal
Indicators
Items 2006-07 2007-08 2008- 2009-
RE BE 09 Tar 10 Tar
1.Revenue Deficit 2.0 1.5 0.0 0.0
as % of GDP
2.Fiscal Deficit 3.7 3.3 3.0 3.0
as % of GDP
3.Gross tax rev. 11.4 11.8 12.3 12.7
as % of GDP
4.Year-end debt 64.4 61.4 58.6 56.0
stock (% of GDP)
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 4.3 Fiscal Consolidation at the
States
• Rs.110,268 crore of States' debt has been
consolidated; twenty States have availed of
benefit of debt waiver of Rs.8,575 crore;
• VAT, CST and a Roadmap towards GST:
Agreement reached with State Governments
to phase out CST; rate to be reduced from 4%
to 3% with effect from April 1, 2007;
• A roadmap for introducing a national level
Goods and Services Tax (GST) with effect
from April 1, 2010 to be prepared.

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 5.1 Major Tax Reforms
(a) Reduction in peak customs duty for non-
agricultural products from 12.5% to 10%.
(b) Reduction of customs duties on most chemicals
and plastics, seconds and defectives of steel, coking
coal, polyester fibres and yarns and raw-materials,
polished diamonds, rough synthetic stones, unworked
corals, drip irrigation systems, agricultural sprinklers
and food processing machinery, medical equipment,
edible oils.
(c) These measures are expected to reduce production
cost and moderate inflation.
•       

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 5.2 Other Tax Reforms
(d) Imposition of of imports duty of 3% (WTO
bound rate) on all private import of aircrafts,
(e) Imposition of exports duty on iron ores
and concentrates.
(f) Excise duties:  Reduction in ad valorem
component of excise duty on petrol and
diesel from 8% to 6%.
(g) Rate of dividend distribution tax is raised
from 12.5% to 15% on dividends distributed
by companies; and to 25% on dividends paid
by money market mutual funds and liquid
mutual funds to all investors.

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 5.3 Service Tax Reforms
(h) Exemption limit for small service providers is
raised from Rupees four lakhs to Rupees eight
lakhs.
•  (i) Service tax extended to:
• Outsourcing for mining of mineral, oil or gas;
• Renting of immovable property for use in
commerce or business;
• Supply of content for use in telecom and
advertising purposes;
• Asset management services;
• Design services;
• Services involved in works contract

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 6.1 Concluding remarks- (1)
• Budget makes a fine balance between growth
and distributive justice and between monetary
discipline and fiscal prudence.
• Budget is growth oriented, but takes care of
people’s basic needs for housing, drinking
water, education and health.
• It is a developmental budget leading to
balanced growth of agriculture and industry.
• An innovative budget which would stimulate
both consumer and investment demand.
• Progressive Budget with special emphasis on
the development of both physical and social
infrastructure.
• Budget integrates both policies and programs in
a well-defined sectoral framework.

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 6.2 Concluding remarks- (2)
• Budget further deepens fiscal
consolidation at both centre and states.
• Budget encourages private participation
and public-private partnership in
infrastructure development.
• Budget has sharp focus on sectors which
have high potentials for either growth or
employment generation.
• Budget has a strong human face.
• In brief, Budget is education and other
social sectors friendly, agriculture and
rural development friendly, infrastructure
friendly, above all, people friendly.

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 Thank you –
Have a Good Day

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