Chapter – 15 Financial Awareness


 

INFLATION- WHAT IS IT?

Inflation in simple words means rise in prices of goods and services. It also means fall in value of money during a particular period/time. It is in fact a sustained rise in prices accompanied by fall in value of money.It is measured normally in terms of percentage increase or decrease in the price index duringa given period.

What is Hyper-inflation?

Hyper-inflation means very high economic inflation during which period value of the country’s currency nosedives in terms of its value and prices of commodities rises uncontrollably. Such a situation normally happen when there is uncertain political conditions in the country or there is war or war-like situation.

What is the Impact of Inflation?

(i)It brings heavy profit to business houses like manufacturers, traders, and other middlemen.

(ii)People living at below poverty line or those who are middle class earners remain the major surfers during the period of ination.

(iii)Nearly all types of consumers are affected by the situation. Those who depend on interest income which is fixed, are the bigger sufferers since interest rates are not sufficient to cover inflation rate.

(iv) Many a time, inflation creates imbalance in the family budget of people leading to hard days.

What Causes Inflation?

(a) Deficit financing leads to increase in aggregate demand against aggregate supply, former being more than the latter.

(b)Increase in investment or other expenditure may cause inflation.

(c)Any level of speculation leading to hoarding for more profit through low supply of goods and services may also cause inflation.

(d)When income increases leading to increase in disposable income, it causes inflation.

(e)Increase in salary and wages, leading to more disposable income causes inflation.

(f)Market demand for large exports reduces supply of goods in the domestic market leading to labeling higher prices of goods and services.

(g)Population pressures also affect inflationary trends.

(h)Government’s policy to supply more credit in the market also creates such situations

NATIONAL INCOME

– Important PointsIt is total monetary value of goods and services produced in the country during a given period. In economic terms, national income is defined as the sum of net value added at factor cost by normal resident in domestic territory of a country and net factor from abroad during an accounting period. (Hansen)

•Concept of National Income has been presented in different ways. National Income is represented as Gross National Product (GNP), Net Domestic Product (NDP) at cost, Net National Product (NNP), Personal Income, Disposable Income, Net National Income (NNI) at cost, and Real Income.

•National Income is a flow concept which means flow of goods and services during a period. Only final goods and services are included during the period.

•Normally National Income covers an accounting year.

•It is expressed in monetary terms.Gross National Product (GNP)

•It is the total flow of goods and services measured at market value resulting from current production of the period in consideration. It also includes net income from abroad.

• The constituents of GNP are:

(a)Consumer durables or goods that satisfy people needs.

(b)Gross investment in capital goods in domestic market like capital formation,residential construction, inventories of goods.

(c)Those goods and services that are produced by the Government.

(d) Net exports (difference between export and imports) of goods and services. This is also called net income from abroad.Measurement of GNP Three common methods are:(i)Income Method(ii)Expenditure Method(iii)Value Added Method

Income Method:

GNP = Wages & salaries + Rent + Interest + Dividends + Undistributed Corporate Profits + Mixed Incomes + Direct Taxes + Indirect Taxes + Depreciation + Net Income from Abroad.

Expenditure Method:

Private Consumption Expenditure (C) + Gross Domestic Private Investment (I) + Net Foreign Investment (X- M) + Government Expenditure on goods & services (G).

BRICS – Important Features

• Nations like Brazil, Russia, India, China and South Africa together form the Brics bloc. The importance of BRICS lies in the fact that 40 per cent of the population of the world lies in these FIVE nations. They also have the combined GDP of around $24 trillionwhich is around 1/5thof the global GDP. Despite such a strong base, these nations are marginalized by global banks.

•Recent Sixth summit of BRICS was held from 15th July 2014 in Brazil’s Fortaleza city.

• The purpose of BRICS summit is to develop greater economic cooperation among Brics nations and advance global economic stability and prosperity.

BRICS’s BANK Floated

• BRICS countries agreed to roll out a new bank with headquarter in Shanghai in China. It will start functioning in next two years.•The bank aims to counter western dominance on global finances.

• The subscribed capital of the Bank would be around $50 billion and the total authorized capital of $100 billion. Each country will have a shareholding of $10 million in the bank, making it clear that each country will have equal say in the bank.

• The President of the Bank for the initial 6 years will be India. After India completes its term, the Presidency will pass on to Brazil for 5 years, followed by Russia for another 5 years.

UNION BUDGET 2014-15 – SALIENT FEATURES

Important Budgetary Terms

Fiscal Policy: The spending and taxing activities of government constitute its fiscal policy.

Fiscal Deficit:It is the surplus of total expenses (expenditure) over the revenue receipts and capital receipts. Capital receipts included in fiscal deficit are exclusive of borrowings. For instance, Fiscal Deficit = Total Expenditure, that includes total of capital expenditure and revenue expenditure less Receipts that includes capital receipts less borrowings + revenue receipts.

Government Budget: This is a document that central government and all State governments prepare every fiscal year to show their income and expenses. This is a annual task which highlights the item-wise details of estimated receipts and expenditure for a fiscal year. This is also called annual budget of the government.

Government Receipts: The estimated income or money receipts from all sources during a accounting period is called government receipts .

Nostro Account: Nostro is Italian word meaning ‘our’. In the business of foreign exchange fund sare transferred from one country to another. Such transfers take place at our end involving particular currency and transferring it to another country in their currency at other centre. In order to transact such business, the foreign exchange dealers maintain balances, in current accounts in foreign currencies in overseas branches/correspondents etc. Such a foreign exchange account by a foreign exchange dealer is called ‘nostro account’.

Primary Deficit: Primary deficit means net of fiscal deficit and interest payments. In simple words, primary deficit is the deficit arising out of the fiscal deficit minus payment of interest.

Public-Private Partnerships (PPPs): It is not new in the economy to involve public as partner to the growth and development of projects. In India this concept is being taken up by Government of India as well as State Governments. PPPs is a type of nance by public for development of projects beneficial to the society in general. Public or large business rms invest money for a return on investment, may be as interest, and part money is invested by the government. Management is jointly handled by the parties to the project.

Gross Domestic Product, Deflator: A price index which adjusts the overall value of GDP according to the average increase in the prices of all output. The GDP deflator equals the ratio of nominal GDP to real GDP.

Gross Domestic Product, Per Capita:

The level of GDP divided by the population of a country or region. Changes in real GDP per capita over time are often interpreted as a measure of changes in the average standard of living of a country, although this is misleading (because it doesn’t account for differences in the distribution of income across factors of production and individuals, and it doesn’t consider the value of unpaid labour).

UNION BUDGET- SALIENT FEATURES

Economic Survey-2013-14

•Fiscal deficit is in bad shape as announced by the Government.

• Growth estimated during 2014-15 shall range between 5.4 to 5.9%. Expected growth of 7-8% could be achieved by only 2016-17 subject to good monsoon.

•Import restrictions led to improvement in Balance of Payment (BoP) during 2013-14.

• The Economic survey has projected that current account decit (CAD) shall be contained around 2.1% of the GDP in 2014-15.

•The current account and the capital account balances together form the country’s BoP.

•CAD is the gap between inflows and outflows of a foreign currency. CAD which was $21.8 billion (Rupees 1.3 lakh crore) during April-June, 2013, moderated to around $1.3 billion (Rupees 7.765 crore) in January-March, 2014. This was possible due to the ban on import of gold because of rupee depreciation. Lower CAD will make Indian industries less susceptible to global economic changes and reduced volatility in foreign exchange rates.

•Food Procurement: Food grain stocks are to the tune of 69.84 million tones as on June 1. 2014. This is due to higher procurement. Irony of this situation is that despite higher procurement and stocks, inflation rate is still high.

• FDI: Government in its budget has announced allowing higher foreign direct investment (FDI) in selected sectors. FDI may be allowed in defence, insurance sector, infrastructure sector, technology etc.

•GST: Goods and Services Tax (GST) will be important step towards economic reforms as well as taxation reforms. Adoption of GST will help raising resources for states and central government. Replacing existing indirect taxes by GST, the later will help create national market as well as align taxation of imports and exports correctly. It is also hoped that when GST is adopted, it will improve competitiveness of production and exports from India. Direct Tax Code (DTC) is also seen as a step towards replacement of existing income tax laws.

•Non-Performing Assets (NPAs) of Public Sector Bank (Government owned banks): It shows a major concern in terms of rising NPAs of public sector banks as per the economic survey. This may be because of slowdown in the important industries and infrastructure,like textile industry, chemical industries, iron and steel industries, food processing,construction, telecommunication etc. Overall NPAs increased from 2.36% of total credit portfolio of banks in March 2011 to 3.90% in March 2014 as shown in the economic survey.

Some factual information on NPAs of public sector banks (PSB) is given below:

NPAs of PSBs stood at 4.4% in 2013-2014 against 2.09% in 2008-09.Gross NPAs increased to Rupees 2,04,249 crore in March 2014 from Rupees 59,972 crore in March, 2010.

Overall NPAs of banks, including private sector banks, rose from 2.36% in 2011 to 3.90% in March 2014.

• Ganga Development Programme Project for the proper development, cleaning, and maintenance of river ganga has been allocated a total sum of Rupees 20,000 crore as announced by the Government. However yearly budget allocations is given in following sector-wise allocations.

•Main focus of the budget was on nursing public finances, tame inflation, simplify tax regime etc. It is believed by the government that above actions will lead to growth,investment and employment.

•On the front of direct taxes, salaried/wagers have been given a benefit in the income tax. The income tax slab has been increased to Rs.3.0lakh up to which no tax is payable. This is an increase of Rs.50,000 than last year. Also Rs.50,000 increase has been given in 80CC as savings incentive. From Rs.1lakh, now a person can save up to Rs.1.50 lakh and take income tax benefit.

•As per budget 2014-15, the government has extended tax holiday benefit for another 3 years to power companies which otherwise expires on 31.3.2014. Now it expires on 31.3.2017. Benefit of this extension is that power sector projects can avail tax benefit under section 81-IA of Income Tax Act. The law permits power companies to claim tax exemption for up to 10 years within worst 15 years of a project’s operation.

• Duty on cigarettes has been hiked to 72% on cigarettes with 65 mm length and 11-21%for cigarettes of other length.Deficit and Inflation

• Decline in fiscal decit from 5.7% in 2011-12 to 4.5% in 2013-14 mainly achieved by reduction in expenditure rather than by way of realization of higher revenue.

• Improvement in current account deficit from 4.7 % in 2012-13 to year end level of 1.7% mainly achieved through restriction on non-essential import and slow-down in overall aggregate demand. Need to keep watch on CAD.

• 4.1 per cent fiscal deficit a daunting task in the backdrop of two years of low GDP growth,static industrial growth, moderate increase in indirect taxes, subsidy burden and not so encouraging tax buoyancy.

OTHER KEY FEATURES OF BUDGET 2014-2015 (SPECIFIC SECTORS)

• Road map for fiscal consolidation outlines fiscal deficit of 3.6 % for 2015-16 and 3 % for 2016-17.

Administrative Initiatives

•Legislative and administrative changes to sort out pending tax demands of more than Rs.4 lakh crore under dispute and litigation.

•Resident tax payers enabled to obtain on advance ruling in respect of their income-tax liability above a defined threshold.

•Income-tax Settlement Commission scope to be enlarged.

•National Academy for Customs & Excise at Hindupur in Andhra Pradesh.

•The subsidy regime to be made more targeted for full protection to the marginalized, poor and SC/ST.

•Convergence with International Financial Reporting Standard (IFRS) by Adoption of the new Indian Accounting Standards (2nd AS) by Indian Companies.

•Setting up of Expenditure Management Commission to look into expenditure reforms.

•Employment exchanges to be transformed into career centers. A sum of Rs. 100 crore provided.

ECONOMIC INITIATIVES

Foreign Direct Investment (FDI)

•Government to promote FDI selectively in sectors.

•The composite cap of foreign investment to be raised to 49 per cent with full Indian management and control through the FIPB route.

• The composite cap in the insurance sector to be increased up to 49 per cent from 26 per cent with full Indian management and control through the FIPB route.

• Requirement of the built up area and capital conditions for FDI to be reduced from 50,000 square metres to 20,000 square metres and from USD 10 million to USD 5 million respectively for development of smart cities.

• The manufacturing units to be allowed to sell its products through retail includingE-commerce platforms.

Bank Capitalization

• Requirement to infuse Rs.2,40,000 crore as equity by 2018 in our banks to be in line with Basel-III norms

•Capital of banks to be raised by increasing the shareholding of the people in a phased manner.

Public Sector Undertaking’s Capital Expenditure

•PSUs will invest through capital investment a total sum of Rs. 2,47,941 crores in the current financial year.

Irrigation

•1000 crore provided for “Pradhan Mantri Krishi Sinchayee Yojna” for assured irrigation.

Rural Development

• Shyama Prasad Mukherji Rurban Mission for integrated project based infrastructure in the rural areas.•Rs. 500 crore for “Deen Dayal Upadhyaya Gram Jyoti Yojana” for feeder separation to augment power supply to the rural areas.

•Rs. 14,389 crore provided for Pradhan Mantri Gram Sadak Yojna(PMGSY).

•More productive, asset creating and with linkages to agriculture and allied activities wage employment would to be provided under MGNREGA.

•Under Ajeevika, the provision of bank loan for women SHGs at 4% to be extended to another 100 districts.

• Initial sum of Rs.100 crore for “Start Up Village Entrepreneurship Programme” for encouraging rural youth to take up local entrepreneurship programs.

• Allocation for National Housing Bank increased to Rs. 8000 crore to support Rural housing.

• New programme “Neeranchal” to give impetus to watershed development in the country with an initial outlay of Rs. 2142 crores.

• Backward Region Grant Fund (BRGF) to be restructured to address intra-district inequalities.

Agriculture Credit

• To provide institutional nance to landless farmers, it is proposed to provide finance to 5 lakh joint farming groups of “Bhoomi Heen Kisan” through NABARD .

•A target of Rs.8 lakh crore has been set for agriculture credit during 2014-15.

•Corpus of Rural Infrastructure Development Fund (RIDF) raised by an additional Rs. 5000 crores from the target given in the Interim Budget to Rs.25000 crores .

•Allocation of Rs.5,000 crore provided for the Warehouse Infrastructure Fund.

•“Long Term Rural Credit Fund” to set up for the purpose of providing refinance support to Cooperative Banks and Regional Rural Banks with an initial corpus of Rs.5,000 crore.

•Amount of Rs.50,000 crore allocated for Short Term Cooperative Rural Credit .Sum of Rs.200 crore for NABARD’s Producers Development and Upliftment Corpus (PRODUCE)for building 2,000 producers organizations over the next two years.

Food Security

•Restructuring FCI, reducing transportation and distribution losses and efficacy of PDS to be taken up on priority.

•Government committed to provide wheat and rice at reasonable prices to the weaker sections of the society.

• Government when required will undertake open market sales to keep prices under control.

INFRASTRUCTURE

• An institution to provide support to mainstreaming PPPPs called 4P India to be set up with a corpus of Rs. 500 crores.

FINANCIAL SECTOR

Capital Market

• Ongoing process of consultations with all the stakeholders on the enactment of the IndianFinancial Code and reports of the Financial Sector Legislative Reforms Commission(FSLRC) to be completed.

•Government in close consultation with the RBI to put in place a modern monetary policy framework.

•Following measures will be taken to energize Capital markets:

Introduction of uniform KYC norms and inter-usability of the KYC records across the entire financial sector.

Introduce one single operating demat account

Uniform tax treatment for pension fund and mutual fund linked retirement plan

BANKING AND INSURANCE SECTOR

Banking

•Time bound programme as Financial Inclusion Mission to be launched on 15 August this year with focus on the weaker sections of the society.

• Banks to be encouraged to extend long term loans to infrastructure sector with flexible structuring.

• Banks to be permitted to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending (PSL).

•RBI to create a framework for licensing small banks and other differentiated banks.

•Differentiated banks serving niche interests, local area banks, payment banks etc. are contemplated to meet credit and remittance needs of small businesses, unorganized sector, low income households, farmers and migrant work force.

•Six new Debt Recovery Tribunals to be set up.

•For venture capital in the MSME sector, a Rs.10,000 crore fund to act as a catalyst to attract private Capital by way of providing equity , quasi equity, soft loans and other risk capital for start-up companies with suitable tax incentives to participating private funds to be established.

Insurance Sector

• The pending insurance laws (amendment) Bill to be immediately brought for consideration of the Parliament.

•The regulatory gap under the Prize Chits and Money Circulation Scheme (Banking) Act, 1978 will be bridged.

Water Resources and cleaning of Ganga

•Rs.100 crore provided for Detailed Project Reports for linking of rivers.

• Rs.2037 crores provided for Integrated Ganga Conservation Mission “NAMAMI GANGE”.

• Rs.100 crore provided for Ghat development and beautification at Kedarnath, Haridwar, Kanpur, Varanasi, Allahabad, Patna and Delhi.

• NRI Fund for Ganga will be set up as per budget provisions.

BUDGET ESTIMATES

•Mandate to be fulfilled without compromising fiscal consolidation.

• Non-plan Expenditure of Rs. 12,19,892 crore with additional provision for fertilizersubsidy and Capital expenditure for Armed forces.

•Rs.5,75,000 crore Plan expenditure – increase of 26.9 per cent over actuals of 2013-14.

•Special allocation of Rs.53,706 crore for North East Regions.

•Total expenditure of Rs.17,94,892 crore estimated.

•Gross Tax receipts of Rs.13,64,524 crore estimated.

•Net to centre of Rs.9,77,258 crore estimated.

•Fiscal deficit of 4.1% of GDP and Revenue deficit of 2.9% estimated.

OBJECTIVES OF TAX PROPOSALS

• Ambitious Revenue Collection Targets in Interim Budget. Proposed tax changes factored in the Budget Estimates 2014-15

• Measures to revive the economy, promote investment in manufacturing, rationalize tax provisions to reduce litigation, address the problem of inverted duty structure in certain areas. Tax reliefs to individual tax payers.

DIRECT TAXES PROPOSALS

• Personal Income-tax exemption limit raised by Rs.50,000/- that is, fromRs.2 lakh to Rs.2.5lakh in the case of individual taxpayers, below the age of 60 years. Exemption limit raised from Rs. 2.5 lakh to Rs. 3 lakh in the case of senior citizens.

•No change in the rate of surcharge either for the corporates or the individuals, HUFs, firms etc.

•The education cess to continue at 3 percent.

•Investment limit under section 80C of the Income-tax Act raised from Rs. 1 lakh to Rs. 1.5 lakh.

•Deduction limit on account of interest on loan in respect of self occupied house property raised from Rs.1.5 lakh to Rs.2 lakh.

•Conducive tax regime to Infrastructure Investment Trusts and Real Estate Investment Trusts to be set up in accordance with regulations of the Securities and Exchange Board of India.

• Investment allowance at the rate of 15 percent to a manufacturing company that invests more than Rs. 25 crore in any year in new plant and machinery. The benefit to be available for three years i.e. for investments up to 31.03.2017.

• Investment linked deduction extended to two new sectors, namely, slurry pipelines for the transportation of iron ore, and semi-conductor wafer fabrication manufacturing units.

•10 year tax holiday extended to the undertakings which begin generation, distribution and transmission of power by 31.03.2017.

•Net Effect of the direct tax proposals to result in revenue loss of Rs.22,200 crore.

INDIRECT TAXES PROPOSALS

• To boost domestic manufacture and to address the issue of inverted duties, basic customs duty (BCD) reduced on certain items.

• Color picture tubes exempted from basic customs duty to make cathode ray TVs cheaper and more affordable to weaker sections.

• To encourage production of LCD and LED TVs below 19 inches in India, basic customs duty on LCD and LED TV panels of below 19 inches reduced from 10 percent to Nil.

•To give an impetus to the stainless steel industry, increase in basic customs duty on imported at-rolled products of stainless steel from 5 percent to 7.5 percent.

•Concessional basic customs duty of 5 percent extended to machinery and equipment required for setting up of a project for solar energy production.

•To develop renewable energy, various items exempted from excise duty.

• Likewise there are many other sectors where either tax/duty exemptions have been given or taxes/duty increased.

APPRECIATION AND DEPRECIATION OF RUPEE

Appreciation and depreciation are two words that are commonly linked increase and decrease of any value. In case of monetary terms, when we say that value of rupees vis-à-vis dollar has increased from 58 to 60 per dollar, it means that rupee has depreciated. In other words, we have to shell out rupees 60 now to get a dollar i.e. more rupee money is to be parted with to get one dollar. On the other hand, if value of rupee comes down from 60 to 55 per dollar, we say that rupee has appreciated, i.e. less of rupees have to be shelled out for a dollar.Such up and down movement of one currency vis-à-vis other currency continues in the foreign exchange market. As seen above dollar and rupee currency’s upward or downward movement indicated that one is in more demand than the other. In other words when dollar is moving up it means more demand of dollar.

Effect of Changes in Currency Prices

When rupee gets depreciated then import items gets costlier. For instance, on importing an item from USA, we pay rupees 5500 if rupee is appreciated (1 $ =Rs.55). But same import costs Rs.6000 if rupee is depreciated (1 $ = 60 Rs.). This shows that on depreciation import items are affected the most since more money is paid.

Similarly with appreciating rupee importers will gain.

Mostly the changes in the4 currency value vis-à-vis other currencies are due to demand and supply. As per the economic theory if demand of a product is higher but supply is poor, the prices tend to rise. The vice versa is also true, i.e. more the supply and less the demands reduces the prices. The same principle applies to currencies.

Factors affecting rupee value

1. Employment

Higher unemployment causes low spending since there is no money with unemployed for spending. Sometimes employed are cautious and spend less to save for future. Unemployment indicates poor economic growth. When such situation arises demand for currency declines. So there is depreciation

2. Economic Growth

Higher economic growth leads to increase in prices of commodities. Workers earn more, but are unable to spend due to higher prices. Central banks of the countries may increase interest rates. A change in interest rates may signal a change in currency rates.

3. Interest Rates

During poor economic conditions, money supply is low. And so is the spending power of people. It means supply is low and demand is more. This increases the prices and value of rupee increases. RBI in India or Central Bank of any country can lower the interest rates to make borrowing cheaper. Higher inflow increases available cash in hand and increase spending.

4. Balance of Trade

Balance of Trade means = Total value of exports – Total value of imports

If above trade balance is positive it means the country’s economy is good. If it is negative then there is trade gap or trade deficit.

Trade balance affects the supply and demand for a currency. During positive economy (positive trade balance) currency demand is higher. A trade deficit, on the other hand, increases the supply of a country’s currency and could lead to devaluation if supply greatly exceeds demand.

In short we see that when currency depreciates corporate importing goods and services are most losers and exporters are gainers. However the situation is reverse when rupee currency appreciates.