Is falling /devaluation /depreciation of Rupee good for the economy ?

 People often says Rupee is depreciating or falling and depreciation of Rupee is harmful for the economy. What is the reality. lets try to understand the economics behind falling of the INR.

                Recent SBI Report about depreciation of  INR in the TRUMP 2.0 regime

First we will understand different terms like devaluation and depreciation .

DEVALUATION: 

• Devaluation is a deliberate action of the government to downward adjustment of the currency with relation to other foreign currency. 
• It takes place in a pegged / Fixed exchange rate system.
• In the present times, governments avoid devaluation with certain exceptions. Like China many times has opted for devaluation so as to promote its exports. In response ,countries used to get involved in competitive devaluation of their currncies leading to "currency war".

DEPRECIATION:

• Fall in the  currency value is  controlled by market factors like economic fundamentals political stability and other related factors. 
• It takes place in a floating Exchange rate regime.
• In the present times ,this is the prevalent mechanism.

***********The devaluation and depreciation similar in the sense of their after effects .They only differ in the sense of how value of currency is falling if it is through market then it is depreciation and if it is by government order then devaluation.

Lets  understand what happens to our exports /imports if INR depreciates /devaluates.

Lets say,on 12.11.2024:

1 $=80 Rs 

On 12.12.2024, INR depreciated to the value of 

1 $ =90 Rs 

Now we have to understand the economic implication of depreciation in case of trade:

Suppose there is a buyer of pen in the international market with 10 dollars in his  pocket and the  cost of Indian pen is Rs 50.

Now in case 1 on date 12.11.2024,when he was in the market then he could buy 80*10/50=16 Indian pen

In case 2 ,On 12.12.2024,Everything remains same except depreciation of INR ie 1 $ =90 Rs, so on 12.12.2024, he can buy :90*10/50=18 Indian pen,

From the above example, it is clear that buyer can buy more pen when INR is depreciated ie in case 2 , now we can conclude that :

Export of Indian goods increases when INR is depreciated or devalued which is good for the Indian economy as it earns foreign currency.

But it does not mean that depreciating INR is always good for the economy. Depreciating rupee can be manifestation of the relative weakening of the economy (demand of INR decreases). So on arrival of Trump2.0 in USA , SBI report published in 2nd week of November 2024 says that INR may depreciate 8-10 % against dollar . 

Depreciating INR can also result in :

• Increased cost of imports 
• Increased inflation
• Increased cost of foreign borrowings 
• Reduce foreign investments because of weak economy

Maintaining the value of INR within a band is a tight rope walk which is to be ensured by RBI so as to maintain economy stable.

So, from next time don't be judge -mental merely on the sloganeering rather decipher the reality and make the people aware .

NRI Accounts: Non-Resident External (NRE) Account,Non-Resident Ordinary (NRO) Account, Foreign Currency Non-Resident Account (FCNR)

 

What are the types of NRI Accounts?

There are various types of NRI Accounts that are available to an NRI Investor. Some of the major ones are-

●       Non-Resident External (NRE) Savings Account/ Fixed Deposit Account

●       Non-Resident Ordinary (NRO) Savings Account/ Fixed Deposit Account

●       Foreign Currency Non -Resident (FCNR) Fixed Deposit Account

NRE Savings Account /Fixed Deposit Account :

• The NRE account is an Indian rupee-denominated account opened by an NRI in an Indian bank.
• NRI uses this account to deposit earnings in the foreign land.
• It offers  savings, current, recurring, or fixed deposits. 
• Interest income earned on the amount in an NRE account is non-taxable in India.

How NRE account works :

Foreign Currency earned outside India (thats why it is NRE-External)

                                     ↓

Foreign Currency converted to INR

                                    ↓

Deposits in the form of INR

                                    ↓

 Repatriation of funds (Principal & Interest amount) to a foreign account on maturity .

Non-Resident Ordinary (NRO) Savings Account/ Fixed Deposit Account:

• The NRO account is an Indian rupee-denominated account opened by an NRI in an Indian bank.
• NRI uses this account to deposit income generated from within India.
• It offers  savings, current, recurring, or fixed deposits. 
• Interest income earned on the amount in an NRO account is taxable in India.
• The funds of NRO are easily accessible to your family members in India
• The amount deposited  and the earnings on this account can be Repatriated to the country of residence  up to 1 million USD per financial year. 

How NRO account works :

Income generated by an NRI  in  India 

                                     ↓

Deposits in the form of INR

                                    ↓

Repatriation of funds  to a foreign account on maturity  with limits .

Foreign Currency Non-Resident Account (FCNR Account): 

• The FCNR account is a foreign currency denominated account opened by an NRI in an Indian bank.
• There is no risk of exchange rate fluctuations as it is foreign currency denominated account
• It offers exclusively fixed deposits. 
• NRI uses this account to deposit earnings in the foreign land.
• FCNR (A) was introduced in 1975 to encourage NRI deposits. In 1993, RBI introduced FCNR (B), to replace FCNR (A).
• At present there is no FCNR (A) account and only FCNR (B) account is there.
• Interest income earned on the amount in an NRE account is non-taxable in India 

How FCNR  account works :

Foreign Currency earned outside India 

                                     ↓

Foreign Currency converted to INR

                                    ↓

Deposits in the form of INR

                                    ↓

 Repatriation of funds (Principal & Interest amount) to a foreign account on maturity .

Securities and Exchange Board of India (SEBI) ,Objectives of SEBI, Functions of SEBI,

 

The Securities and Exchange Board of India (SEBI) :

SEBI is the regulator of Securities market of India. The main functions of SEBI is :

"...to protect the interests of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto“.It was established in the year 1988 and given statutory powers on 12 April 1992 through the SEBI Act, 1992.

Objectives of SEBI:

•         To regulate the activities of stock exchange.
•         To protect the rights of investors and ensuring safety to their investment.
•         To prevent fraudulent and malpractices by having balance between self regulation of business and its statutory regulations.
•         To regulate and develop a code of conduct for intermediaries such as brokers, underwriters, etc.

Functions of SEBI:

The SEBI performs following important functions to meet its objectives:

1. Protective functions   
2.  Developmental functions  
3. Regulatory functions.

1. Protective Functions:

These functions are performed by SEBI to protect the interest of investor and provide safety of investment.

As protective functions SEBI performs following functions:

• SEBI Checks Price Rigging:
• SEBI Prohibits Insider trading:
• SEBI prohibits fraudulent and Unfair Trade Practices
• SEBI undertakes steps to educate investors .
• SEBI promotes fair practices and code of conduct in security market

Developmental Functions:

These functions are performed by the SEBI to promote and develop activities in stock exchange and increase the business in stock exchange. Under developmental category:

• SEBI promotes training of intermediaries of the securities market, 
• SEBI tries to promote activities of stock exchange by adopting flexible and adoptable approach .

Regulatory Functions:

These functions are performed by SEBI to regulate the business in stock exchange by framing rules and regulations and a code of conduct to regulate the intermediaries such as merchant bankers, brokers, underwriters, etc.

• SEBI registers and regulates the working of various stakeholders like stock brokers, sub-brokers, share transfer agents, trustees, merchant bankers etc.
• SEBI registers and regulates the working of mutual funds etc.
• SEBI regulates takeover, merger and aquisition-of the companies. 
• SEBI conducts inquiries and audit of stock exchanges.

Budget Deficits: Fiscal Deficit, Twin deficit, Gross Primary Deficit, Monetized Deficit, Effective Revenue Deficit

 

CLASSIFICATION OF BUDGET:

Budgets are broadly categorized into three main types based on their financial outcomes, each playing a distinct role in fiscal planning:

●        Balanced Budget

●        Surplus Budget

●        Deficit Budget

 

A balanced budget occurs when planned revenue match or exceed the amount of planned expenses. A balanced budget occurs when tax revenue is equal to government spending.

A surplus budget is a condition when incomes exceeds the expenditures. In simpler words, when government revenue exceeds the expenses then it is known as a surplus budget.

A budget deficit occurs when expenditures exceeds revenue. In simpler words, when government revenue is less than the expenses then it is known as a deficit budget.

Revenue Deficit: The revenue deficit refers to the excess of government’s revenue expenditure over revenue receipts.

               Revenue deficit = Revenue expenditure – Revenue receipts.

• The revenue deficit includes only such transactions that affect the current income and expenditure of the government. 
• When the government incurs a revenue deficit, it implies that the government is dissaving and is using up the savings of the other sectors of the economy to finance a part of its consumption expenditure.

Budgetary deficit:

• It is the difference between all receipts and expenses in both revenue and capital account of the government. 
• Budgetary deficit is the sum of revenue account deficit and capital account deficit. 
• Budgetary deficit is usually expressed as a percentage of GDP. 
• Prior to 1997, GOI  used the following methods for making budget deficit zero:

1.Printing of new currency

2.Borrowing from RBI.

But after 1991 reforms ,Sukhmoy Chakraborty committee recommended for FISCAL DEFICIT.

Fiscal Deficit: Fiscal deficit is the difference between the government’s total expenditure and its total receipts excluding borrowing.

Gross fiscal deficit = Total expenditure – (Revenue receipts + Non-debt creating capital receipts).

From financing side:

Gross fiscal deficit = Net borrowing at home + Borrowing from RBI + Borrowing from abroad.

Net borrowing at home includes directly borrowed from the public through debt instruments (for example, the various small savings schemes) and indirectly from commercial banks through Statutory Liquidity Ratio (SLR). 

Non-debt creating capital receipts:

• Those receipts which are not borrowings and, therefore, do not give rise to debt.
•  Examples are recovery of loans and the proceeds from the sale of PSUs.
• The fiscal deficit will have to be financed through borrowing. 
• Thus, it indicates the total borrowing requirements of the government from all sources.

TWIN DEFICIT / DOUBLE DEFICIT :

• When a country has both current account deficit and fiscal deficit, it is said to be twin/double deficit. 
• This means the country's economy is importing more than it is exporting, and the country's government is spending more money than it is generating.

Gross Primary Deficit:

• It is Gross Fiscal Deficit less interest payments of the current fiscal year .
• This deficit is about actual liability for the particular year.
•  A shrinking primary deficit indicates progress towards fiscal health as it shows that your deficit in the current year is decreasing . 
• When the primary deficit is zero, the fiscal deficit becomes equal to the interest payment. 
• This means that the government has resorted to borrowings just to pay off the interest payments. Further, nothing is added to the existing loan.

Monetised Deficit: 

• Monetised deficit means the increase in the net RBI credit to the central government without increasing public debt, such that the monetary needs of the government could be met easily. 
• Making money from a deficit means printing more money in layman’s terms. 
• It results in increase in High powered money. 
• RBI does so by purchasing government securities directly in the primary market. Monetisation of deficit was in practice in India till 1997, whereby the central bank automatically monetised government deficit through the issuance of ad-hoc treasury bills. 
• Two agreements were signed between the government and RBI in 1994 and 1997 to completely phase out funding through ad-hoc treasury bills.
• And later on, with the enactment of FRBM Act, 2003, RBI was completely barred from subscribing to the primary issuances of the government from April 1,2006.
•  Post 1997, monetisation is done  indirectly by buying government bonds in the secondary market through what are called open market operations (OMOs).
• As the  government started borrowing in the open market, interest rates went up. High interest rates incentivized saving and thereby spurred investment and growth.

EFFECTIVE REVENUE DEFICIT (ERD):

• Effective Revenue deficit is a new term introduced in the Union Budget 2011-12. 
• The concept of effective revenue deficit has been suggested by the Rangarajan Committee on Public Expenditure.
• Revenue deficit is the difference between revenue receipts and revenue expenditure but  the present accounting system includes all grants from the Union Government to the state governments/Union territories/other bodies as revenue expenditure, even if they are used to create assets. 
• Such assets created by the sub-national governments/bodies are owned by them and not by the Union Government. Nevertheless they do result in the creation of durable assets. 
• According to the Finance Ministry, such revenue expenditures contribute to the growth in the economy and therefore, should not be treated as unproductive in nature.
• Effective Revenue Deficit signifies that amount of revenue deficit that is being used for actual consumption expenditure of the Government and not for creating the assets. 
• ERD is revenue deficit excluding capital expenditures  used for creating durable assets out of revenue expenditure .

TYPES OF BUDGETING SYSTEM:INCREMENTAL BUDGETING,Zero-based budgeting (ZBB),Gender budgeting (GB),OUTCOME BASED BUDGETING.

 

TYPES OF BUDGETING SYSTEM

Prominently Budgeting is done with the following methods:

INCREMENTAL BUDGETING :

• The most conventional budgeting system, widely adopted across many countries, is a method where a new budget is developed by implementing only minor adjustments to the existing year's budget. 
• This approach utilizes either the previous year's budget or actual performance as basis of the budget, with additional incremental amounts included for the upcoming budget period. 
• Since it is based on last year's budget, consistency and stability over time are maintained. 
• Resource allocation for the current year depends upon allocations from the prior period. This method of budgeting does not require any extensive analysis or calculations.
• This budget is very simple in its implementation, which aids management in saving time and simplifying calculations.
• With this budgeting method, the effects of any adjustments in the current year’s budget can be readily observed and recognized. This is due to the fact that the budget remains consistent and almost remains unchanged from year to year.
•  Significant variations in the subsequent year's budget are rare; thus, if management enacts any major modifications, they can be easily detected, and the repercussions can be clearly seen.

On negative side :

• It does not encourage innovation, as it simply follows last year's budget line items with incremental adjustments. 
• This method is not advisable, as it overlooks evolving conditions and the changing environment.  
• Additionally, it fosters a mindset of "spend up to the budget" to secure a suitable allocation for the following period, leading to a "spend it or lose it" attitude.

 

Zero-based budgeting (ZBB) :

• It is a budgeting approach where every expense must be justified for the upcoming new period.

• The zero-based budgeting process begins from a "zero base," evaluating the needs and costs of every function within an organization.

• ZBB offers benefits such as improved Efficiency, Accuracy, prevention of Budget inflation, enhanced Coordination and Communication, and a reduction in redundant activities.

• However, Zero-Based Budgeting also has some drawbacks, including High Manpower Turnover, being Time-Consuming, and a Lack of Expertise needed to implement this kind of budgeting.

Gender budgeting (GB) :

Background :

The concept of gender budgeting emerged in response to the global context of economic globalization. Initially, countries within the Commonwealth took the lead in implementing gender budgeting initiatives. During the Seventh Plan (1987-1992), 27 significant schemes aimed at women were identified for monitoring to evaluate the amount of funds and benefits received by women. The Eighth Plan emphasized the importance of ensuring a specific allocation of funds from general developmental sectors to women. The Ninth Plan introduced the Women's Component Plan (WCP), which sought to allocate 30% of funds specifically for women-related sectors. The Tenth Plan aims to connect the concepts of the WCP and gender budgeting.

Budget 2016-17 mentions that:

“Gender Budgeting in its simplest connotation is 'Gender Analysis' of the budget aimed at examining the budgetary allocation through a gender lens.” 

• Gender budgeting represents the integration of a gender perspective into the budgetary process,policy development, implementation, and assessment.

• Gender budgeting in India have  gender specific programmes in the budget under various ministry budgets  and it has  separate gender budget statement  attached as part of the general budget. 

• In India, gender budgeting is a developing field and goes beyond merely accounting.

• Gender budgeting enhances transparency concerning the factors that underlie political decisions related to the budget.

• It promotes increased accuracy and sustainability since available funds are better aligned with the actual needs of various social groups.

• Gender budgeting is a process that exposes the discriminatory effects of financially impactful decisions and facilitates a gender-equitable reshaping of resource allocation choices.

• It serves as a means to implement gender equality goals, even during periods of larger budgetary allowances.

OUTCOME BASED BUDGETING :

Output vs Outcome :

1.We have Total sanitation campaign since 1999 and on records there were toilets constructed in rural areas throughout the country but still people defecated in open. Construction of toilets in numbers is Output while habit of using toilet is outcome. So in case of TSC, output was there but outcome was not there.

2.Sarve Shiksha Abhiyan (SSA) is operational since 2002 and target was to educate all children between 6-14 age by 2010.But ASER report-2023 published by NGO PRATHAM observed that over 50 % of the children in the age group of 14-18 years are not able to do elementary calculations. So,Bringing children to school is output but learning abilities is outcome.

In view of such aspects, outcome budgeting becomes of significance.Outcomes refer to the ultimate products and results of various government initiatives and interventions, including collaborations with state governments, public sector undertakings, autonomous organizations, and the community. They are represented in terms of qualitative targets and achievements, enhancing the comprehensiveness of the technique.

• One of the prominent budgeting methods currently practiced in India is outcome-based budgeting.
• This approach involves outlining and estimating the results of each program or scheme that has been developed.
• A noteworthy aspect of outcome-based budgeting is that program outcomes are evaluated not solely in monetary terms but also through physical achievements expressed in actual figures, such as kilowatts of energy generated or tons of steel produced.
• Additionally, outcomes are conveyed in terms of qualitative targets and accomplishments to enhance the overall technique's comprehensiveness.
• This method assesses the developmental outcomes of all government programs and determines whether funds have been utilized for their intended purposes, including the effectiveness of financial expenditure.
• The outcome budget contributes to improved service delivery, informed decision-making, program performance evaluation, communication of program objectives, enhanced program effectiveness, cost-effective budgeting, accountability establishment, and better management of schemes.
• Outcome budgeting shifts the focus of government programs from being oriented around expenditures to being focused on results.
• Starting from 2007-08, the former Performance Budget was integrated with the Outcome Budget, leading to a single document known as the Outcome Budget. All ministries are required to prepare outcome budgets to ensure that budgeting is directed towards achieving specific targets.

BUDGET, Revenue Budget, Capital Budget

BUDGET:

According to Article 112 of the Indian Constitution, the Union Budget of a year is referred to as the Annual Financial Statement (AFS). It is to be noted that there is no such word "budget " mentioned in the Indian Constitution.

Government budget can broadly be classified into:

• Revenue Budget 
• Capital Budget 

Both revenue and Capital budget can further be classified as receipts and Expenditure as depicted in the below mentioned image.

Credit of the image: NCERT -Introductory Macro Economics, class XII.

 

Revenue Budget: The revenue account shows the current receipts of the government and the expenditure that can be met from these receipts. It comprises of Revenue receipts and revenue expenditures.

Revenue Receipts:

• Those receipts that neither create any liabilities nor lead to any claim on the government are called revenue receipts. 
• Revenue receipts are non-redeemable .
• These are divided into tax and non-tax revenues. 

Tax Revenue:

Tax revenue consist of the proceeds of taxes and other duties levied by the central government. Tax revenue comprise of direct taxes and indirect taxes.

Direct Tax : It  is paid directly by an individual or organization to the imposing entity/Government. . 

Example of direct tax are: Personal income tax or  corporation tax, wealth tax, Capital Gains tax, Property Tax, Entertainment Tax, STT, DDT and MAT etc. 

Indirect Tax: Those taxes which are not directly levied on the Income of an Individual rather  indirectly levied on the expenses incurred by the Individual. This tax is basically levied on the seller of goods but finally it is being paid by the end consumer. Examples :GST ,custom duty.

Non-tax revenue :

It mainly consists of interest receipts, dividends and profits on investments made by the government, fees, fines, stamp duties, gifts and grants from other countries ,escheats   and other receipts for services rendered by the government. Cash grants-in-aid from foreign countries and international organisations are also included. 

Revenue Expenditure:

• Revenue expenditure consists of all those expenditures of the government which do not result in creation of physical or financial assets. 
• These expenses are incurred for day to day functioning of the government departments and various services, interest payments on debt incurred by the government, and grants given to state governments and other parties . 
• Interest payments on market loans, external loans and from various reserve funds constitute the single largest component of non-plan revenue expenditure. 
• Subsidies are an important policy instrument which aim at increasing welfare.

The Capital Budget :

The Capital Budget is an account of the assets as well as liabilities of the central government, which takes into consideration changes in capital.

Capital Receipts: 

• These receipts that either create liabilities or reduce assets .
• These receipts are redeemable .
• These receipts are not of recurring nature .
• The main items of capital receipts are loans raised by the government from the public which are called market borrowings, borrowing by the government from the Reserve Bank and commercial banks and other financial institutions through the sale of treasury bills, loans received from foreign governments and international organisations, and recoveries of loans granted by the central government.
•  Other items include small savings (Post-Office Savings Accounts, National Savings Certificates, etc), provident funds and net receipts obtained from the sale of shares in Public Sector Undertakings (PSUs).

Capital receipts can be classified as :

• Debt creating capital receipts and 
• Non-debt creating capital receipts ,
• Non debt capital receipts are those receipts which don’t create liability on Government to be paid back like Disinvestment amount and Loan payments received. 
• All the loans taken by Government creating to be paid back are said to be Debt creating Capital receipts.

Capital Expenditure :

• Expenditure  generally made to acquire an asset or improve the capacity of the asset.
• Its nature is creation of Long Term assets 
• It is of non recurring and one time investment in most of the cases .
• Capital Expenditure is capitalized as opposed to Revenue Expenditure which is not capitalized. This is asset capitalization.
• Capital expenditure was also categorised as plan and non-plan in the budget documents. 
• Plan capital expenditure, like its revenue counterpart, relates to central plan and central assistance for state and union territory plans. 
• Non-plan capital expenditure covers various general, social and economic services provided by the government.
• Capital Expenditure includes expenditure on the acquisition of land, building, machinery, equipment, investment in shares, and loans and advances by the central government to state and union territory governments,PSUs and other parties.