 In the previous class we were discussing about the key aspects of money and how it affects three macroeconomic variables namely the interest rate, the exchange rate as well as the inflation and we understood when the supply of money increases it causes interest rates to fall, the exchange rate to depreciate as well as results in inflation and vice versa if there is a decrease in the supply of money and we understood how all of these variables are also interlinked and the challenge in economics is to find a workable balance between all of these variables because it is very difficult to have a favorable environment with respect to all of these macroeconomic variables and that is why last class I was explaining that the single most important objective of any economic policy making is to ensure that the inflation is under control because that is one major macroeconomic variable that all governments all policy making entities would ensure that it is always kept under control. Now during the course of the introductory session of this course I was mentioning that the very purpose of this course was not to give you deeper insights of the various concepts that I have dealt so far but to give you some comfort level when it comes to understanding some of the key terminologies whatever it might be whether it is in financial accounting or management accounting or in strategy or in the last few courses on economics. Now the last part of this third module on economics that I am going to deal today is about the budget the reason that I am going to spend a little time on the union budget is because when you take up carriers in whatever industry or if you are going to even start your own businesses there are a few signals that you would like to pick from the annual budget exercise that the government is engaged in so every year you all know that the government comes out with its union budget and this union budget has various constituents in it and each of them will give a very clear understanding of what is ahead in terms of the planned expenses the estimated revenues that the government is going to earn and how it plans to use these revenues and if there is a deficit how is it going to make good the deficit and in addition to this it will also announce some policies which as business people as people are working in a business or as individuals who as individuals when we pay income taxes so as stakeholders in various capacities the union budget will definitely have an impact so it is good for us to understand what constitutes a union budget and what are all some of the major terminologies that are used in the union budget so that when we listen to a budget or we read the budget report we would make some sense out of what the budget is trying to explain so let me just give you a quick overview of the union budget and then I will finish the class with some concluding remarks the union budget as I said before is is representative of the financial health of a nation and more than calling it a union budget for the purpose of easy understanding you could you could also call this the annual financial statement of the Indian economy I am talking about the union Indian union budget so you could you could call this the annual financial statement of India now just as corporate entities or any entity will have its own income expenditure or the balance sheet India as a single entity will have its own financial statement and that financial statement is in the form of the union budget that gets tabled in the parliament every year so it clearly indicates the revenue expenditure account of the country which includes the investments and borrowings as well and usually you would see that the budget is presented in the last working day of the February of every year and then it comes into effect from April 1 of that particular year and usually it was the practice that it used to be presented in the parliament in the evening because historically since this is this is an exercise that we have been doing for the last so many years and coming out from the British practice when it is evening it is morning for the British and hence the budget that historically was tabled in the parliament in the evening times but over a period of time it was changed and then you would see that the union budget being presented in the morning hours and usually what is presented in the parliament is a very brief abstract of the union budget but the entire budget statement runs into thousands of pages with all those annexures it is a constitutional requirement that every year the revenue expenditure statement for the succeeding fiscal year is approved by the parliament and that is why you find that the budget exercise is an annual affair. The framework of the budget if you look at the budget it has the revenue accounts which includes the revenue and the expenditure account and you would find that there is something called the consolidated fund it is in this consolidated fund all the taxes the borrowings of the government the interest that it receives on the loans that it has disbursed all of these get into the consolidated funds now any amount of money that gets into these consolidated funds it cannot be spent without getting the approval of the parliament there are some exceptions to it the contingency fund actually there is something called the contingency fund which is used to meet some unexpected events like a natural calamity and it was in 2005 what it used to be rupees 50 crores was raised to 500 crores and every time that we use the money from the contingency fund to meet such emergency expenses it gets replenished during the next sitting of the parliament so that in future again the contingency fund is used to meet any urgent emergent expenses. In addition we also have the budget has the public account which constitutes the public account into which all the provident fund or this the revenues from the small saving scheme all this get into the public account it is possible that from the consolidated fund there is a transfer that can be made from the consolidated fund to the public accounts but when it comes to spending the money from the public account a prior approval from the parliament is necessary now there are some exceptions where like the salary to the president the salary to the governor judges constitutional authorities like the CAG interest payments on loans now these are all exceptional expenses of the government that need not be approved by the parliament and still could be drawn from the consolidated fund I said before that all the expenses out of the consolidated fund needs prior approval from the parliament except these exceptions now if you look at the expense accounts there are two categories to it the capital expense and the revenue expense now capital expense will be included in the capital budget and the revenue expense will be included in the revenue budget and we need to distinctly differentiate between a capital expense and a revenue expense because when we were handling accounting I had explained the difference between a capital expense and a revenue expense a capital expense is one that creates that results in creation of assets whereas revenue expense is as good as an annual recurring expense so it is essential that we have a we maintain a difference between a revenue budget and a capital budget because only if we have that difference will we be able to have a proper check on the government spending and if the revenue expenses are more than the revenue receipts then we know that the government is spending more than what it can earn so to have a check of that time it is good to have two different accounts the capital budget and the revenue budget now a revenue deficit or a revenue surplus is a result of a revenue expenditure being less or more than the receipts that the government receives as I said before if the permanent revenue is greater than the permanent expense then you have a revenue surplus otherwise there is a revenue deficit and historically if you look at the financial statement of our country till 1979 there was a revenue surplus which means our revenue expenses were less than the receipts that the government receive on an annual basis it is only after it is only from 1980 that we have constantly seen a revenue deficit because the revenue expenses were more than the receipts now revenue expenses are similar to your recurring expenses annual expenses revenue receipts are similar to the annual incomes that the government receives in the form of a direct tax about which I will be talking later so if you look at the fiscal account the revenue receipts as I said before includes the various sources of annual income that the government receives it could be from the direct and indirect taxes it could be from the interest payments it receives from the state it could be dividends from the companies in which the government is a shareholder it could be the interest that the companies pays on the loans that it has received from the government so there are various possibilities by way of which the union government receives its annual income and this comes under the revenue receipts now just as we have revenue receipts we also have the capital receipts now the capital receipts are the receipts that the government gets because of its activity of creating capital assets one could be principal repayments it could have loaned out to create capital assets the interest that it receives from such loans gets into the revenue receipts while the principal portion that it receives gets into the capital receipts suppose the government is also a shareholder it invests in shares in in its own in its public sector enterprises and it decides to sell those shares so the sales of government owned shares the income that it gets also get into the capital receipts if it is this if it is disposing of some of the capital expenditure that it has that also gets into the capital receipts of the government so the total receipts includes the capital receipts and the revenue receipts likewise the total expenditure would include the capital expenditure and the revenue expenditure and difference between both as I explained before gets into the total expenditure both the revenue expenditure as well as the capital expenditure and these expenses are also categorized under various heads usually you would see them in in the form of the budget for various ministries you would have a budget for the ministry of human resource development ministry of health ministry of heavy industries so various ministries that will have its own planned expenditure estimated expenditure and an aggregate of all of this is your total expenditure now based on the total receipts and the total expenditure we can calculate the expected fiscal deficit now the fiscal deficit is the difference between the total receipts and the total expenditure fiscal deficit means the total receipts and the total expenditure which means the capital receipts and the revenue receipts minus the revenue expenditure and the capital expenditure while the capital account difference is just the difference between the capital receipts and the capital expenditure and revenue deficit as I said before is just the difference between the revenue receipts and the revenue expenses. Now when do we say that our fiscal deficit is under control because it is very difficult to have a budget that results in fiscal surplus. I told you before that from 1980 we have always been having revenue deficit. Now while we are having a revenue deficit it makes you to understand how difficult it is to have a fiscal surplus. Fiscal surplus means the fiscal receipts being more than the fiscal expenditure which means the total receipts being more than the total expenditure. But having said that we need to ensure that the deficit is within controllable limits and that is why you would see you would hear the fiscal responsibility and budget maintenance act that was passed in 2003 that aimed at having a fiscal deficit less than 3% of GDP by 2008. Thanks to the crisis this target was also postponed and just as the bill wanted the fiscal deficit to be less than 3% of the GDP the revenue deficit was the target for the revenue deficit was 0 by end of 2008 which again was not possible at all. Now if you look at what is the current level of fiscal deficit the current level of fiscal deficit is around 5.3% of our GDP way beyond the target at 3% of GDP. Now all this just points out to the fact that there is more expenditure than receipt more capital expenditure than capital receipts more revenue expenditure than revenue receipts as a result of which you would find different you would read in the newspapers also recently different rating agencies downgrading the ratings of our country India. But the understanding that I want you to have is that there is a mechanism in place that keeps a check or at least ensures that the deficit levels the fiscal deficit is very much within controllable limit today it is 5.3% of GDP. But the effort of any government in power is to ensure that the fiscal deficit never gets beyond controllable limits the reason that we need to be concerned about the fiscal deficit and the revenue deficit is that it sends signals to the external stakeholders and as I said before the fiscal deficit is a sum of the capital account deficit and the revenue deficit. Now if you ask the question which is affordable to have a revenue deficit or a capital account deficit a capital account deficit means that our capital expenses are more than the capital revenues. Now is it good to have a capital account deficit and if you ask me that question I would say relative to a revenue deficit it is affordable to have a capital account deficit because a capital account deficit in the process creates new assets out of which that can be future streams of income. As against a revenue deficit which is a very clear case of revenue expense being more than the revenue receipts and revenue expenses remember they do not create any new assets. So between revenue deficit and capital account deficit it is the revenue deficit that is more dangerous. The reason is you compare a country's financial statement to that of a company you know that an increase in a profit increases the share value but a loss decreases share value. I am talking about the revenue loss and accumulated loss erodes the owner's equity and contrast that with a country's financial statement the currency of a country is like the share of a company as revenue deficit keeps on mounting the value of the currency decreases. Now if the value of the currency decreases as we saw in the earlier class the exchange rate the strength of the currency relative to the US dollar decreases as a result of which our imports become expensive and a country like ours which has a trade deficit because our imports are more than our exports when imports become more expensive exports are not enough to meet the imports then the value of the currency gets eroded further. Now look at because of the revenue deficit that we have been seeing from 1980 let us see the impact of that on the exchange rates remember in 1950 our dollar to the rupee ratio was 1 is to 3.5 went to 1 is to 8 and today we are seeing the dollar rupee exchange rate at 1 is to 55 and imagine the type of ripple effect that it will create considering we are the imports are more than our exports especially when oil becomes very expensive suppose we have US dollar denominated loans then we need to pay more rupees to repay US dollar denominated loans as a result of all of this it causes inflation because and the rising prices. So this is all just to tell you that between capital receipts and revenue receipts we can afford I am not saying that we should we can afford to have a capital deficit but definitely our revenue deficit must always be within controllable limits and if not then it is going to cause ripple effects leading to an inflationary regime. Now what I was just presenting to you was just the union budget which is the budget of the federal the central government in addition to this every state government will have its own state budgets just as the central government will have its income expenditure account every state government will have its own income expenditure account then every government owned companies will have its own account income expenditure account and this is different from the ministries that I was mentioning before those are departments of the government while government owned companies are entirely different from the government itself which means the union budget does not involve the income expenditure statement of government owned companies. So if you really want to measure the financial strength of government and government owned companies in our country and if the assumption is that represents India's financial health then we will have to take into account the central budget the state budget plus the budgets of all the central government companies and that aggregated all of these aggregated together would present the Indian financial health now this is what I wanted to explain to the class on the union budget so these are all the various elements that gets into the union budget so when you see a union budget all that you have to look out for is major indicators like what is the fiscal deficit what is the capital deficit what is the revenue deficit and to finance this deficit where is the government going to get its funds from it will raise money from the global capital markets or it can sell bonds in here or you can borrow money from the banks itself so there are various ways by which the government raises money to meet the deficit so this you will see in your annual budget and of course there are other provisions which as I said before will directly or indirectly affect various stakeholders like the tax provisions direct tax provisions and indirect tax provision this is if it is in the case of individuals in the case of businesses are various duties exemptions and all this gets factored in the union budget so what we have done in this entire course is as I said before gave you and in introduction to financial and management accounting to some of the popular strategic models and a basic introduction to various economic concepts both macro as well as micro now before I would like to conclude I know there might still be a lot of lame and questions questions like if there is so much deficit why cannot we just print currency so that we can create money and make good the deficit but printing money will have its own issues you will understand why then some had doubts on the reasons for these financial crisis what is this all about how this financial crisis was created some about inflation I mean these are all from a layman's perspective so I what I am going to do is instead of me trying to explain each of these I am going to leave a set of three to four videos that it is in fact a cartonic video that explains in a best form to understand what it means to just keep on printing money what inflation is all about what is this global financial crisis all about so I urge you to just watch those videos so that you will gain a better understanding and this is purely from a layman's perspective now before I would just like to conclude the course I with thought I thought I will just spend a little time on some thoughts that I would want the students to have in their mind so that when they when they start thinking about economics as a subject of study they should also they should also try to develop the habit of linking economics with other streams of study now we all know that we are we are just facing the effects of a global financial crisis now if you look at the financial crisis after 2008 you would know that there has been a lot of difficulties that various economies have faced which includes the advanced economies like the US the European Union and various other countries have felt the effect of the global financial crisis now this global financial crisis has also created tremendous amount of confusion amongst various stakeholders in fact if you look at one of a very popular article that caught a published in a in German magazine called Der Spiegel it was I think it was in the dispatch of early 2009 where five Nobel laureates in economics got together to discuss about the financial crisis. The discussion was about to find was was on the reasons for these financial crisis these five Nobel laureates in economics where Joseph Stiglitz Paul Samuelson Edmund Phelps Robert Lucas and Raylard Seltor so all these five Nobel laureates got together to understand the reasons for this financial crisis one said it was because of the regulator one said it was because of the markets one said it was because of the corporates so different people had different perspectives and remember these were all Nobel laureates in economics and at the end of this entire discussion nobody could come out with a single solution saying that this single reason saying that this was the reason for this entire global financial crisis so when all the five Nobel laureates in economics themselves could not conquer with one single reason for this global financial crisis leave getting a solution for this crisis so that is why still there is a lot of effort that is going to ensure that advanced economies are pulled out of this crisis but remember it is only during these adverse times that there is a learning for every stakeholder because I have never seen anybody learning during times of prosperity because it is only during times of adversity that there is a lot of learning so it is from that perspective that I thought I will leave this course with a new learning for the class which is a little different from the conventional learning it is not very theoretical it is going to be a little different I have been telling in the previous classes that money is the fuel for any economic activity so whether we need to spend or whether we need to save we need money we need money to spend and we need money to save and the incentive to spend or save comes in the form of an interest rate so I told the class that the interest rate is the tool that arbitrates and it is the one that decides whether people would be able to spend or save if the interest rates are very high there is incentive to save if the interest rates are very low then there is encouragement to spend but if interest rates is used as a tool to encourage spending then there is a different dimension to the economic activity and I will just give you an example now if you take the US economy there were times when the interest rates are very high early 80s but that is after the war and then it was decided to reduce the interest rates reduced from 20% up to 10% when interest rates were very high the amount of investments the savings that went into the stock market was not that high because people chose to invest their savings into the bank deposits then into the stock market so when interest rates dropped from as high as 20% to 10% investments in stocks which was at that point of time less than 5% was 25% so 25% of the entire savings went into the stock market and interest rates further lowered from 10% to 5% the investments in stock markets also increased from 25% to 50% now there were different reasons to reduce the interest rates before the dot com crisis the need to reduce the interest rates was to ensure that there was savings the savings went into the stock market see if you look at the way in which capital needs to be enriched of corporates let us for example say see you reduce the interest rates there is no incentive to put your money in banks so you do two things either you spend the money or you put your money in stocks now till the dot com crisis the investors felt at reduced interest rates it was wise to put the money in the stock market so it enriched the capital account so the equity account of the corporates got enriched and after 2001 when the dot com bust happened the entire stock markets crashed as a result of which we needed an alternate mechanism in which the revenue account if not the capital account is getting enriched and revenue account gets enriched only if there is consumerism so still the interest rates were kept low so that there is an incentive to spend not necessarily invest in stock market but to spend money as a result of which after 2001 there was excessive spending and that is why you found that at lower interest levels you found a lot of people engaging in hyper consumerism and that is one of the reasons that led to the global financial crisis I am not going to explain the details of all that enough for you to understand that all this started because of reduced interest rate regime that forced consumers to engage in hyper consumerism and the global financial crisis was because of the homework gauge loans I will just give you a small example for you to understand this better suppose you have a house and you purchase the house out of a loan let us say the value of that was 100,000 dollars the loan amount was 100,000 dollars and that you purchase the house and this happened around three years back so you would have paid let us say around 10,000 dollars so the remaining amount that you had to pay was 90,000 dollars and by that time the value of the house increases from 100,000 dollars let us say to 500,000 dollars and you have somebody coming and telling you that the outstanding loan is 90,000 dollars the value of the loan is the value of the house is 500,000 dollars so the net value of the house is a 410,000 dollars and this they called as the home equity which means it is the value of the house which in the name of home equity was the collateral based on which more loans were given either to purchase new houses or to engage into hyper consumerism literally such loans were hooked like vegetables and at one point of time it so happened that such loans were given to people who are the first place were undeserving to receive such loans which means their repayment capacity was there was no repayment capacity at all and that is why it was called subprime loans they had no capacity whatsoever to repay these loans and without stopping there such loans were bundled together were aggregated together and new financial products were designed out of that bundled loans and you had rating agencies that gave them good ratings and this instrument called the collateralized debt obligations these were sold to another financial intermediary as a result of which a loan that was first issued in US got packaged with similar loans and sold as a financial product to some financial intermediary inside or outside the US which finally reached a group of investment banks and other banks outside the US and that is why usually in a lighter vein this is a US crisis that was exported globally and that is why you found that when the home mortgage loan the entire market got bust it was not just the US economy that got affected all the economies that had exposures to such products got affected more importantly the European Union got affected very severely now coming back to our discussions now if you just dissect the entire crisis and try to understand the main reasons for this there are a number of reasons but one thing that I want the class to understand is the fact that the interest rates were lowered to encourage hyper consumerism is something that needs to be seen very seriously is this a model that is sustainable over a long term period is a model that discourages savings but an encourages spending is sustainable over a long term period and if you try to seek answer to this question then you will find that there are alternate models that are available and it is only because of such alternate models some countries were not as impacted as other countries during the financial crisis and in the list of those some countries India is a clear leader if you look at the Indian model it is more a savings based economy and that explains that our savings is around 35 to 38% of a country's GDP we have seen an increase in savings as a percentage of GDP year on year and it is always kept on increasing and that is why if you find the fiscal deficit as I explained before in the budget if you have a fiscal deficit today advanced economies have deficit take for example the crisis that you see in Greece the entire country is having deficit compounding the problem is that they do not have resources to meet this deficit they do not have any place to borrow money because there is no savings in the banks contrast that with the Indian system if we have a deficit of 4.5 lakh crores then we have a savings that comes from our Indian system into the banks which is close to around 7.5 lakh crores so we have bank savings which can provide which is the source to meet the fiscal deficit it is in fact it looks this way the government deficits can be financed by the family surpluses now a family surplus is because that there is a natural drive for Indian families to save and this is got nothing to do with a mathematical model or savings as a financial pattern it is got something to do with the DNA of an average Indian investor it is got something to do with the sociology of an average Indian investor who always thinks that it is better to put my money in a safe deposit than to gamble it in risky speculative investments and that explains the reason why the savings in stock market is less than 5% consistently and this is true in the case of Japan which is the number 2 economy number 1 economy is the US and number 2 economy has a model which is entirely different from the number 1 economy in Japan in fact the savings is a family virtue that is why you will see that long term deposits let us for example say a 3 year deposit or a 5 year deposit gives the investor hardly any returns probably less than 2% 1.5% so imagine a 1 year deposit in Japan would not give you an interest more than 1% in fact there were times where a short term deposit if you had to put a money in a Japanese bank for 1 month you had to in fact pay the bank a custodian deposit but still people wanted to put their money in the banks because the feeling was that it is the savings and savings in safe deposits is something that is more sociological than economic and it is this sociological virtue or branded as social capital that has actually saved many countries countries like India countries many Asian economies India China of course has a crisis for a different reason but then it is again a savings driven economy Brazil Thailand Taiwan so these are countries where savings still constitute a family virtue but the West criticizes this as a feeling of insecurity this is not a feeling of insecurity it does not mean that we are saving and reducing our conception pattern in fact our consumerism is also amongst comparable peers our GDP is because of 70% of conception driven activities so 70% of our GDP is because of conception we are an economy that relies entirely on a calibrated expenditure we calibrate our expenses if we want to grow a 10% 12% GDP growth every year it is possible and it will be possible if all the families decide to spend and not save but that is not the way in which our economy functions there is more calibration in the functional part of an economy and this functional part of an economy is done by the families themselves I will just give you a very small example for you to understand this better before I conclude the per capita income per capita expenditure and per capita savings let us take these three indicators if you look at the economic survey there were there is a wonderful report that got published very recently that the per capita income per capita expenditure and per capita savings in the last 15 years in our country these were recorded and an analysis of this data gave a very startling finding now whenever per capita income increased and this happened during the robust periods of economic growth in our country and especially during the 2001 to 2007 period when per capita income increased so did the per capita expenditure and the per capita savings when the per capita income did not increase to the extent to which it increased during the growth phases of an economy the per capita expenditure got adjusted internally and per capita savings continued to remain the same now this explains the fact that despite our per capita income not increasing at higher rates it is the per capita conception that gets adjusted internally to ensure that the per capita savings rate keeps on increasing year on year so this explains the DNA of an average Indian family based investor there are always things that it is a banked safe deposit there is always better than a speculative investment you definitely have matured stock markets you have other speculative financial instruments in which a number of people invest their money but by and large our economy has remained a savings driven economy and if at all there is a single reason why our economy was insulated from the global financial crisis it is because that we had an economy that was driven by what I call the social capital the foundation of which is the family and the DNA of every average Indian family has been aligned to the virtue of creating a savings oriented culture drawn from investing in fully detached from investing in risky investments like the stock markets as I said before we still have investments in the stock markets but the overall structure of an Indian investor has always been towards investing money in safe deposits and that is why as a conclusion I feel that if at all there is a solution that can pull out the countries from the financial crisis that they are facing now the solution does not lie within the four realms of economic theories the solution lies outside the boundaries of economic theories and it is the interlink between sociology and economics that needs to be understood in a different perspective and only if we are able to understand the relationship between sociology and economics then we will be able to get a solution to this crisis as I said before this economic crisis does not have an economic solution it has a socio economic solution this is the message I want to leave to the class so that as you go forward you start thinking about new ideas as to how we can relate economics with other interdisciplinary subjects and try to see if we can come out with some winning solutions that will not only make India more insular from such global crisis will also pull out other countries from the crisis that they have today thank you.