FOREWORD
The budget which generated unprecedented speculations and which was so keenly awaited not only in India but the world over has finally been unveiled setting at rest the uncertainties about the continuance of reforms and the economic strategy to be pursued by one of the second largest emerging economy of the world. The focus of the doubts centered on the F.Ms ability to act as per the dictate of his conviction. With the architect of the dream budget of 1997 as the person at the helm of affairs, assisted by equally efficient technocrat in Planning Commission and guided by the father of economic reforms in India - himself an accredited financial wizard who held the reins of economy in crucial years of reforms - one was left in no doubt about the wisdom of policy makers but there was always a lurking suspicion about their ability to take decisions unaffected by political compulsions of a coalition government supported form outside. Where and to what extent the decisions were influenced can only be a matter of
guess. What is relevant is what has come out which will set out the course of the economy, charter the programmes and determine the extent to which the reforms will continue as well as the direction they will take. Even though technically the second budget of UPA government, it is the first full-fledged budget prepared after adequate deliberations and debate. While the promises made in Common Minimum Programme set the goal, it was not easy to chalk out the way to reach it. The committed large allocation for health, education, guaranteed employment, infrastructure investment subsidies and redemption of pledge to offer new deal to rural India, could not have ignored fiscal profligacy and prudence. Distribution for social needs is possible only when there are adequate funds to distribute. Ways and means were required to be devised for raising additional resources and saving existing resources for diversion to committed objectives. Unenviable situation is faced if the manager of government finances finds his hands tied in controlling expenses, more
particularly subsidies, and raising revenue as per his own wisdom for reasons other than economic, while remaining responsible for committed allocation for social purposes as done by allocating 10337 crore, 10334 crore, 16254 crore and 10200 crore for education, rural development, fertilizer subsidy and health care respectively. No government, howsoever serious about reforms, can completely ignore political expediency. Two areas, which were subject of serious differences within, were foreign direct investment and disinvestment policies. The Finance Minister has shown courage to carry his convictions when FDI in telecom and aviation sectors was raised as per the promise made in his last budget speech. The economic survey 2004-05 gives enough indications of a further liberalized FDI regime. The recent announcement of 100% FDI in relation to construction sector is evidence of firmness and, with it the contentious areas of banking, insurance and retail trading should also not be far off. In his budget speech the
propriety of FDI in mining, trade and pension has been advocated indicating the shape of things to come. The constitution of Board for Reconstruction of Public Sector Enterprise to advise, interalia, on disinvestment/ closure/ sale of loss making units and permission to profit making units to raise resources from capital market through IPO, either in conjunction with a fresh equity issue or independently by the government, has been a workable solution to increase private participation leading to increased efficiency of PSUs. The process is likely to be carried further by permitting more such units. A somewhat bright feature is not too disappointing economic indicators to start the fiscal year with and carry the economy to further strength. The year started with the growth rate of 8.9% and inspite of Kharif set back, global shoot up of petroleum prices and tsunami disaster, the economy in the fiscal 2004-05 is poised to grow at 6.9%. The revenue deficit targeted at 2.5% of G.D.P against 3.6% last year may not reach the targeted
figure but atleast be not above the legally sustainable deficit of 3.1% under The Fiscal Responsibility and Budget Management Act. The Security Market witnessed a rebound in primary market issues particularly in IPOs. Growing confidence of investors was witnessed by stock market returns of 72% in 2003 followed by 11% in 2004. Inflation could be contained at 5.2% in January, 2005 after touching a peak of 8.7% in August 2004 even though 52 week inflation rate stood at 6.5% against 5.5% a year ago. The Current account surplus for the third consecutive year further strengthened the balance of payment position. The foreign exchange reserves stood at US $ 132.95 billion as on February 18, 2005 which, as announced by the F.M., will be drawn for meeting foreign exchange needs for infrastructure projects. The foreign exchange reserves far exceeds the country's foreign exchange liabilities and the country is in a position to pre-pay the debts without much problems. Added by strong dollar inflows, the rupee closed
stronger at 43.71 per dollar continuing the strengthening position. In the area of agriculture, however, erratic monsoon caused a substantial fall in Kharif, foodgrains. As a result this sector made insignificant contribution in overall growth. In the area of infrastructure, strong growth rate was noticed for electricity generation, ports, railways, civil aviation and also in telecom sector. Mr. Chidambaram is known for his penchant for bold and radical tax reforms. Abolition of tax on dividend, abolition of tax on long-term capital gains on securities with introduction of securities transaction tax to compensate for revenue loss, introduction of tonnage tax for shipping are some of the glaring instances of innovative reforms which have gone a long way in making tax payer's life easier and increasing compliance. Radical tax reforms was in the agenda for this year's budget also. For this the F.M. was likely to proceed from the recommendations of expert committees including the Kelkar Committee which he has
done. While not affecting the incidence of tax on non-corporate tax payers in any significant way, the F.M. has met the long standing demand of raising the exemption limit and rationalising the slab, abolishing simultaneously rebates and most of the deductions to make the package revenue-neutral but simple to operate. To what extent these proposals will be viewed is to be seen particularly to do away with tax sops which Indian taxpayers have become accustomed to. Strangely, so far as direct tax proposals are concerned, they are largely primarily systemic without being significant. Switching over to the system of deduction from the system of rebate may be ideologically justified but it is for consideration whether such a change was necessary when frequent changes in tax laws have already made them a nightmare for tax administrators to implement and tax-payer to keep pace of. The object of providing some tax benefit to people could have been achieved under the existing systems. Similarly, while reduction in corporate tax rate
from 35% to 30% is the need of the time, one wonders whether the increase of surcharge from 2.5% to 10% should have accompanied the fulfilment of a justified demand. As a novel scheme, basically of the nature of anti tax avoidance measure, the F.M. has introduced a tax on cash withdrawals from bank. Without going into the rationale of such provision, one wonders whether the limit of Rs.10,000/- for cash withdrawal will have justification in the present day, India is, to a large extent, cash economy where routine payments of daily life are made in cash and withdrawals are necessitated for making such payments. We have yet to make an advance towards credit card payments and other modes of non-cash payment. Further the provision does not make exception even for cash withdrawn for disbursing routine business payments like salary or wages to workers. If the object of the legislation was to prevent utilisation of funds for illegal purposes, a small tax is hardly likely to be a deterrent. A suitable information system and probe in
selective cases could have achieved the purpose without an apparently uncalled for provision which will throw great responsibility on banks which, operating through large network of branches, may find extremely difficult to discharge. Another radical but high controversial proposal is introduction of additional tax on fringe profit payable by employers. A new chapter has been introduced for the purpose which is a self-contained code providing for filing a separate return of fringe benefits, separate assessment, separate advance tax and lays down provisions for time limits, recovery, penal consequences etc. In case, it was made a part of income tax, the provision for parallel proceedings for determination etc. of tax liability is unconceivable. Determination of amount taxable in the hands of employee and that in the hands of the employer will be an issue fraught with possibility of litigation. Then there is question of record keeping by the employer. The provision will require keeping separate record of expenses falling within
each fringe benefit. Whether the administrative burden to the government and the tax-payer will be commensurate to additional revenue is a matter to be considered. The Finance Minister has done well in giving a green signal to perhaps the most significant tax reform carried out so far by announcing introduction of Value Added Tax throughout the country with effect from 1.4.2005 with the ultimate objective of integrating all indirect taxes into Goods and Services Tax which will be consistent with the system prevailing in other countries. A successful implementation of the scheme of VAT, may go a long way in establishing an uniform indirect tax regime avoiding pitfalls of the existing system. As Services contribute to 52% of GDP, it was not unexpected to find new areas in the tax net. The providers of relevant services will decide on the impact of such taxes and practical problems arising therefrom. One area that attracts the attention most is services provided by any person in relation to construction of a
complex. At a time when utmost attention is being given to the development of construction sector by offering tax incentives and other sops, very recently the government permitted 100% FDI for the Sector this is likely not only to influence the business decisions of builders but also to increase the cost to the customer. It is hoped that the service element in the total cost will be kept at a reasonable figure to avoid housing becoming too costly for the customers. In the ultimate analysis, a budget is good or bad depending on the person considering it. A housewife views it from how will it affect her budget, an economist will judge it from whether is growth oriented, an industrialist from its impact on industries in general and his line of activity in particular and a politician on how the same will be viewed by voters as a class. Like blind persons forming an idea of what an elephant is by touching it, let us not consider the proposals in isolation but view it as a whole in the context of the prevailing economic, social and
political conditions. February 28, 2005 Mumbai.
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