The Hindu : Business : A turning point in budget making

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Monday, Jul 19, 2004

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Business

A turning point in budget making

THE 2004-05 Central Budget is P. Chidambaram's maiden effort on behalf of the Congress led coalition government. With considerable discussion after the new government assumed power about the need for an entirely new approach to revitalise the agricultural sector, afford succour to those below the poverty line, improve amenities in the villages and strengthen the functioning of small and tiny industries even while paying greater attention to the infrastructure sectors, it was expected that the Budget would mark a beginning in realising the targets under the Common Minimum Programme of the United Progressive Alliance. Indeed, this Budget may well prove to be a turning point in the history of Indian Central budgeting.

As Mr. Chidambaram had been stating that his Budget proposals would be investor friendly and that new policies would be formulated for boosting investment in the manufacturing sector as well, it was being speculated in industry and stock market circles how the conflicting claims would be reconciled. There was also anxiety to know how the Government would augment the pool of resources to fund not only higher plan and non-plan expenditure but also create the climate for faster growth of the manufacturing and services sectors. These sectors have been increasing their contributions to the growth in the Gross Domestic Product in recent years.

The proposals for the current financial year, however, have belied expectations in industry and stock market circles. With the short time at his disposal, Mr. Chidambaram could not recast the Budget estimates in the manner visualised. There was also a desire to await the proposals of the Planning Commission, now engaged in a mid-term appraisal of the Tenth Plan, with a view to changing the allocations under various heads to implement the CMP. Also, the much needed tax reforms, on the basis of the proposals of the Kelkar Committee, require careful consideration and it has been observed by the Finance Minister that the Budget estimates for 2005-06 will reflect in good measure the efforts to reform the structure of taxes and achieve effectively the targets outlined in the CMP.

The latest estimates on revenue account do not, therefore, reveal any significant changes in allocations, as non-plan revenue expenditure will be rising modestly to Rs. 2,93,650 crores from Rs. 2,84,801 crores in 2003-04 (revised) mainly due to a heavier burden of Rs. 1,29,500 crores against Rs. 1,20,475 crores in respect of interest charges. The grants to States and Union Territories too have been raised by Rs. 3,801 crores and other general services by Rs. 1,285 crores. But the latter too increases are offset by a reduction in expenditure in other directions. The plan revenue expenditure, of course, will be higher at Rs. 91,843 crores against Rs. 78,086 crores. As the Finance Minister is keen to bring about a reduction in the revenue deficit and achieve the desired growth in total expenditure, gross and net tax revenues will be increasing by 24.64 per cent and 24.72 per cent to Rs. 3,17,733 crores and Rs. 2,33,906 crores in 2004-05 as compared to the revised estimates in 2003-04 respectively.

New tax proposals by themselves have not been responsible for any big increases in gross and net tax revenues in recent years. It is estimated that direct tax proposals will fetch only Rs.2,000 crores additionally this year, after allowing for concessions in other directions. Besides the duty relief to purchasers of tractors and dairy machinery, with the abolition of the related excise duties, sops to the textile sector and reliefs in other directions, there will be adjustments under other heads. There will not be any additional revenue since the changes are stated to be revenue neutral. With total revenue expenditure rising by Rs. 22,606 crores to Rs. 3,85,493 crores, the revenue deficit will be lower at Rs.76,171 cores against Rs.99,860 cores in 2003-04 (revised).

Even with a budgeted increase in total expenditure to Rs. 4,77,829 crores from Rs. 4,74,255 crores due to larger allocations to defence services and planned schemes on capital account, there will not be any decline in the fiscal deficit. However, the new demands on the banking system, as a result of the anxiety of the coalition Government to increase agricultural credit by 30 per cent in the current year and double the credit in three years as well as the arrangement with a consortium of banks to make available Rs. 40,000 crores over a period for projects in the infrastructure sectors may result in a competing demand for available forex and rupee resources. However, forex reserves have shown an irregular trend latterly and further sizable additions can take place only if FII inflows increase at last year's rate and foreign direct investment is on a bigger scale. It is also apprehended that interest rates may tend to harden with the U.S. Federal Reserve raising its discount rate to 1.25 per cent at the end of last month and reports about a reversal of interest rates in other countries.

It is difficult to say at this stage whether the growth in GDP will accord with the earlier expectations because of reports about the erratic behaviour of the monsoon and production being adversely affected in areas where drought conditions prevail. Also, sowing operations for the kharif season have not been progressing satisfactorily.

The levy of a 2 per cent education cess on all direct and indirect taxes and a transaction tax of 0.15 per cent on trading in securities have had an adverse impact on trading in the bourses, especially as fresh incentives have not been provided for stimulating saving and investment. Even though the transaction tax will be borne only by the buyers, FIIs, day traders and mutual funds are worried about an increase in the cost of purchase of securities, especially as trading in the open market will be severely affected. The transaction tax is intended to plug the loopholes for evasion of long-term capital gains tax and offset the loss arising out of the abolition of the long-term capital gains tax. The representations to the Finance Minister and the Securities and Exchange Board of India are being examined and the Finance Minister is expected to announce some changes in the transaction tax rate today when he replies to the budget debate in Parliament.

Since it is imperative that the secondary and primary markets should remain buoyant and there is a continuing sizable inflow of forex resources from FIIs and the Finance Minister has been claiming that he is also the Minister for Investment, it is generally expected that the incongruities in some directions will be removed and the importance of augmenting the total pool of forex and rupee resources substantially for sustaining the GDP growth by 7-8 per cent over a period will be recognised.

P. A. Seshan

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