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Will FM present another dream budget?

There is an air of optimism in industry and stock market circles, as it is confidently anticipated that the forthcoming budget will provide a new lead to the economy and the growth in the Gross Domestic Product (GDP) may be higher at 8-10 per cent on a sustainable basis in the coming years.

THE BUDGET estimates for 2005-06 due to be presented to Parliament by P. Chidambaram, Union Finance Minister, at the end of this month have special significance. An attempt may be made to streamline the structure of direct and indirect taxes and also implement the Common Minimum Programme (CMP) vigorously.

Since the Finance Minister had been observing that fresh incentives would be provided for attracting foreign direct investments (FDI) in a big way, it was initially indicated that foreign stake in the telecom, civil aviation and insurance sectors would be substantially increased. With the expectation of a distinct improvement in the investment climate, it is now speculated in industry and stock market circles how the new objectives for augmenting the total pool of resources will be achieved.

Left parties' reservations

As the Left parties have been vigorously opposing the Finance Ministry's moves to attract foreign investment on a large scale in private sector banks and in insurance and civil aviation sectors, the proposals for raising the stake of foreign interests in insurance and civil aviation have been dropped. The suggestions for amending the Banking Regulation Act to facilitate foreign stake up to 74 per cent in private sector banks and also to lift the cap on voting rights have been kept in abeyance. This is due to the fact, it is averred, that a road map has not yet been prepared for introducing reforms in the banking sector. Against this background, it will be interesting to watch how the conflicts in approach are reconciled and the new Budget proposals helpfully conceived.

Boom in bourses

There is an air of optimism in industry and stock market circles as it is confidently anticipated that the forthcoming Budget will provide a new lead to the economy and the growth in the Gross Domestic Product (GDP) may be higher at 8-10 per cent on a sustainable basis in the coming years. The expectations in this regard have been responsible for unprecedented buoyancy in stock markets, especially as the Cabinet has taken a decision to permit an increase in the stake of foreign interests to 74 per cent in the telecom industry.

It has, at the same time, been announced that provident and pension funds can invest up to 5 per cent of their fresh resources in industrial securities. The decision of the UPA Government to raise the interest rate on funds in the Central Provident Fund account by one percentage point to 9.5 per cent may also necessitate a reshuffling of the investment portfolio with scope for investing a portion of the corpus in equities. The BSE index, thus, finished high at 6618.23 on February 4.

Bid to avert higher fiscal deficit

The budgetary position, however, has not improved to the extent anticipated in recent months, in spite of a smart increase in collections from corporate taxes and customs duties. The Budget estimate of 24.72 per cent rise in net tax revenues may not be realised, even assuming that a faster growth in receipts from various levies, particularly those on services in January-March 2005.

But there has been no upset in calculations relating to revenue and fiscal deficits as the fiscal deficit has actually declined to Rs.90,239 crores from Rs.92,435 crores at the end of December and net borrowing through market loans, including those under the Market Stabilisation Scheme, was only Rs.65,684 crores in the current financial year up to January 21 against Rs.91,816 crores in the corresponding period in 2003-04.

It is, however, likely that there will be an increase in non-plan expenditure in January-March, as liberal assistance has to be extended to the States affected grievously by the tsunami disaster, while relief operations in the drought affected areas have necessitated the use of large quantities of fine cereals apart from sizable financial assistance.

The boom in the secondary and primary markets may be helpful to a significant extent in garnering sizable resources for projects involving huge outlays. An attempt may also be made to utilise a portion of the bulging forex reserves while FDI may get stepped up to $15 billion annually in a short period from around $5 billion at present.

With a comfortable balance of payments position, faster growing invisible receipts and the creditable functioning of the industrial and services sectors, receipts from direct and indirect taxes may rise at a fast rate, even with streamlined new levies. The recommendations of the Eleventh Finance Commission will however result in a larger dilution of revenues.

Mr. Chidambaram has, therefore, to finalise his Budget proposals in such a manner that the larger allocations required under the CMP and for revitalising the agricultural sector can be ensured.

P. A. Seshan

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