Financial Daily from THE HINDU group of publications
Tuesday, Mar 11, 2003
Jaswant proceeds with caution
S. D. Naik
THE Finance Minister, Mr Jaswant Singh's maiden Budget has received the widest possible acclaim from all quarters. This is because he has steered clear of political minefields while formulating his Budget proposals and yet succeeded in addressing the overriding concerns relating to prolonged investment deceleration and economic slowdown. What is more important, he has delivered a `feel good' budget with something for everyone.
The strategy adopted in the Budget to promote growth comprises:
(a) a comprehensive initiative for infrastructure development;
(b) putting more money in the hands of potential consumers through some tax sops and excise duty reduction on a range of consumer goods;
(c) providing bank credit to agriculture and SSI at a lower rate of interest; (d) continuing with the tax relief on housing loans and providing incentive packages for housing, tourism and textile industries, all of which are high employment generating activities; and
(e) empowering the poor through health insurance and encouraging setting up of private hospitals by treating hospitals as infrastructure.
The major thrust of the Budget, however, is on infrastructure development aimed at reversing the declining trend in public and private investment. His infrastructure initiative covers roads, railways, airports, and seaports, through innovative funding mechanisms, involving investments totalling Rs 60,000 crore.
The lion's share of the infrastructure projects would go to 48 new road projects at an estimated cost of Rs 40,000 crore. These will be over and above the National Highway Development Project (NHDP) and will cover a length of over 10,000 km, a quarter of them being made of cement concrete. These projects will be funded on a build-operate-and-transfer (BOT) basis, with the government providing a subsidy in the form of an annuity flow to meet only the shortfall between anticipated revenue and loan repayment liabilities. In the first year, 2003-04, at least 3,000 km of roads, or almost a third of the total of these 48 projects will be taken up for four-laning. In addition, encouraged by the success of the scheme of funding rural roads under the Pradhan Mantri Gram Sadak Yojana, by earmarking 50 per cent of the cess on diesel, the Budget proposes to augment resources for rural roads. Accordingly, apart from allocating the anticipated Rs 2,325 crore from the existing cess on diesel for 2003-04, additional funds would be made available for rural roads from the proposed additional cess on diesel of 50 paise per litre.
Among other infrastructure development projects, the expenditure on National Rail Vikas Yojana Projects would be Rs 8,000 crore; renovation/modernisation of two airports and two seaports Rs 11,000 crore; and establishment of two global standard international convention centres Rs 1,000 crore. While this infrastructure initiative is no doubt welcome, it is not clear from where the money will come from. In his Budget speech, the Finance Minister talks about the need to encourage public private partnership, so that public funds are leveraged, and the quality of service delivery improved, thus yielding better value for money. The public sector outlay on these schemes will be only a paltry Rs 2,000 crore in the first year. Even assuming that all these projects will be completed over a three-year period or so, it is not clear how such paltry sums could be leveraged to get investments worth Rs 60,000 crore. One can only hope the Government will find ways to provide more budgetary allocations for infrastructure projects in the coming years.
In the case of housing, apart from continuing the interest deductible under the Income Tax Act up to Rs 150,000 for construction or purchase of a self-occupied house property, it is proposed that income from housing projects for construction of residential units of prescribed specifications up to March 31, 2005, will be exempt from income tax. Since an important reason for the declining rates of capital accumulation over the past five years is the demand recession that has resulted from the erosion of purchasing power, the Finance Minister has made an effort in this Budget to put more money in the hands of the citizens. Thus, he has made at least a modest effort, even in a difficult fiscal situation, to redeem his promise soon after assuming charge of the finance portfolio that it would be his endeavour to put more money into the purse of a housewife. The various tax sops and excuse duty reductions are expected to leave more disposable income in the hands of the citizens. Another far-reaching initiative in the Budget is the effort to improve the cost and availability of credit to agriculture and small-scale industries (SSIs).
It is a well-known fact that apart from the decline in public investment in agriculture, the rural credit delivery system has suffered a major setback post reform. Also, the Finance Minister has admitted in his Budget speech that the full benefits of declining interest rates have not percolated to the agriculture sector and SSIs. He further added: "I am not satisfied with this arrangement. We cannot have a system wherein credit for motor cars is on easier terms than for farm equipment and tractors."
Under the new dispensation being worked out, agriculture and SSI sectors will get loans at new interest rate band of two per cent below or above the prime lending rate (PLR). The Finance Minister has also announced that subject to the Reserve Bank of India's prudential requirements, banks will have automatic licensing in rural areas and small towns. This is a positive signal that farm sector will get a better deal in the coming days.
It is heartening to see that while consistently focussing on growth, Mr Jaswant Singh has not failed to provide a humane touch to his budget proposals. Keeping the poorest of the poor in mind, it is proposed to cover a quarter of all the below-the-poverty-line (BPL) families by the Antyodaya Anna Yojana from April 1. Thus, an additional 50 lakh families will be covered under the scheme, for which the budgetary expenditure will be Rs 507 crore. This is a commendable move to utilise the foodgrains rotting in FCI godowns to eliminate hunger.
Similarly, to provide the much-needed medical aid to the poorer sections of society, a community-based universal health insurance scheme will become operational in 2003-04. The Budget also contains a relief package for the physically handicapped and a higher tax rebate and Insurance Pension Scheme for senior citizens.
However, a further cut of one percentage point from 9 to 8 per cent on interest payable on Public Provident Fund (PPF) and small savings is rather an unkind cut and will hit the lower income households, pensioners and senior citizens hard. This was clearly uncalled for at a time when the inflation rate is showing signs of moving up.
A major area of concern relates to the further deterioration in the fiscal situation. The Budget estimates the gross fiscal deficit for 2003-04 at Rs 153,637 crore, the highest ever in absolute terms. As per cent of GDP, it is estimated at 5.6 but the actual may be still higher going by the past experience.
According to revised estimate for 2002-03, the fiscal deficit rose to 5.9 per cent of GDP from the budget estimate of 5.3 per cent. Unfortunately, the Budget makes no effort at reducing the subsidies. Major subsidies stood at Rs 30,523 crore for 2001-02. As compared to this, the subsidy bill for 2003-04 is slated to grow by a whopping 66 per cent to Rs 49,907 crore. The biggest element in this is the food subsidy, which was budgeted at Rs13,675 crore in 2001-02. For 2003-04, it is estimated at Rs 27,800 crore, more than double in two years.
The gross and net borrowings for 2003-04 are projected at Rs 165,887 crore and Rs 107,194 crore respectively, reflecting the continuing fiscal strains. The only positive measure in this area is the "debt swap" scheme under which states will swap their costly debt of over Rs 100,000 crore with lower interest bearing debt and save as much as Rs 81,000 crore over a three-year period.
Unfortunately, one cannot wish away the political compulsions confronting the Finance Minister in a difficult financial year, especially when elections are round the corner. The constraints under which he has to function is evident from the widespread protests against the small increase proposed in the Budget in fertiliser prices. The opposition has come from within the BJP also and the matter has been referred to the Prime Minister.
In the context of the need to step up the growth rate of the economy, it was difficult to make a major revenue raising effort through taxation. The Finance Minister has given away Rs 2,955 crore in direct taxes and hopes to collect an additional Rs 3,294 crore in indirect taxes, with service tax itself expected to fetch an extra Rs 3,000 crore in 2003-04. He has raised service tax rate from 5 per cent to 8 per cent and brought 10 new services under the tax ambit.
Understandably, Mr Jaswant Singh wants to proceed with caution on the reform front. Even so, the decision to lower the peak rate of Customs duty from 30 per cent to 25 per cent, excise duty rationalisation with a three-tier structure of 8 per cent, 16 per cent and 24 per cent and the introduction of Value Added Tax (VAT) from April1, 2003 are all steps in the right direction.
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