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Friday, Jul 09, 2004

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Adopting the Keynesian route

P. S. Shenoy

THE Union Budget 2004-05 has reiterated the new government's increased thrust on agriculture, infrastructure and social sectors in line with its Common Minimum Programme (CMP). The Budget has adopted the Keynesian expansionary route to maintain investment momentum and promote higher levels of employment.

In addition to the gross budgetary support of Rs 1,31,000 crore provided in the Interim Budget, the full version has decided to allocate an additional Rs 3,000 crore. However, its status quo on interest rates is justified on the grounds of rising interest rates globally and a surge in inflation rate in recent weeks.

The proposed measure in the Budget to amend the Securitisation and DRT Acts to strengthen the rights of creditors is a positive move but the government has to move fast while maintaining the necessary safeguards.

The RRBs have been advised to adopt new governance standard to receive funds from the government for restructuring. This will improve the health of the credit delivery channels and also be helpful in meeting the Finance Minister's target of doubling the agricultural credit over the next three years. Inter-institutional group of financial institutions and banks to finance infrastructure projects will speed up the process of infrastructure development.

Other noteworthy measures are the abolition of long-term capital gains tax and its replacement with tax on transactions, and reduction in short-term capital gains tax. This brings domestic investors on a par with the foreign institutional investors, which coming through the Mauritius route were anyway not paying long-term taxes.

Other measures that will deepen the capital market further are the creation of an alternative trading platform for SMEs to raise equity and debt funds from the capital market and the proposed integration of commodities and securities markets.

In the realm of indirect taxes, the Finance Minister has retained peak Customs duty at 20 per cent. Even though the peak customs duty has not been cut, the FM has expressed his commitment to align the tariff structures with that of Asean countries. But he has carried out his intention of bringing more services under tax net. Services are ultimately to become the biggest source of tax revenues for the Government.

The Budget has taken a number of steps to perk up the sentiment of institutional investors in the capital market. To induce the FIIs to invest more in Indian capital market, the Budget has simplified necessary administrative procedures for the FIIs and raised the investment ceiling for their investment in debt funds from $1 billion to $1.75 billion.

(The author is Chairman and Managing Director, Bank of Baroda.)

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