The Hindu Business Line : A fine balancing act

In his budget proposals for 2005-06, Finance Minister Mr P Chidambaram has pulled off the tricky business of balancing reform agenda and social issues successfully. Though he has stayed clear of bold measures such as labour reform and divestment, and though the budget clearly does not have any big-bang moves, there is enough reason for everyone to be happy.

THE Finance Minister presented the budget amidst huge expectations and has walked the tight rope dexterously, trying to balance the reform agenda with the social sector increased outlays.

Clearly, the budget does not have any big-bang moves but there is enough reason for everyone to be happy.

There are moves to encourage banks to increase credit off-take to the rural sector and to engage in micro finance through MFIs. The focus on SHGs and MFIs given the success of existing efforts is good to see in the UN's international year of Micro Credit. This, along with a greater public private engagement and infrastructure development of roads and health programmes in villages and the Northeast, will be instrumental in bridging the economic divide.

There is a new move to accept the Planning Commission's idea of using the foreign exchange reserves for infrastructure development. A Special Purpose Vehicle would be created with Rs 10, 000 crore from foreign exchange reserves to finance infrastructure projects.

The budget seeks support for increases in Foreign Direct Investment. The Securities Contract Regulations Act would be amended to enable securitisation of debt, with corporate debt brought under the ambit.

Ambiguities regarding legislation of OTC derivative contracts would be cleared. Commercial paper stamp duty has been rationalised and would now be uniform irrespective of the primary subscriber.

Banks would also be allowed and encouraged to raise preferred capital to conform to Basle capital adequacy norms. Laws would also be amended to remove of the cap and floor for SLR and CRR. This would give the RBI the necessary freedom and flexibility to manage monetary policy. Even as I write this piece, the Reserve Bank of India has announced the promised road map for Banking Sector reform.

Corporate income tax has been lowered for domestic companies to 33 per cent from the earlier effective tax rate of 35.875 per cent although depreciation rates have also been reduced.

The value added tax regime takes effect from this fiscal, which is a prudent measure and in line with international trade practices. The rationalisation of the personal income tax slabs would result in some relief to tax-payers.

Fiscal inefficiency has been removed and most tax exemptions have been given a quiet burial.

The balancing of the budget is a tricky act and has been achieved by increasing government borrowing from the market. The net government borrowing has gone up to INR 1.04 trillion against expectations of around INR 950 billion.

In an environment of high crude prices and healthy credit off-take, this may result in some pressure on interest rates. The budget stayed clear of bold measures such as labour reform and divestment.

The fiscal deficit target of 4.3 per cent of GDP for financial year 2005-2006 leaves no scope for slippage under the Fiscal Responsibility Act. It is an exercise with good intent and one hopes all revenue targets are met to achieve the budget targets.

(The author is Deputy Chief Executive Officer, HSBC India.)

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