The Hindu Business Line : Re-starting reforms

THE popularity of the Budget or of the Finance Minister presenting it is inversely proportional to the frequency of interruptions in Parliament. Going by this criterion, the Finance Minister, Mr P. Chidambaram, has indeed come out with good grades. That is precisely what Mr Chidambaram has attempted in his second Budget in the UPA Government. If in 1997 he presented a `Dream Budget', this one looks at the harsh realities of the countryside and suggests improvement. The Minister had the Common Minimum Programme (CMP) for his exercise. In deference to coalition sensibilities, the Budget has tried to tread the path of least confrontation though it did see scope for foreign direct investments in such sectors as construction, mining, and retail trade.

The focus on the rural sector with higher outlays and the before-the-Budget decision to keep the EPF rate at 9.5 per cent should be of some cheer to the Left parties. Quite appropriately, the Minister referred to the successful experience of China, which had attracted $500 billion by way of foreign investments since it opened the economy. This has led among other things to better integration of China with the global economy.

The Minister's definition of poverty to include several other factors such as illiteracy, malnutrition, infant mortality, lack of skills and prevailing high unemployment, and not just income, is very appropriate. It is against this background that one has to view the Plan allocation of Rs 18,334 crore for rural development and enhanced allocation for health, primary and secondary education, provision of drinking water facilities, and improvement in sanitation. The allocation for education in 2005-06 will be Rs 18,337 crore. A national rural health mission is to be launched next fiscal. The substantially higher allocation for integrated child development schemes should benefit the poor particularly in the rural areas. But the moot point here is not the higher allocation as such but the efficiency of implementation of the programmes without corruption. Also the resources for the higher allocation to these sectors will have to come from better tax compliance and buoyancy of the economy.

At the macroeconomic level, the forecast of 7-8 per cent growth forecast for 2``005-06 is encouraging. With turnaround in the performance manufacturing sector and a buoyant service sector, which accounts for 52 per cent of GDP, the resources should not be a major constraint if the economy continues on its current path For the long-term development of the infrastructure sector, the mechanism of special purpose vehicles seems best suited as they will function autonomously with least bureaucratic rigidities and raise funds from the financial markets. The allocation of Rs 9,320 crore for National Highways development is part of infrastructure development that will in time help the economy functionm more efficiently.

Considering the peculiar problems of India, we should not go for the model of jobless growth but a productive economy that would create large number of jobs as in the IT sector which is expected to generate seven million jobs in the next five years and the textile sector which is entering an era of quota free exports and can generate 12 million jobs in the next five years.

What then is the grand picture emerging out of this Budget? Basically, it is an exercise to reconcile the demands for improvement of the rural sector while taking a look at the organised segments including reform of the tax system and administration and modernisation and diversification of the capital market. Introduction of VAT from April 1 will be a major achievement. Customs duty reduction on a variety of goods and intermediates including capital goods will increase local competition.

Direct tax rates and slabs have been revised with abolition of tax exemptions It is claimed that the new scheme based on the recommendations of the Kelkar Task Force will benefit assessees across the board but the actual effect has to await final analysis by experts. The corporate tax has been reduced to 30 per cent from the existing 35 per cent. This change will bring the corporate tax rate to that prevailing in other Asian countries.

One of the weakest points in the Budget is the proposal to levy a tax of 0.1 per cent on cash withdrawals from banks in a day of Rs 10,000 and above. This measure, it has been argued, will leave a tax trail to trace black-money transactions. The question of government getting its hands on the resources of parallel economy including laundered money which finds its way to secret accounts of foreign banks has been the subject of study by several high-power committees but a viable solution has not been found. It may be true to say that most black-money transactions happen outside the banking channels and are thus beyond the radar of the Income-Tax Department. The issue has to be tackled on the expenditure side particularly in large real-estate transactions, commodity trading, hawala deals, and gold and other jewellery financing. The present move will only lead to fruitless workload for the already overworked department and result in harassment of honest citizens. The number of transactions will be so huge that it is practically impossible to handle the load of work which in any case will be without proportionate results. Hopefully, the Minister will re-visit this measure.

The Budget marks another beginning towards reforms with equity and growth.

(The author is a New Delhi-based management and financial consultant.)

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Budget: The playmaker's play

One for the consumer

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Re-starting reforms

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Enduring bonds

Income tax issues