The Hindu Business Line : Budget's investment focus can propel economy

INVESTMENT is paramount to growth of the economy, as it promotes capital formation and production capacity, and provides employment. The current Budget is multi-dimensional, as far as over-all impact is concerned, and has given top priority to development and growth of the rural sector. It has provided Rs 4,800 crore for accelerated irrigation projects and another Rs 400 crore to micro-irrigation. Water resources, flood management etc., have been allocated more than Rs 300 crore. National Horticulture Mission, with an allocation of Rs 630 crore, will promote crops like flower cuts. Rural credit to the tune of Rs 1,08,500 crore will boost agriculture.

Investment in the agricultural sector has stagnated over the last several years and the area under irrigation has not increased. The rural economy is expected to improve with the implementation of the Budget. The government plans to urbanise the rural sector by providing urban amenities and expand the informal sector to create mass employment in the rural areas. Urbanisation of villages will check migration to metropolitan cities, where infrastructure is over-burdened by the burgeoning population.

The Budget has rightly focused on infrastructure development, which deserves much attention. National highways have been allocated Rs 2,000 crore and rural electrification Rs 1,100 crore, an investment that will strengthen power-supply and promote irrigation.

On the industrial front, equity support of Rs 3,554 crore will promote investment in public sector enterprises, enabling them to compete in the global market. They will now be able to enhance their production capacities.

Further, funds have been created for specific industries. For instance, funds for textiles have been enhanced to Rs 435 crore, along with a 10 per cent capital subsidy. The Budget has estimated an investment of Rs 30,000 crore for this sector, which earns foreign exchange and generates very large employment opportunities. The budget has announced several funds for development of specific industries, like the Rs 150 crore fund for pharmaceutical and biotechnology.The Small Scale Industry (SSI) sector, in addition to receiving a subsidy of Rs 173 crore will benefit from the Rs 500 crore fund that the Small Industries Development Bank of India (SIDBI) proposes to set up. Investment in the rural sector will increase purchasing power and thus create demand for both rural and urban goods and services. The Finance Minister, Mr P. Chidambaram, has rightly sought to augment investment in rural areas because there is a lot of disguised unemployment in this sector.

Tax proposals are also an indication of the investment potential, as the taxation policy directs the economy in desired direction. As such, tax proposals have offered a number of investment incentives. The Finance Minister has reduced customs duty by about 10 percentage points for import of textile machinery, machinery for manufacturing leather goods, pharmaceuticals and biotechnology. Duties on import of primary and secondary metals has also been reduced. These reductions will increase investment in their respective industries.

With respect to direct taxes, the Finance Minister has altered the income-tax brackets and reduced tax-rates for lower slabs. For instance, income upto Rs 1 lakh is exempt from tax. And income upto Rs 1.5 lakh will be taxed at 10 per cent and that upto Rs 2.5 lakh at 20 per cent. However, the benefit of extended exemption has been nullified by withdrawal of standard deduction from the income.

In short, net increase in the income of a taxpayer has been limited.

The net benefit for an individual earning Rs 1 lakh per annum would be around Rs 10,000. Though this is a small amount and does not create potential for saving, taxpayers in higher income brackets will benefit.

Taxpayers have two alternatives - either they spend on consumption or spend partly, and invest the rest.

The other incentive for saving is the consolidated exemption of Rs 1 lakh, if invested in savings instruments. This is a positive measure to enhance domestic savings rate, and will most benefit taxpayers falling in the Rs 8-10 lakh per annum bracket.

Thankfully, deduction of interest on housing loan from taxable income has been retained. Corporate tax, an important source of income for the Government, has been reduced to 30 per cent with a surcharge of 10 per cent.

Though this is an investment-oriented measure, it may not encourage investment in the corporate sector due to the cut in depreciation rate to 15 per cent. In the interest of replacing old machinery by modern ones, depreciation should have been kept at 20 per cent.

The Budget has potential for furthering growth of the economy, creating jobs in the rural sector, and in industries like textile, construction and the service sector. The outcome, however, will be determined by effective and accurate utilisation of the resources.

The Centre should monitor, atleast half-yearly, the physical achievement and the quality of asset formation. The execution of the Budget has always been reported in numbers and not in terms of quantity.

(The author is former economic adviser to Securites and Exchange Board of India.)

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