The Hindu Business Line : Looking beyond the Budget

In India, the Budget exercise usually provokes considerable excitement and curiosity. However, the common man looks at it with some trepidation — on possible new levies — and hope — for reliefs. For it is generally thought that what the Budget gives by the right hand it takes away by the left.

Last year, the Finance Minister, Mr P. Chidambaram, carried out a major exercise in simplification of direct tax policies in keeping with the Kelkar Committee recommendations, which have been widely welcomed. There could be room for some fine-tuning in terms of increasing the exemption limit further to Rs 2 lakh, which could partly go into savings through mutual funds particularly at a time when the stock market is buoyant.

Strengthening mutual funds

Mr Chidambaram has expressed himself in favour of strengthening the mutual funds to mobilise domestic savings for investment. Currently, savings is around 29 per cent of GDP while there is a gap in investment of 3 percentage points. Increasing the exemption limit will boost the investment effort of the middle-class and small investors, which will more than compensate for the revenue loss resulting from a bigger tax limit.

The traditional view of linking exemption limit to inflation rate — currently at 4.5 per cent — need not be the only logic to avoid raising the exemption limit. As for the indirect taxes, the major effort was introducing VAT (value added tax) though some States have not implemented the scheme. Consultation with those States must continue to bring them into the VAT fold. Customs levy changes have followed the WTO compatible route. There may not be too much of a change in this area.

Open import regime

Some changes to safeguard interests of specific product groups or industries are possible. The old argument to protect domestic capital goods industry from cheaper imports holds no ground in the face of an open import regime. In a global arena, Indian industry should be able to withstand competition from abroad.

The recommendation of the Dr C. Rangarajan Committee for reduction in Customs levy on petro products may also find a place in the Budget since petroleum companies are burdened with huge losses. On central excise, the settled principle of lowest rate on raw materials, next higher rate for intermediates and the highest rate for capital goods seem to be working well.

The next big ticket item is service tax, which rakes in a revenue of over Rs 21,000 crore and has the potential to fetch more. Reports are that the Finance Minister is considering bringing new assesses such as multiplexes, fashion designers, doctors and even railways under this tax net. It may be worthwhile revisiting the cash withdrawal tax to examine whether or not it has been helpful in tracking black-money transactions in the economy, for which purpose it was introduced. Some streamlining such as excluding conference expenditure from the purview of fringe benefit tax seems to be in order. In the corporate world such expenses are a legitimate part of professional requirement.

It would also be useful if the Finance Minister placed before Parliament a document detailing the progress of major investment proposals announced by the government. If economic management improves, fiscal deficit at the Centre will automatically follow suit. It is not mere allocation of public funds but vital is actual achievement of targets.

Allocation for infrastructure projects must be considerably increased. Take, for example, the announcement of the decision in last year's Budget to set up five medical institutes of the size and quality of AIIMS. What exactly is the status of the scheme and the probable time-frame within which it might be completed? The same should hold good for any other major scheme.

Global leader

The strides India has made in the last 15 years leaves one in no doubt of its potential in areas of economic competence. The steep rise in GDP growth, a strong export performance, the emergence of the IT sector which has catapulted India to global leader in the area, and the consistent record of an emerging market in the financial world are real achievements.

But we have to learn from China about infrastructure development and the speed with which policies are implemented. The fruits of development have largely gone to urban India. Rural poverty and unemployment haunt us still. Even taking into account that the country's poverty index now stands at 26 per cent, in actual numbers, that is still the size of the population in the US! Rural development schemes can be effectively implemented with the involvement of credible NGOs and the local community. Over to Mr Chidamabaram.

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

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