The Hindu Business Line : Good exercise, but with eye on polls

While certain measures, such as the farm debt waiver and raising of personal income-tax exemption limits, were long overdue and welcome, it is not clear if the Budget will help achieve the elimination of inequality and equitable distribution — hallmarks of good governance.

M. R. Mayya

Although guided by the forthcoming general elections, presumably being advanced from April-May 2009 to November-December 2008, the twin measures introduced by the Finance Minister, Mr P. Chidambaram — waiving of agriculture loans and raising the personal income-tax slabs — are indeed overdue and should have been done earlier. Anyway, better late than never.

The debt waiver for agricultural loans unpaid up to February 29, 2008 and overdue as on December 31, 2007 for marginal and small farmers, benefiting about three crore farmers estimated at Rs 50,000 crore, and one-time settlement facility giving a rebate of 25 per cent to other about one crore farmers, estimated at Rs 10,000 crore coupled with entitlement to fresh loans, will not suffice.

The bigger bugbear for the farmers in India are the loans taken from money-lenders, numbering about 20,000 among registered ones alone, not to speak of unregistered ones, all of whom resort to recover the loans with usurious rates of interest up to 48 per cent per annum by all possible means, including merciless ones.

Farmers’ suicides across the country will continue, though of course, at a lower pace. The Union Agriculture Minister, Mr Sharad Pawar, was candid enough to admit: “I cannot tell whether they (suicides) will stop”. His appeal to farmers all over the country not to repay loans borrowed from illegal money-lenders is not a practical proposition. A solution to the indebtness of farmers to money-lenders, registered as well as unregistered, needs to be found, howsoever, imperfect be it to tackle this serious problem.

I-T exemption limit

Raising the threshold limit of exemptions in respect of personal income-tax from Rs 1,10,000 to Rs 1, 50,000 and charging income-tax at the rate of 10 per cent for incomes from Rs 1,50,000 to Rs 3,00,000 and at the rate of 20 per cent from Rs 3,00,000 to Rs 5,00,000 and at the rate of 30 per cent above Rs 5,00,000 as against the existing rates of Rs 1,10,000 to Rs 1,50,000 Rs 2,50,000 and above Rs 2,50,000 would result in a benefit of Rs 4,120, Rs 14,420, Rs 24,720 and Rs 45,320 respectively per annum at each of these slabs.

The exemption limit for a woman assessee has been raised from Rs 1,45,000 to Rs 1,80,000 and for a senior citizen from Rs1,95,000 to Rs 2,25,000.

With an estimated tax paying population of 50 million, and assuming a per capita benefit of Rs 10,000, there would be a release of Rs 50,000 crore from the government coffers.

Soon, there will be the benefit to Central government employees to the extent of 20-25 per cent of their present emoluments because of the Sixth Pay Commission’s recommendations, to be followed closely by the State governments and public sector undertakings with the concomitant effect on the private sector.

All these will add to the inflationary pressure, which is already at the level of 5 per cent. Because of the lagged effect, the serious fallout will be left to the next government to handle.

Any stringent measures by the monetary authorities, such as hiking the interest rate, restraining the money supply, etc. will in turn hurt growth.

Differential rates of stamp duty on securities transactions by different States are not only inequitable but have also proved to be a great irritant to stock exchanges and stock brokers.

The proposal by the Finance Minister to request the empowered committee of State finance ministers to work with the Central Government to create a truly pan-Indian market is really welcome, albeit belated.

Raising the short-term capital gains tax on transactions from 10 per cent to 15 per cent is welcome. In fact, there is a strong case to revive the capital gains tax on long-term capital gains, at least at the rate of 10 per cent. This will not affect in any way the liquidity of thickly traded securities, where actually there is excess liquidity. Stock operators should remember that there can be no free lunch. The immediate bearish impact on the stock market will be short lived.

SECURITIES TRANSACTION TAX

Changing the base on options for payment of Securities Transactions Tax (STT) from the aggregate of strike price and the option premium to the option premium only payable by the seller at the rate of 0.017 per cent where an option is not exercised and on the settlement price where the option is exercised at the rate of 0.125 per cent payable by the buyer is just setting right an anomaly. Commodity Transaction Tax on commodity futures is also a good move.

Shifting the amount of STT paid as a rebate against tax liability to deductible expenditure against business income would be hitting the stock-brokers with regard to their transactions in proprietary accounts, jobbing and arbitrage, as the tax set off would be only a third of what they have hitherto been paying.

The Finance Minister would do well to reconsider this matter as jobbing transactions lend ready liquidity to the market and arbitrage transactions set right aberrations in prices between different deliveries and different markets.

Growing inequality

Separating the equity portion embedded in the convertible bond and trading it separately will kill the limited liquidity that is there in convertible bonds. It is the embedded equity that encourages some limited liquidity in convertible bonds.

Lowering the excise duty on cars, particularly small ones, will choke the already congested streets of metros. One dreads to think of the plight of the streets in metros with small cars flooding them.

Extension of the National Rural Employment Guarantee Scheme to all the 596 rural districts of India is undoubtedly a welcome proposition, but what one is dreaded of is whether it would at all be implemented faithfully. Recently, reports in a newspaper quoting the Comptroller and Auditor General of India revealed to the shock of the nation that in one State actual beneficiaries under the Scheme were less than 5 per cent of the total beneficiaries on paper.

The reference to the goals of the work in Government by the Finance Minster, inter alia, to elimination of inequality and equitable distribution unfortunately is contrary to the ground realities. Imagine a relatively poor nation like India with over 25 per cent of the population living below the poverty line, has some of the richest persons in the world.

Inequalities will continue and the goals of the government will recede day by day into the distant horizon.

Saint Tiruvalluvar’s dictum of “succour to the downtrodden” as one of the hallmarks of good governance remains performed, but only partially.

(The author is a former Executive Director, Bombay Stock Exchange.)