The Hindu Business Line : Interim Budget 2004-05: Understated, yet promising

While the Finance Minister could hardly be expected to deliver a package of initiatives in an Interim Budget, Mr Jaswant Singh has indicated many new directions and initiatives, promising what he can do if he comes back to power. It is a Budget that promotes growth and strikes the right notes in regard to reforms, says S. Venkitaramanan.

THE Finance Minister, Mr Jaswant Singh's interim Budget 2004-05 has stirred many hopes and offered new visions but is, by and large, restrained in its populist intent. It is mostly about achievements in the sphere of growth and reform and in respect of forex reserves, and has not promised many new sops at Government expense.

The most noteworthy aspect of the interim Budget is the claim that the fiscal deficit for 2004-05, at 4.4 per cent of GDP, is lower than the figure of 5.6 per cent for BE 2003-04. RE 2003-04 is at 4.8 per cent. Correspondingly, the revenue deficit is also lower, at 2.9 per cent for 2004-05 and 3.6 per cent for 2003-04.

To an extent, the Finance Minister has been able to achieve a reduction in the fiscal deficit/GDP ratio in keeping with the Fiscal Responsibility and Budget Management Act. He has, however, been helped in accomplishing this by the boost in the GDP rate of growth, which has itself led to revenue increases and brought down the ratio by being a larger denominator.

The quality of fiscal adjustment is also important. Primarily, it reflects reduction in capital expenditure, from Rs 1,11,368 crore in RE 2003-04 to Rs 76,692 crore in 2004-05. In the post-Budget explanations on TV, the Expenditure Secretary also attributed part of the reduction to lower subsidies arising from lower food stocks and lower interest costs of food credit because of the direct access to markets.

Be this as it may, the reduction in fiscal deficit is a creditable achievement, inasmuch as the fiscal stimulus continues with access to loans from the financial sector for various investment programmes in the infrastructure sector. The interim Budget, as expected, did not have any announcements of significance on the tax front. It was, however, noteworthy for an attempted clarification on taxation of BPO entities, especially of MNCs and cross-border entities engaging in the activity.

The intention of the Finance Minister was obviously to declare that the cross-border entity will not be taxed on the attributed profits arising from BPO operations. But one has to see the fine-print of the notifications when they are issued. I do hope the CBDT will not succeed in obfuscating the Finance Minister's declared intentions when it converts the speech into a circular.

Some of the other aspects of the interim Budget that deserve mention are the extension of tax concessions for power projects beyond the earlier stipulated period, retention of the capital gains tax exemption in respect of specified listed equity investments, and the provision of deemed export benefits to producers of goods competing with cheaper imports, particularly those supply to projects.

All these are supportive of the manufacturing sector and indicate the broad vision of the Finance Minister, which is in favour of enterprise and investment.Another noteworthy announcement was the decision to give IDBI the pride of place in development financing. It will get back its place as the lead financial institution among development finance institutions.

What is, however, missing in its access to resources at low interest rates, which used to be provided in the old days by the RBI from out of its long-term operation funds. Perhaps, the Finance Minister may like to revisit this option, which can ensure relatively cheap money for development.

The Finance Minister has rightly reserved many new schemes for the full Budget. But his priority in respect of creating six new All India Institutes of Medical Sciences in various States is appropriate. This is a recognition of the importance of health in the national agenda.

In a sense, it is creating IITs in the sphere of medical education. This enterprise will surely be of long-term significance in enabling India to achieve higher targets in health and becoming a global destination in health-care.

True, the Budget had some sops for the middle-classes and the poor. But what else can one expect from a Finance Minister presenting a pre-poll Budget? What is creditable is that he has confined his middle-class sops mainly to a merger of 50 per cent DA with basic pay — which is, after all, a Pay Commission recommendation.

In addition, the Finance Minister has announced enhancement of HRA in outlying locations such as the Andamans. This is not too great a transgression in fiscal terms.

The ruckus about whether an interim Budget was provided for in the Constitution was entirely uncalled for. After all, the first budget of free India, presented by R. K. Shanmugham Chetty, was an interim budget because the Partition of India had just been implemented. As many such interim budgets have been presented subsequently, the arguments about their constitutionality were theatrical, if not absurd. The Speaker called a halt to these arguments by an eminently sensible ruling.

True, the Finance Minister cannot expect an entire package of initiatives to be included in the interim Budget. That is why he has contented himself with indicating new directions and initiatives in many respects. He has tried to keep within the bounds of propriety by so doing.

Whether the interim Budget will enhance the feel-good factor in the country at large is, however, a million-dollar question. It does not have much to set the Ganga and Jamuna on fire. It is classic Jaswant style — understated but substantial, promising what he can perform if and when he comes back to power.

All in all, a Budget that promotes growth and strikes the right notes in regard to reforms — particularly in fiscal terms. The Finance Minister's interim Budget deserves three cheers — in spite of its being an interim Budget.