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IIF/2005/PR-REL 30th April, 2005
 

Analysis of Union Budget 2005


The immediate impact of the union budget on the fifth day of its presentation has been positive. Sensex has gone up and touched its all time figure crossing 6800, Prices of many products except cigarettes & tobacco, have gone down, inflation even on the week ending 25 February has gone below 5 percent. Many automobile companies have announced price cuts immediately. Almost every newspaper, magazine, people in general, economists and politicians except from opposition have lauded the budget proposals except for a few direct tax proposals. There has been a strong reaction to the transaction tax on cash withdrawals and tax on fringe benefits. The Hon’ble finance minister has been obliged to make statements on these two issues. We have also witnessed strike by gold merchants against the excise duty levied on branded jewellery. The general impression of cess of fifty paise per litre on petrol & diesel has been taken to be pinching the pockets of the people as it was perceived that the petrol prices would go up by that amount ignoring the fact that right mix of advaluram and specific duty structure has been introduced reducing both the excise and custom duties by about five percent on each head on petroleum products to make it price neutral. I would deal with these two issues related to direct taxation in details in my speech,

The Finance Minister in his proposals in Union Budget 2005 has rightly concluded that the budget is for growth with stability and equity. In my opinion, the budget would be growth oriented, non-inflationary and generate employment and benefit the common man. The Finance Minister has been able to carry forward the spirit of National Common Minimum Programme (NCMP), Financial Consolidation, while distributing the much desired largees to all sections of the society. This year’s budget is quite different from last year as it is path breaking and beyond expectations of people in general.

The Union Budget 2005-2006 presented by the Finance Minister in the Parliament has emerged to fulfill the agenda laid down in the National Common Minimum Programme and also the long overdue needs and the requirements of the economy. It is clear from the budget that the lobbyists who have been affecting the government decision could not be successful to push away the hard realities facing the nation. The economic situations in the country and the economic fundamentals of the economy, when the Finance Minister raised to present the budget were sound and empowered him to make large outlays to the much needed areas, although there has been an overall byonancy in all the sectors of the economy as exhibited through the Economic Survey 2005 except in agriculture, which is also due to 13 % deficiency of rainfall observed in the current year.
The overall performance of the economy in the last six months has been highly appreciable despite international oil price shocks and the national disaster of tsunami. The economic strength of the economy as well as the partnership of Left front has helped the budget to maximize the welfare aspect of the economy, market orientation and targeting of issues such as agriculture, rural development, basic infrastructure – both rural and urban, education, healthcare, poor and disadvantaged in the right perspective. The money allocated if spent well, the outcome would be great to accelerate the India’s developmental process, which is already set in motion ever since the economic reforms process began.

This year the Union Budget is path-breaking budget in more than one ways as it is a well thought out, introduces drastic change in the philosophy of budget making from the systems of additions and deletions of figures in the one time prepared budget documents repeatedly particularly in case of tax proposals and resource mobilization. First time a large outlay has been provided for education followed by planned allocation for rural development of Rs. 18,334/- crores. In my opinion, the budgetary allocations will provide an impetus for growth stability and equity.

The budget has agriculture and rural bias but the expenditure allocation on rural and urban infrastructure, education and health care will benefit the industry and the urban centers of economy. The Finance Minister has maintained a fine balance in stepping up investment in agriculture, irrigation, rural electrification & rural roads, enhancement of investment in infrastructure, enabling public private partnership in infrastructure sector, resource mobilization and simplifying procedures & relaxing entry / exit barriers to give a boost to the trade.

Enhanced allocations have been made in social sectors and infrastructure to build the productive capacity of the economy. The Finance Minister has rightly targeted poverty alleviation programmes, labor and employment generation schemes, primary education and health care, socially disadvantaged minorities SC / STs. The allocations to Antodaya scheme to cover 2.5 crore families is also welcomed. In order to take care of the National Common Minimum Programme (NCMP), the Finance Minister has assigned high priority to the development of social sector so that the benefit of the economic reforms process initiated by Dr. Manmohan Singh in 1991 are percolated to the masses. The Finance Minster has rightly launched schemes in light of National Rural Guarantee Bill for enhancement of livelihood of the poor in the rural areas through planned programmes like food for work, widen mid-day cooked meal scheme, provision for drinking water and construction of rural roads etc. The public private participation has also been rightly encouraged to have larger investment from private sector. When will take pride that poverty is alleviated and we do not need to provide for schemes like Antodaya.

The budget has rightly focused on micro finance and micro credit. His proposals on indirect taxes, customs and excise are welcome feature and would give boost to the industry and increase its competitiveness globally. The removal of surcharge on tea, refined edible oil and vanaspati would please households.

The prosperity and development of India lies in the prosperity and development of the masses and empowering those who are in some form disadvantaged to earn and live a living with pride. The allocations announced in the Budget would amply take care of development and maintaining young India’s most valuable resource i.e. people of this country who have the capacity and capability to make this county as one of the strongest economic power in the world. While taking care of these basic requirements, the Finance Minister has been equally concerned with injecting necessary doses of efficiency through market orientation by taking care of allocations to urban infrastructure, up-gradation of ITIs, allocations to knowledge centers, allocations to Indian Institute of Science to become a world class university, announcing Mumbai to be the regional financial centre and provision of metro rail for metros and mini metros.

In this year’s budget in contrast to last year’s budget where focus was on disinvestment to raise resources, he has ventured to allocate more than 14,000 crores in equity participation in public private partnership and proposing to introduce flexibility in functioning of the banks by removing the cap on SLR and CRR, capital market & Financial market would usher in new era with these budget proposals and may be more buoyant in nature. We might witness new IPOs of over Rs. 50,000 crores, generating employment, The budget proposals would also attract good size of FDIs and FIIs.

The last year’s budget was more rhetoric while this year budget is more specific in nature both in terms of targets and their allocations, although the basis of both the budgets have been National Common Minimum Programme (NCMP).

In this year’s budget, the share of non tax capital receipts has gone down to two percent from six percent, while share of corporate tax has gone up by two percent, excise duties by one percent and income tax by two percent and share of custom duties down by one percent.

There has been a substantial hike in budget allocations to the states. The allocation to the non plan assistance to states an UT government has been hiked by four percent. The state and union territories have been suffering from financial crunch. The increased allocation would provide the states and UTs much needed financial relief.

The Finance Minister proposals of mobilising resources through providing relief and without inflicting burden would significantly improve tax collections and tax compliance. It would also reduce the interest burden of the Government. Various tax proposals would help the government reduce inflation to a level ranging between 3% to 4 %, maintain fiscal deficit between 4% to 4.5% and revenue deficit between 2% to 2.7%. In my opinion, the proposals would give a boost to savings and investment in the economy and generate employment both for skilled and unskilled workers. We may expect during the year a saving rate of 25 % and a growth rate in GDP of about 8% if there are no man made or natural disasters during the year. There would be a boost to exports as well.

The Finance Minister through his tax proposals has tried to maintain a fine balance and has introduced simplification and provided relief through realignment of tax rates and tax slabs. The raising of minimum exemption limit to Rs. 1 lakh across board is good. It may apparently look big but the effect in tax savings would be marginal. People in high income bracket would be benefited more than lower incomes group. I feel the tax proposals would facilitate greater tax compliance. However, his proposal to tax cash withdrawals of Rs. 10,000/- or more through bank on a single day holds no justification and if not rolled back would become counter productive as people who need to make justified expenditure in cash will hold cash instead of keeping that money in banks. Domestic Industry deserved level playing field by alignment of tax duties and the reduction in custom duties.

The Sizeable increase in allocations to almost each identified sector of the economy have been uniquely financed instead of burdening the tax payers by providing relief to him through an equitable distribution of tax collection and removing the distortion which existed over a period of time among the tax payers. The Finance Minister has very intelligently been able to provide relief to tax payers by bringing about change in tax rates and tax slabs and simplifying the tax computations. The existence of standard deduction for salaried class was in violation of equity as self-employed people were not entitled for it. Similarly directed savings in certain schemes and instruments were discriminatory in nature as certain schemes enjoyed preference over others leaving little scope for one to save and invest according to ones own needs and enjoy flexibility. Similarly 30 % taxation on corporate fringe benefits would remove discriminatory treatment of incomes as it was misused by corporates to distribute largees to its employees and charge that as a deductible expense against those who for any reason did not enjoy such fringe benefits. Realignment of depreciation rates to a realistic level from 20 % to 15 % and reduction in customs duties on non agricultural items close to that of its east Asian neighbors and reduction of excise duties on some of the items at CENVET rate would not only be equitable but also increase growth prospects and competitiveness of some of the sectors of the economy. The Income Tax rates for individuals have been rightly aligned and the procedure simplified and has become more equitable and less discriminatory in nature.

As said earlier, the transaction tax on cash with drawl from bank of more than Rs. 10,000 is not justifiable and would be counter-productive. It would increase the cash holdings by people and suck money out of productive channels. It would also pose more difficulties for the middle class people and the common man. Similarly, the fringe benefits tax is indirectly expenditure tax on tax entities. It is true that companies, particularly large ones misused the fringe benefits to evade and avoid taxes. But to stop some misusing a facility penalizing 80 percent business entities is not justifiable. These two measure while would help the government to raise revenues marginally, would spoil government’s endeavor to simplify the tax structure. These two proposals require a serious re-look before implementing them. Moreover, these would give unnecessary discretionary powers to tax men and likely to be misused by some of those who are corrupt. Instead of unearthing black money would become instrumental in generating black money. The finance minister has not made serious attempt to unearth already generated black money or money laundering. There are so many other areas well known where black money is generated left untouched by the hon’ble finance minister. Estimates indicate that over Rs. 300,000 crores of black money is generated every year.

The additional cess on petrol and diesel by 50 paise per litre would help him generate sizeable resources for the National Highways Development Project and would not cause any increase in the increase in retail prices.

I feel that government should ensure that all reductions in excise and custom duties are passed on to the consumers through adjustment in prices as is done when such duties are raised.

However the budget suffers from certain weaknesses, In the process of pleasing everybody and displeasing none by Finance Minister, no serious attention has been made to unearth black money and phasing out of both implicit and explicit subsidies. The Finance Minister has also not ventured in monitoring process of large outlays to ensure the targeted outcome to be realised. The gender bias in terms of minimum taxable income exhibited in the budget proposals by Finance Minister although appreciated in general and working women in particular is against the tenets of the Constitution which guarantees equity among men and women in the country. However the senior citizens been given the preferred treatment by exempting the income upto Rs. 1.5 lakhs although against the tenets of the Constitution yet deserve to be honoured to be respected with larger tax free income for the labour and efforts invested by them during their working life in Bharat Nirman and also due to lack of social security schemes available in the country for senior citizens. All men and women through the process of law and in the constitution must be treated equally.

Although the budget may pinch slightly to some yet the quality of life of the polity both rich and poor would improve in the light of budget proposals. There was no such attempt made in last year’s budget.

Overall impact of the budget would be more prosperous rural India, larger savings, boost in investment, buoyant capital markets, greater literacy, less poverty, better quality of life of people, more employment, up-liftment of poor and weaker sections of society and better standing of India in the international arena.

What India needs today is not only quantity of service but also the quality of service in governance of the country. The massive infrastructure built in the area of education, health care and other state services require not only be enhancing but also qualitatively improving to increase both the efficiency and effectiveness of Indian economy.

The Finance Minister has tried to please everybody and displease none while targeting growth with stability and equity. In my opinion, it is a splendid budget which would bring rapid growth, financial stability and equity, generating employment and boost savings and investment in the economy and usher a new era for the country.

Appendix
Growth & Equity2

J.D. Agarwal

Abstract
The focus is likely to be on the social sector to make the gains of reforms percolate to the masses.

The presentation of the Union Budget evokes much interest on the part of countrymen, media and the government as it affects the lives of the people. It brings cheers to some and pinches the pockets of some others. The work of the Finance Minister in this year's Budget is rather more difficult as he has to do the balancing act by taking care of the National Common Minimum Programme and putting the economy on a faster growht path. He has to boost investment including foreign direct investment (FDI) and foreign institutional investment (FII) to bring about increase in the nation's global competitiveness. At the same time th performance of the economy in the current year in general and sound economic fundamentals exhibited through the Economic Survey makes the task of the Finance Minister easier.

What is likely to be presented in the Budget today is a difficult task particularly in the light of the high level of confidentiality maintained by the government. However, every-body is interested to know what is in the Finance Minister's bag. I am making a modest attempt to pen down what I think is likely to be in the Budget document.

The Union Budget 2005 to be presented by Finance Minister Mr. P. Chidambaram is likely to be investment oriented targeting faster growth and the social sector of the economy. It is likely to be a path breaking Budget tuned to meet the needs and requirements of the Indian economy. It is likely to focus on five major issues i.e., stepping up investment in agriculture, irrigation, rural electrification and rural roads, enhancement of investment in infrastructure, enabling public-private partnership in the infrastructure sector, resource mobilisation and simplifying procedures and relaxing entry/exit barriers to give a boost to trade. The Budget is likely to be investment oriented with a projected fiscal deficit at four percent and revenue deficit at two percent of GDP. The Budget may also encourage FDI in coal mining, insurance, real estate and retail trade.

The Budget may target a rapid growth with stability and equity. The Finance Minister may announce a scheme for unearthing of black money in order to boost investment in agriculture, infrastructure and enhanced expenditure in the social sector. Enhanced alloactions may be made in social sector and infrastructure to build the productive capacity of the economy. The Finance Minister may particularly target poverty alleviation programmes, labour and employment generation schemes, primary education and health care socially disadvantaged minorities SCs/STs. The allocations to the Antodaya scheme may be made to cover 2.5 crore families.

1. Priority Sector
In order to take care of the National Common Minimum Programme (NCMP), the Finance Minister may attach high priority to the development of social sector so that the benefit of the economic reforms process initiated by Dr. Manmohan Singh in 1991 percolate to the masses. The Finance Minister may launch the National Food for Work Programme in another 150 most backward districts of the country, he may announce a scheme in the light of the National Rural Guarantee Bill for enhancement of livelihood of the poor in the rural areas through planned programmes like Food for Work, widening the mid-day-meal scheme, providing drinking water and constructure of rural roads etc. Wherever possible the public-private participation may also be encouraged to have larger investment from the private sector.

The Budget may also encourage micro finance and micro credit and announce measures to remove sever gaps, which hinder the flow of institutional credit to agriculture. The rationalisation and realignment of subsidies may be in the offing. While rationalising and realigning the subsidies, the Finance Minister may try to ensure that the benefit of the subsidies are optimised without affecting the poor by improving their design, delivery and transparency. For instance the subsidies on LPG or cooking gas may be reduced.

The Budget may encourange banks to undertake project financing and may include a scheme for realignment of lending and credit rates in general and better credit assessment for SMEs. The Budget may announce a scheme to promote the bond market, which has witnessed a fall in turnover recently.

One of the challenges before the Finance Minister is fiscal reforms i.e., reconcilling the need for fiscal consolidation with appropriate tax reforms. The major share of the tax revenue of the Centre and the states comes from tax revenue. Indirect taxes do not only affect resource allocations but also the investment climate. The tax evasion and tax avoidance is high while the administrative efficiency of tax collection in the country is very low.

2. Tax regime overhaul
In the process of tax revenue augmentation, to mobilise larger revenues to fund the needs of the economy, the Finance Minister may over haul the regime of tax structure, deductions and subsidies and withdraw some of the tax incentives and simplify procedures to build up mutual trust. There are as many as 130 tax incentives offered to the Industry presently. There was a justification of such a large number of tax incentives when the corporate tax rates were very high i.e., 50 percent. He may come out with a shcme to minimise large scale evasion prone cash transactions.

The Finance Minister may also realign the tax rates and tax slabs for corporates and individuals. In order to mobilise more resources, the scope of service tax may be widened to include more services. Some of the exemptions and deductions may be withdrawn and excise and custom duties may be realigned and rationalised besides the operationalisation of VAT. The Finance Minister will be able to maintain a fine balance between financial consolidation, growth and equity and boost investment climate.

1. Text of the Public lecture delivered on 5th March, 2005, organized by Indian Institute of Finance at PHD Chamber of Commerce & Industry, Lakshmipat Singhania Auditorium, PHD House, Sirifort Institutional Area, New Delhi, INDIA.

2. Reproduced: Invited article on Forecast of Union Budget 2005 published in Deccan Herald, 28 February, 2005 on editorial page.

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