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Industry & Economy - Budget


A limited first step

Ajit Ranade

THE Finance Minister had said that he would rather be known as the Investment Minister. On this count, his Budget has scored quite a few points. First, it is the setting up of the Investment Commission. For too long, we have had a lot of attention paid on how to induce more FDI (foreign direct investment), but perhaps not enough to DI (domestic investment). In fact, it was the same Finance Minister who had also set up a Disinvestment Commission in 1996.

In the current Budget, however, his support for disinvestment is muted, as the National Common Minimum Programme itself has ruled out privatisation of profitable public sector entities. However, the Finance Minister's announcement of a modest target for disinvestment (Rs 4,000 crore) and the proposal to off-load government equity in NTPC means that disinvestment will continue, albeit much more selectively.

A second investment-friendly measure is the elimination of long-term capital gains tax and the lowering of short-term capital gains tax. It is surprising that the stock market reacted negatively — perhaps an over-reaction, focused too much on the turnover tax and not enough on capital gains. The third investment inducement comes in the form of a slew of tax incentives for investments in R&D and into the rural economy and will induce investments.

Fourth there is the hiking of sectoral limits on FDI in a few sectors, which will attract foreign investors. Fifth is a variety of investment expenditures announced in infrastructure and rural areas. The change of the FIPB from being an approver to a facilitator will also be welcomed by investors.

The Budget had to achieve multiple, and somewhat conflicting objectives. The need to increase social sector spending seems counter to achieving fiscal rectitude. From where will funds come?

Also, the desire to spur growth to 8 per cent and yet achieve an equitable redistribution of this growth also seems difficult to balance.

The Finance Minister had an additional handicap of implementing his Budget in a shortened fiscal year. The Union Budget is increasingly an exercise in expectations management, and much more about implementation than promises.

(The author is Chief Economist, Aditya Birla Group.)

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