Financial Daily from THE HINDU group of publications
Friday, Jul 09, 2004
Industry & Economy
New deal for farmers; more funds for States
The Budget papers being taken to Parliament on Thursday. Kamal Narang
The Government proposes to launch a National Horticulture Mission. The goal is to double horticulture production from the current level of 150 million tonnes to 300 million tonnes by 2011-12. I invite States to join hands with the Government in launching this mission. One of the steps that States will be encouraged to take is to emulate the Anand model and establish a State Level Cooperative Society for promoting horticulture.
Oilseeds is another critical area. Last year, we produced 25 million tonnes of oilseeds, but we also imported US$ 2.5 billion of edible oil. Government will facilitate farmers to diversify into oilseeds by promoting superior seed-technology and through an appropriate policy of price support.
India must become a single market for all products, particularly agricultural produce. The existing Acts governing agricultural produce marketing committees have outlived their utility. The Government has circulated a model law. So far, ten States have initiated legal or administrative action for `direct marketing' and `contract farming' arrangements in line with the model law. I urge all States to enact the model law at an early date.
Research and development
Agricultural research and development is an area which deserves special attention. The Indian Council of Agricultural Research (ICAR) is a beneficiary of the scheme under which every commercial rupee earned by ICAR, incrementally, is matched by another rupee from the Budget. Besides, ICAR receives funds from the Technology Development Board in respect of projects that are commercially viable. Agricultural research must be expanded rapidly to new frontiers such as bio-technology, vaccines and diagnostics. There must be a special focus on farming in drylands and unirrigated areas. The allocation for 2004-05 is Rs 1,000 crore (which is an increase from Rs 775 crore in BE 2003-04), and I propose to make further allocations during the course of the year.
The Small Farmers Agri-business Consortium (SFAC) was set up in 1994. Although SFAC started functioning from 1998, its corpus stands at a meagre Rs 10.95 crore. In my view, SFAC should provide venture capital to projects and must be run, preferably by a banker, on purely business lines. The MS Swaminathan Research Foundation has identified 13 districts where there is a huge potential for agri-businesses and an appetite for investment of nearly Rs 170 crore. The Ministry of Agriculture has initiated action to improve the governance of SFAC, including the appointment of a banker as the chief executive. For my part, I propose to provide the necessary additional capital that SFAC will require to aggressively promote agri-businesses.
The Agricultural Insurance Company (AIC) was incorporated in December 2002. The National Agricultural Insurance Scheme (NAIS) which insures the yield or crop is in operation since Rabi 1999-2000. AIC is redesigning the scheme. We shall continue with the scheme and make another evaluation. Meanwhile, a pilot scheme insuring farm income (as opposed to crop) has been launched in 19 districts across 12 States during Rabi 2003-04. Government has decided to extend the scheme to Kharif 2004 in order to assess its feasibility. I wish to add that a weather insurance scheme appears to be more promising, at least in the design. AIC is introducing the scheme on a trial basis in 20 rain gauge stations in the current crop season. It is difficult to tell at this stage which of the three schemes will be successful. Agricultural insurance as well as livestock insurance are complex products and have to be designed with care. I wish to re-affirm Government's commitment to provide insurance cover to farming and livestock.
Sustainable growth depends upon the availability of efficient infrastructure. Government is committed to removing the inadequacies in infrastructure facilities through a mix of policy and fiscal measures.
An Inter-Institutional Group in the power sector has succeeded in bringing 6 power projects to financial closure. Another 10 projects are on the verge of achieving financial closure. The concept can be extended to some other infrastructure sectors. I am glad to announce that IDBI, IDFC, ICICI Bank, SBI, LIC, Bank of Baroda and Punjab National Bank have formed an Inter-Institutional Group (IIG). They will pool their resources on a callable basis, and a sum of Rs 40,000 crore will be made available as and when necessary. The IIG will ensure speedy conclusion of loan agreements and implementation of infrastructure projects. Initially, airports, seaports and tourism will be the target sectors of the IIG.
The Rajiv Gandhi Drinking Water Mission was intended to be implemented in the mission mode. In recent years, however, new programmes have sprung up obscuring the original mission. More than 75,000 habitations are yet to be provided adequate drinking water. Government intends to bring all drinking water schemes under the umbrella of the Rajiv Gandhi Drinking Water Mission.
The Accelerated Rural Water Supply Progamme (ARWSP) has been allocated Rs 2,610 crore in the current year. It will focus on renewal of water sources and on serving uncovered and partially covered habitations. Panchayati raj institutions will be encouraged to plan, implement, own, operate and maintain the rural water supply schemes in consultation with the State Governments. Funds will be devolved on Panchayati raj institutions to implement the ARWSP.
Likewise, the Urban Water Supply Programme is in operation in urban areas. 2151 towns qualify for consideration under the programme. In the current year a provision of Rs 151.25 crore has been made.
The city of Chennai and other cities suffer from acute scarcity of drinking water. It is proposed to install the first large desalination plant near Chennai in the State sector, and more such plants will be installed along the Coromandel coast. A desalination plant with a capacity of 300 million litres per day (MLD) is estimated to cost Rs 1,000 crore, and there will be other costs for transmission pipelines and a captive power plant. It is proposed to implement the project through public-private partnership.
Sethusamudram ship canal project
The Sethusamudram Ship Canal Project is a long-standing demand - nay dream - of the people of peninsular India. I am happy to inform the House that the Environmental Impact Assessment study of the project has been completed by the National Environmental Engineering Research Institute (NEERI), Nagpur. NEERI is now preparing the techno-economic feasibility report and the report is expected to be submitted shortly. The Ministry of Shipping proposes to establish a special purpose vehicle (SPV). The SPV will raise funds for the project and Government will participate in the funding through a mix of equity support and debt-guarantee.
International container transshipment terminal at Vallarpadam
Government attaches high priority to the development and expansion of port infrastructure. Presently, because of inadequate draft and cargo handling infrastructure, and partly due to locational disadvantages, mainline vessels often skip Indian ports. Containers from India are carried to their final destination after transshipment at Colombo, Dubai and other neighbouring ports. Kochi has locational advantages compared to other major Indian ports since it is closer to the main sea routes. Government will facilitate the construction of an International Container Transshipment Terminal (ICTT) at Vallarpadam in Kochi port on Build, Operate and Transfer (BOT) basis.
Indira Awas Yojana (IAY) has been the main instrument to provide housing to Scheduled Castes and Scheduled Tribes as well as to the non-SC/ST rural poor. Built into IAY is a credit-cum-subsidy scheme for rural households. A subsidy upto Rs 10,000 and loan up to Rs 40,000 are provided to eligible households. The allocation for IAY in BE 2003-04 was Rs 1,710 crore. In the current year, I propose to raise the allocation to Rs 2,247 crore and, if more money is needed, it will be found within the enhanced Plan outlay.
In order to complement IAY, the Golden Jubilee Rural Housing Finance Scheme was launched in August 1997 to give a boost to rural housing. The response has been encouraging, and 10.26 lakh dwelling units have been financed so far. However, the number appears to have stagnated at about 180,000 per year in the last three years. The scheme deserves a further stimulus. I am happy to announce that the National Housing Bank has offered to reduce the rate of refinance by 25 basis points this year. RBI has agreed to revise the norms of re-payment for rural housing loans by banks, so that the instalments coincide with crop cycles. A major impediment to credit for rural housing is absence of proper title to the land. The Government of West Bengal has made a law to simplify the creation of security. It appears to me that the law deserves to be emulated by other States. With these changes, I believe it is possible to set a higher target of 250,000 rural housing units per year.
It is my goal to make the environment in India attractive for investors. In order to achieve that goal, I propose to establish an Investment Commission. The Commission will have the broad authority of the Government to engage, discuss with and invite domestic and foreign businesses to invest in India. It will be chaired by an eminent person. The Foreign Investment Promotion Board (FIPB) has played a useful role, and even now it serves as a one-stop centre for securing the nod of different ministries and departments to a proposed investment. Government believes that many of the functions of FIPB could be put on the automatic route, and leave FIPB as a one-stop service centre and facilitator. The function of wooing domestic and foreign investors will be performed by the proposed Investment Commission.
Government proposes to set up a National Manufacturing Competitiveness Council. The Council will be a continuing forum for policy dialogue to energise and sustain the growth of manufacturing industries. The Council will be asked to suggest measures for enhancing competitiveness in the manufacturing sector. The Council may also recommend industry-specific or sector-specific policy initiatives to enhance competitiveness.
Foreign Direct Investment (FDI) has the potential to add a competitive edge, especially in the industrial sector. The NCMP declares that FDI will continue to be encouraged and actively sought, particularly in areas of infrastructure, high technology and exports. Three sectors of the economy fully meet this description. They are telecommunications, civil aviation and insurance. There is an urgent need for infusing huge amounts of capital in these sectors. I, therefore, propose to raise the sectoral cap for FDI in telecommunications from 49 per cent to 74 per cent; in civil aviation from 40 per cent to 49 per cent; and in insurance from 26 per cent to 49 per cent.
Government is committed to the orderly development and functioning of the capital markets. A number of steps have been taken to broaden and deepen the capital markets as well as to strengthen the regulatory regime. There are some signs that retail investors are returning to the capital market. Foreign Institutional Investors (FIIs) have shown a marked preference for India over other emerging markets. In order to carry forward the process of making the Indian capital market strong and attractive, I propose to -
RBI and SEBI will announce the necessary measures in respect of these matters. I am also happy to announce that SEBI has been able to resolve the longstanding issue of brokers' fees, and brokers may expect an announcement shortly.
Many genuine foreign institutional investors (FIIs) are professional bodies of asset managers and financial analysts who can enhance the flow of equity capital and lend depth to the capital markets. An inter-ministerial committee has recommended liberalization of FII limits in certain specified sectors. I propose to examine and implement these recommendations in consultation with the Ministries concerned.
The NCMP has declared the Government's policy on public sector enterprises (PSEs). While sick or ailing public sector enterprises have stirred a debate, not enough attention is paid to the healthy PSEs. I am happy to announce that in 2004-05 the Government will provide equity support of Rs 14,194 crore and loans of Rs 2,132 crore to Central PSEs (including Railways). Major investments will be made in PSEs falling in the sectors of power, telecommunications, railways, roads, petroleum, coal and civil aviation. I am sure Hon'ble Members will appreciate the deep commitment of Government to a strong and effective public sector operating in a competitive environment.
There is, of course, another side to the public sector. This side is beset with problems, and we must address them with responsibility and courage. Disinvestment and privatization are useful economic tools. We will selectively employ these tools, consistent with the declared policy. As a first step, I propose to establish a Board for Reconstruction of Public Sector Enterprises (BRPSE). The Board will advise the Government on the measures to be taken to restructure PSEs, including cases where disinvestment or closure or sale is justified.
One of our Navaratna companies, NTPC, has filed a prospectus with SEBI to raise capital through a public issue. Consequently, Government's holding in NTPC will be marginally diluted. In order to extract value for its holding and to compensate the effect of dilution, Government intends to piggy-back on the public issue of NTPC and disinvest approximately five per cent of its holding. This and some other cases which are under examination are expected to yield a sum of Rs 4,000 crore in the current year. While the disinvestment revenues will be part of the Consolidated Fund of India, I shall, while presenting the Budget for 2005-06, report to the House the manner in which the said revenues have been or will be applied for specified social sector schemes.
The NCMP contains clear policy guidelines regarding disinvestment in PSEs. As long as Government retains control over the PSE, and its public sector character is not affected, Government may dilute its equity and raise resources to meet the social needs of the people. I propose to ask the BRPSE to examine each case objectively and make recommendations on disinvestment, consistent with the NCMP.
I am also happy to announce that I have taken the business of restructuring quite seriously. Hindustan Antibiotics Limited will be given financial support for restructuring. A rescue package has been worked out for Indian Telephone Industries (ITI), and ITI will be given Rs 508 crore to remain out of the net of the BIFR.
Small scale industry
Small scale industry is, and must be regarded as, an engine of growth. At the same time SSI units must also be given the space to grow into medium enterprises. World over, policies are devised to meet the requirements of small and medium enterprises (SME). Keeping in mind the twin objectives, the Ministry of Small Scale Industry has identified 85 items that can be safely taken out of the reserved list. Furthermore, it is felt that technology upgradation of SSI units is the most urgent requirement to do business in a competitive environment. I have reviewed the Capital Subsidy Scheme, and I propose to raise the ceiling for loans under the scheme from Rs 40 lakh to Rs1 crore. The rate of subsidy will also be raised from 12 per cent to 15 per cent. The scope of the scheme will be enlarged by adding more sub-sectors and technologies eligible for assistance. SSI units will be encouraged to obtain credit rating. With these measures, I expect that many more SSI units will benefit from the restructured scheme. A provision of Rs 135.24 crore has been made for "Promotion of SSI Schemes", and within that amount funds will be found for the Capital Subsidy Scheme.
Regeneration of traditional industries
Some of our traditional industries, namely coir, handloom, handicrafts, sericulture, leather, pottery and other cottage industries not only contain great potential for growth and exports, but are integral for the maintenance of our cultural heritage. Accordingly, a Fund for the Regeneration of Traditional Industries, with an initial allocation of Rs.100 crore will be set up. The details, including mechanism for utilization of the fund will be worked out in consultation with the industries concerned.
X. OTHER PROPOSALS
Value-added tax is a tax that has been tested and tried, and found beneficial throughout the world. The country needs a modern and efficient trade tax system that incorporates the international best practices. At the June 18, 2004 meeting of the Empowered Committee of State Finance Ministers, to which all Finance Ministers were invited, and chaired by my distinguished friend Dr. Asim Das Gupta, there was a broad consensus among the States to implement VAT. April 1, 2005 has been set as the date for implementation. I welcome the decision and warmly congratulate the State Governments. I urge all States that have not yet passed the relevant VAT legislation to do so before the end of 2004. International experience, as well as the experience of the State of Haryana, suggests that VAT will lead to an increase in revenue and not a loss in revenue. Nevertheless, in order to give comfort to the States, I propose to evolve a formula for determining the compensation for the loss of revenue, if any. I have offered the States the services of a Technical Experts Committee. The Committee will work with the States closely, and help them move steadily towards the stage of implementation.
A `defined contribution' pension scheme has been introduced with effect from January 1, 2004 for the Central Government employees recruited on or after that date. A suitable legislation to provide a regulatory framework for the scheme will be introduced in Parliament.
My colleague, the Minister of Commerce and Industry, will place before Parliament by the end of this month a new trade policy. Government is of the view that Special Economic Zones (SEZs) are growth engines that can boost manufacturing, exports and employment. The private sector has shown considerable interest in the development of SEZs. Five SEZs have started functioning. SEZs require a special fiscal and regulatory regime. The Commerce Minister will, shortly, introduce a Bill for regulating Special Economic Zones, and it is my belief that the passing of such a law would be a significant milestone in our quest to become a major hub for manufacturing and exports.
The constitutional validity of the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 has been upheld by the Supreme Court, except Sub-Section (2) of Section 17. In the wake of this judgement, many banks have pointed out practical difficulties likely to arise in speeding up the recovery of non-performing assets. It is proposed to amend the relevant provisions of the Act to appropriately address the Supreme Court's concerns regarding a fair deal to borrowers while, at the same time, ensuring that the recovery process is not delayed or hampered. Related amendments to the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, if necessary, will also be made.
The Central Government has saved considerably on interest on fresh borrowings because of moderate interest rates. The States were also able to borrow at lower rates and swap old high cost loans. Since 2002, States have benefited to the extent of nearly Rs.2500 crore through the debt swap scheme. While borrowers are benefited by moderate interest rates, there is a need to boost savings and to protect the savers. I am convinced that, in the larger interests of the country, we should maintain a benign interest rate regime that appropriately balances the legitimate claims of the savers and borrowers.
I believe that all interest rates should be aligned to the market, save for one or two exceptions. There is a need for a savings instrument that will give a return to senior citizens which is above the market-determined rate. There is also a need for an instrument that will provide a risk-free avenue for all citizens to save for a longer term, and such an instrument should bear a slightly higher rate of interest. Balancing these considerations,
I do not propose to make any change in the existing rates of interest on small savings instruments. Consequently, PPF, GPF and the Special Deposit Scheme will attract 8 per cent interest this year. For senior citizens, I propose to introduce a new scheme called the Senior Citizens Savings Scheme offering an interest rate of 9 per cent per annum. For all other citizens, I propose to continue the Government Savings bond which will carry an interest rate of 8 per cent per annum. The Varishta Pension Bima Yojana may no longer be necessary since the new savings scheme will cover the senior citizens adequately.
Reform of public distribution system
In the Tenth Plan document, the Planning Commission had suggested that a system of distributing food stamps should be tested on a pilot basis.
Every eligible family will be entitled to collect its monthly quota of food stamps from a designated distribution centre, and such stamps could then be used to buy foodgrains from any food shop. I propose to introduce a pilot scheme for distributing food stamps, instead of distributing food through fair price shops, in two or three contiguous districts in a selected State. I sincerely hope that one of the States will come forward to associate with the Central Government in this experiment.
Women's groups have met me and urged me to consider gender budgeting. This means that the budget data should be presented in a manner that the gender sensitivities of the budgetary allocations are clearly highlighted. An expert group on "Classification System of Government Transactions" has submitted its report on July 6, 2004. It has recommended appropriate systems for data collection and representation in the budget. The group has also recommended introduction of periodic benefit-incidence analysis. Government will examine the recommendations, and I hope it will be possible for me to implement some of them in the Budget for 2005-06.
Seven years ago, I placed before Parliament the first paper on subsidies. The NCMP pledges that all subsidies will be targeted sharply at the poor and truly needy like small and marginal farmers, farm labour and the urban poor. I have asked the National Institute of Public Finance and Policy (NIPFP) to prepare a blue print to accomplish these objectives. I expect to place the report before the House in the next session of Parliament.
In order to support the States, a substantial proportion of the taxes raised by the Central Government is transferred to the States. Besides, the Central Government extends loans to the States. In the light of the Budget Estimates for the current year, I am happy to report that the States' share of Union taxes and duties will increase to Rs 82,227 crore from Rs 63,758 crore in BE 2003-04. We are helping the States in other ways too. One of them is the Debt Swap Scheme. I propose to extend the facility of debt swap by allowing States to raise fresh loans and repay their old high-cost loans to NABARD and some other agencies. I also propose to consult the States on allowing them to increase their open market borrowings and reduce their dependence on loans from the Central Government. I shall also consider passing on external loans to the States on a back-to-back basis.
We are moving in the direction of empowering the States through devolution of larger resources. It is my fervent hope that States will accept the obligation to observe fiscal prudence and financial discipline.
Loans given by the Central Government to States carried an interest rate of 12.5 per cent. In 2003-04, the rate was reduced to 10.5 per cent. I am happy to announce a further reduction. Loans to the States will now bear an interest rate of 9 per cent with effect from April 1, 2004. States are expected to benefit to the tune of Rs 375 crore this year alone.
Special economic packages
The NCMP promises that special economic packages for Bihar, Jammu & Kashmir and the North Eastern States, announced in the past, will be implemented expeditiously.
Bihar, for example, has a number of projects pending for a long time, including projects in power, roads, drainage and rehabilitation of displaced persons. I would like to assure the House that Bihar will be assisted through the Rashtriya Sam Vikas Yojana. A provision of Rs 3,225 crore has been made for the present and, if necessary, this sum will be augmented.
North eastern region
The Government is committed to the speedy development of the North-Eastern States and Sikkim. Accordingly, all Ministries and Departments have been mandated to allocate at least 10 per cent of their Plan budget for schemes and programmes in the NER. This amounts to an allocation of Rs 5,823 crore to be spent in the NER.
The amount remaining unspent from this 10 per cent allocation is transferred to a non-lapsable Central pool of resources for development of the NER. In the current year, Rs 650 crore have been provided from the Central pool of resources for specific projects and schemes in this region, up from Rs 550 crore in 2003-04.
Jammu & Kashmir
The Government will provide special assistance to the State of Jammu & Kashmir to have a reasonable Plan size. It will also provide financial support for the long pending Baglihar project. The Government has also agreed to provide a grant of Rs.300 crore to the State to ensure smooth switch-over from the current overdraft arrangement with the Bank of Jammu & Kashmir to the Ways & Means scheme of the RBI.
Backward states' commission
NCMP envisages the creation of a Backward States Grant Commission to be used for creating productive assets in such States. It also envisages that all non-statutory resource transfers from the Central Government will be weighed in favour of poor and backward States, but with performance parameters as well.
I am happy to announce that the Government will set up a Backward States Grant Fund with a corpus of Rs 25,000 crore to be provided over a period of five years.
While the existing Backward Districts Initiative Scheme with an annual outlay of about Rs 1,800 crore will be merged into this Grant Fund, the balance amount required for the annual contribution of Rs 5,000 crore will be earmarked from out of the total Central support to the Plan.
It is expected that this will enable taking up social and physical infrastructure programmes in the poorest and most backward districts in the country within a given time frame.
The Fund will become operational from the financial year 2005-06. Further details will be worked out in consultation with the Planning Commission.
As promised in the NCMP, the Government is determined to eliminate all delays in the modernization of the Defence Forces. Having regard to the trend of defence capital expenditure in recent years, it has become necessary to make a higher allocation this year.
Accordingly, I propose to increase the allocation for Defence to Rs 77,000 crore (as against Rs 65,300 crore in BE 2003-04) which includes an allocation for capital expenditure of Rs 33,483 crore (as against Rs 20,953 crore in BE 2003-04).
Budget Estimates for 2004-2005
Now, I turn to the budget estimates for the current year.
While preparing the Budget, I found that there is a plethora of Plan schemes. The number, the variety and even the acronyms under which these schemes are known are mind-boggling.
I also found that there are many schemes with more or less the same objectives. In some cases, all the schemes were located in one ministry or department; in other cases, they were distributed among different ministries or departments.
Plan schemes can be broadly divided into three categories - Central Sector, State Sector and Centrally Sponsored Schemes. The NCMP requires that all Centrally Sponsored Schemes, except national priority areas like family planning, shall be transferred to the States.
Fortunately, a new Planning Commission is in place, and I am confident that the Planning Commission will bring some order into the tangled web of schemes.
Plan expenditure for 2004-05 is estimated at Rs 1,45,590 crore as against Rs 1,22,149 crore in the provisional actuals for 2003-04.
While there is an increase in plan revenue expenditure from Rs 78,537 crore in 2003-04 to Rs 91,843 crore, there is an even sharper and welcome increase in plan capital expenditure from Rs 43,612 crore in 2003-04 to Rs 53,747 crore.
Non-plan expenditure in 2004-05 is estimated to be Rs 3,32,239 crore, lower than Rs 3,49,787 crore in the provisional actuals for 2003-04 which includes capital expenditure of Rs 46,211 crore on repayment to the National Small Savings Fund.
The increase in non-plan expenditure from the interim Budget is mainly on account of capital expenditure in defence (Rs11,000 crore), and assistance to Indian Telephone Industries Ltd.
Revenue deficit and fiscal deficit
Mr. Speaker, Sir, in the Budget Estimates for 2004-05, the total expenditure is estimated at Rs 4,77,829 crore, of which Rs 1,45,590 crore is for Plan and Rs 3,32,239 crore for non-Plan.
I estimate total revenue receipts of the Central Government at Rs 3,09,322 crore and the revenue expenditure at Rs 3,85,493 crore. Consequently, the revenue deficit is estimated at Rs.76,171 crore equivalent to 2.5 per cent of GDP, which is one percentage point below the corresponding estimate of 3.5 per cent of GDP in 2003-04 (according to the provisional actuals).
The fiscal deficit is estimated at Rs 1,37,407 crore, which is 4.4 per cent of the estimated GDP.
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