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Wednesday, Jul 14, 2004

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Opinion - Budget


Budget: Balancing rural, urban demands

R. Parthasarathy

IF THE Finance Minister, Mr P. Chidambaram's 1997 Budget was a Dream Budget, that of 2004 can be described as one that addresses the realities facing the economy today.

Any Budget is both a political and economic document. The Finance Minister has tried to be truthful to the assurances given by him on assuming office such as strengthening the economic reform process while, at the same time, being committed to the Common Minimum Programme (CMP) which sets the policy direction for the ruling United Progressive Alliance. Any major overhauling of the tax system, besides being outside the scope of the annual Budget, cannot be undertaken in a hurry when the Government has assumed office less than two months ago.

The Finance Minister has assured the House that he would re-visit the subject of tax reform in an organised manner next year, once the report of the Task Force under Mr Vijay Kelkar is received. What, then, is the message coming out of the Budget?

First and foremost, it takes a balanced approach to macro and micro-economic issues. Mr Chidambaram has forecast a reduction in revenue deficit by one percentage point in 2004-05 at 2.5 per cent of GDP, compared to 3.5 per cent in 2003-04. Similarly, fiscal deficit is slated to fall to 4.4 per cent. Besides, in line with the Fiscal Deficit and Budget Management Act, he has bound himself to eliminate Budget deficit by 2008-09 — the final year of this Government's term in office.

Fiscal consolidation is of paramount importance. Therefore, the proposed reduction and eventual elimination of the revenue deficit in itself will be noteworthy. Although the deficit reduction is largely the result of higher revenue anticipation, in future, it might, however, help rein in government expenditure. Second, in deference to popular demand of the tax-paying public, he has exempted taxable income up to Rs 1 lakh, making it mandatory, however, for the assesses to file the return of income. This step will benefit 14 million assesses, who will go out of the tax net.

Third, the Finance Minister has tried to alleviate the hardship faced by senior citizens in a regime of falling interest rates by giving them nine per cent return on a new savings instrument.

Mutual funds face a higher distribution tax for corporates at 20 per cent which could divert corporate funds from debt mutual funds to equity funds. The Finance Minister may have to take a second look at the turnover and transaction tax in view of the strong protest from the brokers, who normally charge 0.1-0.2 per cent on delivery-based trading and 0.05 per cent on non-delivery-based transactions as brokerage fees.

The stock market, which rallied enthusiastically on the news of long-term capital gains tax withdrawal, reacted sharply to the levy of transaction tax. Mr Chidambaram also roped in 13 more items under the service tax, which has been hiked from 8 per cent to 10 per cent. The proposal to set up an Investment Commission is welcome as it might help accelerate industrial investment, which has seen some recovery.

On the disinvestment front, the Minister has taken credit for Rs 4,000 crore in the Budget, but future disinvestment or privatisation of sick units will be based on the recommendations of the Disinvestment Board to be set up and headed by an eminent person. The Left parties are again naturally not votaries of disinvestment or the withdrawal of tax on long-term capital gains. They are already upset with the Government's decision to privatise the Delhi and Mumbai airports. This is symptomatic of the type of problems that any coalition government has to tackle.

As is to be expected, the Budget rightly focusses on the rural sector as a whole with agriculture being at the core. Fourteen years of globalisation have practically left this sector untouched. .

While the captains of industry generally welcomed the thrust placed by the Budget on the rural sector, including health, education, water conservation, etc., some of them did raise the question of the efficiency and effectiveness of the delivery mechanism as it exists at present. Leakage of funds and corruption were major drawbacks in reaching the benefits to the targeted beneficiaries.

Therefore, there is urgent need to reform the system and strengthen the monitoring process. This is a matter on which the Prime Minister, Dr Manmohan Singh, has spoken recently, as he called for a new approach to governance. It involves the entire governmental machinery both at the Centre and States, besides the local bodies.

Perhaps, a beginning could be made by involving local communities and NGOs in identifying local needs and implementing the programmes. In a country of India's size and diversity, it is inconceivable that the Central and State governments by themselves can carry out the task of development at the grassroots levels. The amount allocated for rural schemes is significant at Rs 30,000 crore. It may be worthwhile to translate this figure into quantifiable physical assets that may be created or in improvements in the quality of life of the common man, wherever possible.

It is even desirable that the Government tables before Parliament the results achieved or progress in the programmes initiated at the time of the next Budget. This will help in understanding the implementation problems or delivery bottlenecks on which legitimate doubts have been expressed.

Since the activities proposed to be undertaken cover a wide area such as school education, desilting of tanks and water harvesting schemes, rural hospitals and rural infrastructure such as roads, there has to be a multi-disciplinary approach to this effort.

Two important areas which the Budget has not addressed are housing, which provides employment to a large section of skilled and unskilled labour and exports. He has also not come out with any concrete proposals to utilise the large foreign exchange reserves of $120 billion, a good part of which is earning low interest from investment in US securities. Perhaps Mr Chidambaram, in his preoccupation with the improvement of the rural sector, has unintentionally skipped these sectors.

The Budget contains liberal provisions for credit to students taking up higher studies and a whole range of excise and Customs duty reliefs on computers, platinum, ambulances, meat products, and so on. He has abolished excise duty on tractors. But the steel industry has come in for a hike of excise duty by 4 per cent, which will get transferred to a variety of construction, engineering and fabrication activities.

On the whole, the Budget tries to take a balanced approach between the rural needs and the industrial and urban economies. After all, if the rural economy prospers, it might automatically translate itself into better demand for industrial products and services. In a sense, this could be the beginning of integration of India's rural and urban economies, which have co-existed uneasily with poverty at one end and prosperity at the other.

(The author is a New Delhi-based management and financial consultant.)

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