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The Finance Minister Shri P Chidambaram will unveil on February 28 the first full-fledged budget for 2005-06 of the U P A Government, which is expected to reflect new initiatives and programmes for accelerating economic growth with price stability and social equity. The Budget will provide a road map for sustainable high growth of the economy, which is now on an upswing, and allocate resources for implementing promises in key areas of social development embodied in the National Common Minimum Programme.
Considerable importance is attached to the forthcoming Budget because of the directions it will set for the future development of India, which is now being widely regarded as an emerging economic power, and the restructuring of tax and other reforms to mobilize maximum possible resources for financing infrastructure and social advance designed to change the face of Rural India in the near future. Such a thrust is also imperative for the credibility and stability of the UPA Government which came to power in May 2004.
Economic Backdrop
Strong economic performance provides a highly favourable setting for the Budget which has to give a boost to savings and investments to enable India to achieve a durable 7 to 8 per cent growth per annum. In 2004-05, first year of this Government, GDP growth is estimated at 6.9 per cent, somewhat higher than the original assumption based on a relatively weaker monsoon depressing agricultural growth. But the year saw a breakthrough inasmuch as industry on a rebound, enhancing its international competitiveness, and services have propelled the economy faster.
Manufacturing recorded 9 per cent growth, for the first time since l995/96, exports rising by 22 per cent, and foreign exchange reserves building up to 129 billion dollars by the end of January 2005. Despite a widening trade deficit to 22 billion dollars, mainly due to excessively high oil prices, the balance of payments position is highly comfortable. India’s financial and exchange rate markets have remained stable.
The economy is also now well past the threat of spiralling inflation which had been fuelled in August last by the soaring international crude prices. Government acted firmly through fiscal and other measures to bring down the price surge with the annual rate of inflation declinining to 5.01 per cent in the first week of February from a peak of 8.5 per cent in August last.
Lowering Growth Barriers
India’s macro-economic stability, rapid growth in the wake of liberalisation of the economy, its highly skilled manpower and established strengths in IT software, and manufactures acquiring global competitiveness have increasingly attracted international investor interest reflected in increasing flows of capital and technology. The country enjoys a high credit rating abroad and the International Monetary Fund has lauded India’s performance and says the economy is on track to achieve not less than 6.5 per cent growth this year as well as in the coming year with inflation winding down.
Prime Minister Manmohan Singh has said that Government would lower all barriers to growth while the Finance Minister has indicated that the Budget would be “friendly to industry and investor”. Given the huge financing requirements for implementing programmes postulated in the NCMP, the Budget will make a major effort at additional resource mobilisation mainly through tax reforms, which would seek to widen the base and raise the tax-GDP ratio from the present 9.2 to 11 per cent or slightly above.
There is a welcome pick up in gross domestic savings which had risen by two percentage points to 28.2 per cent of GDP in 2003-04, according to the Central Statistical Organisation. Besides the significant rise in household savings, there was also a reduction in the Government dis-savings. Unlike the previous year, investments in the economy have revived during 2004-05 for building new capacity to meet growth in demand, domestic and external. The fiscal framework in the Budget would therefore reinforce these trends.
Tax Restructuring
A restructuring of both direct and indirect taxes would be undertaken in the Budget, judging from official statements. This would involve changes in both rates and income slabs for personal incomes along with reduction of exemptions to essential minimum warranted by social considerations. The Finance Minister had also indicated some time back that he would have to restructure indirect taxes in the case of some commodities while the import tariff would be lowered as part of Government’s policy to bring it in line with the levels of ASEAN countries. Since Services account for over 50 per cent of the gross domestic output, the service tax is likely to be extended to more segments beyond the 70 services already covered.
The tax instrument and other incentives will be deployed to make it conducive for investments in infrastructure and in agriculture, irrigation and rural electrification, areas for which more budgetary resources would also be allocated. Since capital requirements over the next five years would be huge for expanding and modernising the country’s infrastructure, the budget is expected to send out signals attractive for investors, domestic and foreign, together with spelling out of financial and regulatory measures. For public-private partnerships, a mechanism is likely to be announced.
Expenditure Reform
Government has during the year launched the food-for-work programme in selected districts, identified as backward, and legislation for a National Employment Guarantee is before Parliament. Budgetary support for these and other sectors like education, health, rural infrastructure would have to be enlarged. Along with raising revenues, Government is also committed to expenditure reform so as to reduce spending in the category of non-developmental expenditure.. One of the areas is subsidies and here, the attempt will be to target subsidies to the poor and cut down those which do not benefit the needy.
India is listed among countries running large fiscal deficits and high levels of public debt. Under the Fiscal Responsibility and Budget Management Act, Government has to steadily bring down the revenue and fiscal deficits by 2008-09. In the current year, these targets had been kept at 2.5 and 4 per cent of GDP respectively. While tax revenues were becoming buoyant, post-budget expenditures were also rising, like tsunami-related relief. The endeavour has been to remain close to these targets. But in the coming year, the Budget would still adhere to the medium-term fiscal policy framework and lower the deficit targets from the current year’s levels.
The Budget will incorporate the recommendations of the Twelfth Finance Commission on devolution of Centre’s tax revenues to States and non-plan grants for the five year period 2005-10. The States will all be introducing from the new fiscal year beginning April 1, the value-added tax (VAT) in lieu of sales tax and the Centre is committed to compensating for any loss incurred by States in the initial years but the reform is expected to pave the way for turning India into a single market with a single tax covering both goods and services. The Finance Minister may also clarify Government’s approach to restructuring of public enterprises so as to allay misgivings about privatization. A National Investment Fund has been set up to channel resources accruing from sale of minority holdings in public undertakings for social sector schemes. (PIB Features)
*Senior Freelance Writer
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