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The Union Budget for 2005-06 provides for a massive thrust to promote the welfare of the rural poor and accelerate pace of development in social sectors like education and health – all focussed on alleviating poverty and unemployment – while setting a stable environment for higher investments and growth of the economy at 7 to 8 per cent.
The Finance Minister Shri P Chidambaram, presenting the Budget in Parliament on February 28,said it reflected a “decisive intervention in favour of the poor” as mandated by the National Common Minimum Programme(NCMP) of the UPA Government and laid down the path in which growth and equity would reinforce each other to build a new India.
A conducive macro-economic environment, with GDP growth of 6.9 per cent, inflation contained at 5 per cent, investment reviving and foreign exchange reserves building up, had set the stage for the Finance Minister to undertake major tax reforms to generate larger resources for investments, both public and private, in agriculture, rural development, and infrastructure (roads, railways, ports, airports and tourism). A Special Purpose Vehicle (SPV) is being created for the first time to fund projects with public-private partnership, supplemented by loans from banks and financial institutions, and imports for such projects can be financed from the foreign exchange reserves.
Apart from a further 30 per cent rise in the new year in rural credit through banks and cooperatives, which had crossed Rs.108,000 crore in 2004-05, the priorities in NCMP addressed through the budget include the National Rural Employment Programme (Rs.11,000 crore inclusive of the cost of five million tonnes of foodgrains), and larger allocations for education, health, drinking water and mid-day meals for school children. A total of Rs.25,000 crore has been additionally provided for NCMP programmes.
The Finance Minister announced Government’s plan to take up “Bharat Nirman”,a four year programme to develop rural infrastructure - irrigation, roads, rural water supply, housing, rural electrification and telephony with targets set for 2009. Although huge resources are required, it would be an achievable project, he said. Meanwhile, in agriculture, a road-map is being prepared for crop diversification while agricultural marketing infrastructure would be developed and strengthened.
The Budget has provided for a substantial step-up in plan expenditure of the Centre at Rs.172,500 crore inclusive of assistance to the States with due regard to all the ongoing social programmes. Defence expenditure would be Rs.83,000 crore or 14 per cent of total expenditure. Interest payments, though increasing from year to year, would be only 38 per cent of revenue receipts as against 41 per cent in 2004-05.
Under the Twelfth Finance Commission’s recommendations, the States would get substantially higher share of Centre’s tax revenues and non-plan grants. In 2005-06, the States share of taxes would be Rs.94,959 crore, an increase of Rs.16,000 over 2004-05 while grants would total Rs.25,874 crore. The impact of the Commission’s recommendations is considerable, Rs.26,000 crore in 2005-06, and has impaired the Centre’s ability to adhere to fiscal correction. Therefore, revenue and fiscal deficits would be 2.7 and 4.3 per cent respectively in 2005-06. Small slippages in the current year were attributed to oil prices, inflation, low realisation of tax arrears and tsunami relief.
The tax reforms would benefit a large section of the middle class with raising of income slabs and the exemption limit having been raised to Rs. One lakh per year. Standard deduction and certain other exemptions have been withdrawn but exemption thresholds have been raised for women (Rs.1.25 lakh) and senior citizens (Rs.1.5 lakh). Corporate tax has been reduced from 35 to 30 per cent but the surcharge would be 10 per cent, giving relief of 3.8 per cent from the present level. With more disposable incomes, the expectation is that it would promote savings and investment all-round.
In indirect taxes, peak tariff has been reduced from 20 to 15 per cent to bring India’s protection level closer to East Asian countries. Customs duty has been reduced for select capital goods and raw materials to give a fillip to investment. Machinery for industries like textiles, leather and footwear, pharmaceuticals and biotechnology would also benefit to strengthen these industries to become more competitive. Custom and excise duty would be nil for LPG for domestic use and subsidised kerosene. Import duty for petrol and diesel would also be reduced but excise duty will be fixed as combination of ad valorem and specific duties. There would be no increase in retail prices, according to the Minister.
The budget has also extended concessions to several other sectors including small and medium industries. A 10 per cent excise duty on cigarettes and 10 per cent surcharge on other tobacco products is designed to fetch revenue for health programmes. The budget has also extended the 10 per cent service tax to more services, given the fact that this sector contributes 52 per cent to GDP.
The Finance Minister called for a “pragmatic” approach to foreign direct investment, given India’s vast resource needs for infrastructure and technology and said Government would, after due consultation, come forward with suitable proposals in areas like mining, trade and pensions. While protecting the poor, restructuring of the subsidy regime in respect of food and fertilisers would be done cautiously after thorough discussion. He emphasised the critical importance of fiscal correction as India was already “perilously” close to the limits of fiscal prudence.
The States would introduce VAT (value added tax) this year in lieu of sales tax as a simplified structure with no cascading effect because of credits for inputs, and the Centre has agreed to compensate the States for any loss of revenue in the first three years. This would be a major milestone in the history of tax reform in the country.
Other policy measures proposed are amendments to banking laws to dispense with lower and upper bounds to statutory liquidity ratio (which had been fixed at 25 per cent of banks outstanding liabilities) and for banks to issue preference shares. The Reserve Bank would be enabled by another amendment to remove cash reserve ratios to facilitate more flexible conduct of monetary policy.
The budget proposals in direct taxes would yield an estimated Rs.6,000 crore while proposals in indirect taxes are said to be broadly revenue-neutral. Reductions in custom duty would be more than made up from changes in excise. Domestic borrowings by Government in 2005-06 would be 25 per cent of total expenditure with tax revenues contributing 60 per cent and non-tax and non-debt capital receipts accounting for 15 per cent. On the expenditure side non-plan expenditure (mainly defence, subsidies and interest payments) is 55 per cent while plan provisions including central assistance to the States and their share of taxes total 45 per cent.
The Budget, the first full-fledged exercise by the UPA Government has been welcomed generally by both industry and economists and, with some qualifications, by Leftist parties supporting the Government. Prime Minister Dr Manmohan Singh has said that the Budget has honoured the commitment made to people by its massive allocation for education, health, drinking water and other socially neglected areas. At the same time, it takes care to sustain the growth momentum of the economy with measures which are upto “the challenges of our time”.(PIB Features)
*Freelance Writer
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