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DEPARTMENT OF ECONOMIC AFFAIRS
A Special Purpose Vehicle:
A Special Purpose Vehicle (SPV) is proposed to be established to finance viable infrastructure projects in specified sectors including but not limited to roads, ports, airports and tourism. The SPV will lend funds, especially debt, of longer-term maturity to the eligible projects of identified sectors to supplement other loans from banks and financial institutions.
Fiscal Responsibility and Budget Management:
The Fiscal Responsibility and Budget Management Act, 2003 was passed by Parliament on 26th August 2003 but the date of its enforcement was left to the discretion of the Government. The Act and the Fiscal Responsibility and Budget Management Rules, 2004 made by the Government under the enabling provisions of the Act were brought into force w.e.f. 5th July 2004 by the UPA Government.
In the first year of the implementation of the Act, ambitious front-loading of fiscal correction has helped in substantial fiscal consolidation with improvement of about 0.9 per cent of GDP expected in revenue deficit over the level achieved in 2003-04.
Gender Budgeting:
The existing gender neutral budget does not make gender specific impact in budgetary policies. In order to translate gender commitments into budgetary commitments, all Ministries/Departments have been asked to establish gender budgeting cell in their Ministry/Department. As suggested by the Expert Group constituted to review the classification system for Government transactions, 18 Ministries/Departments were asked to bring out clearly scheme-wise provisions and physical targets benefiting women in their Annual Report/Performance Budget for 2004-05. Instructions have also been issued to prepare incidence benefit analysis from the next financial year (2005-06) and include the same in their Annual Reports/Performance Budgets.
ii. For the first time, a separate Statement No.19 has been included in the Budget Documents highlighting the gender sensitivities of budgetary allocations made under 10 Demands for Grants.
iii. In addition to the above, Department of Women & Child Development and National Institute of Public Finance & Policy will jointly undertake a review of the public expenditure profile of selected Departments through the gender lens, conduct beneficiary – incidence analysis and recommend specific changes in operational guidelines of various development schemes so as to improve coverage of women beneficiaries of the public expenditures. These Departments are – Rural Development, Health, Family Welfare, Labour, Elementary Education, Small Scale Industries, Urban Employment & Poverty Alleviation, Social Justice & Empowerment and Tribal Affairs.
Senior Citizens Savings Scheme:
The Government has introduced the ‘Senior Citizens Savings Scheme’ with effect from 2nd August 2004. The scheme offers a risk free avenue of investment with attractive returns to all senior citizens of the country. The main features of the scheme are as under:
(i) Citizens of 60 years of age and above are eligible to invest.
(ii) Citizens who have retired under a voluntary or a special voluntary retirement scheme and have attained the age of 55 years (but less than 60 years) are also eligible to invest their retirement benefits.
(iii) Single or joint account (with spouse) can be opened.
(iv) Deposit in multiples of Rs. 1000 subject to a maximum of Rs. 15 lakh is allowed. (Husband & wife BOTH can separately open accounts and invest upto Rs. 15 Lakh each, under the scheme).
(v) The scheme is available through a large network of designated post offices & branches of pubic sector banks throughout the country.The investment is totally risk-free and the deposit carries interest at the rate of of 9 per cent per annum, this is higher than the interest rates available on comparable savings instruments in the market.
(vi) Nomination facility is available in both single and joint accounts.
(vii) The deposits are for a period of 5 years with the facility of premature withdrawal subject to conditions.
Pension Reforms:
The New Pension System (NPS) was operationalised from 1st January 2004 through a notification dated 22nd December 2003. The NPS is mandatory for new recruits to Central Government (except to armed forces in the first stage).
On 24th December 2004, Cabinet approved a proposal to promulgate an Ordinance, providing, inter alia, for establishing a statutory Pension Fund Regulatory and Development Authority (PFRDA) which will undertake promotional, developmental and regulatory functions in respect of pension funds. The Ordinance was promulgated on 29th December 2004. A Bill replacing the Ordinance was introduced on 21st March, 2005. It has since been referred by the Speaker of the Lok Sabha to the Standing Committee on Finance.
The Bill provides, inter alia, for the following:
(i) establishing a statutory regulatory body to undertake promotional, developmental and regulatory functions in respect of pension funds.;
(ii) empowering PFRDA to regulate the New Pension System as amended from time to time by the Central Government;
(iii) empowering PFRDA to perform promotional, developmental and regulatory functions relating to pension funds (including authorising and regulating intermediaries) through regulations/guidelines prescribing disclosure standards, protecting the interests of subscribers to schemes of pension funds authorising PFRDA to levy fees for services rendered etc. to meet its expenses;
(iv) empowering PFRDA to impose penalties for any violation of the provisions of the legislation;
(v) authorising Central Government to make rules under the proposed legislation; authorising PFRDA to make regulations under the proposed legislation;
External Borrowings:
A window has been opened to enable qualified NGO in micro finance activities to access external commercial borrowings. Necessary guidelines have been formulated by RBI.
DEPARTMENT OF FINANCIAL SECTOR
BANKING
Several initiatives were taken aiming at strengthening the banking system and also to reach the benefits of the banking services to all sections of the society, more particularly the unorganized sector and the farming community.
Social Sector
In June 2004, the Government announced an Action Plan for doubling flow of credit to Agriculture from the banking system in the next three years. For the year 2004-05, a lending target of Rs.1,05,000 crore was set which amounted to a growth of 30% over the performance in the previous year. The Action Plan covered the following: -
Increased coverage targeting 50 lakh new agricultural borrowers, 100 new borrowers on an average in every rural and semi-urban branch of commercial banks and RRBs.
Increasing credit absorption capacity through infrastructure development – each rural branch to take up 2 to 3 investment projects for financing
Introduction of Special Relief Packages aimed at restructuring existing loans and making fresh credit available to farmers facing difficulties. The Special Schemes were :-
Relief Package for farmers in distress to benefit farmers faced with repeated years of natural calamities ;
Relief Package for farmers in arrears aimed at helping farmers tide over temporary difficulties in meeting their repayment commitments.
One Time Settlement Scheme for small and marginal farmers to settle their old dues and avail fresh credit for meeting investment and production credit needs.
A Special Scheme for providing relief from high interest borrowings from moneylenders.
Increase in credit availability through revision of scale of finance with built-in flexibility to suit local requirements and consumption needs of farmers.
Greater extension facilities by encouraging setting up of agri-clinics by agricultural graduates.
Encouraging Self Help Groups (SHGs) and setting up of micro enterprises by matured SHGs. 5.85 lakh SHGs to be credit linked up to March 2007, with target for 2004-05 fixed at 1.85 lakh SHGs.
Banks to increase lending to rural housing significantly. A target of 2.5 lakh dwelling units was fixed under Golden Jubilee Rural Housing Finance Scheme for the year.
The progress achieved by the banks was periodically monitored. The concerted efforts made by all concerned resulted in a credit flow to agriculture of over Rs.1,15,000 crore exceeding the target by over Rs.10,000 crore. The banks financed 66.32 lakh new farmers during the year against the target of 50 lakh. A total 4.46 lakh new Self Help Groups were credit linked by the banking system against the target of 1.85 lakh. Banks financed 777 agri-clinics during the year.
Education
In line with NCMP, Banks were appealed by the Finance Minister to provide educational loans up to Rs.7.5 lakh collateral free to meritorious students to pursue professional education in the country. The educational loan scheme was accordingly modified by the Banks. Banks financed 1.7 lakh students during the year 2004-05 involving an outlay of Rs.3,500 crore.
Infrastructure
The Government has set up Inter-Institutional Group (IIG) to co-ordinate the efforts of various financing agencies and to speed up project implementation. Industry specific IIGs were set up for roads, airports, civil aviation.
Structural changes in the Banking Sector :
In line with the commitments under the NCMP, a package of autonomy measures were announced by the Government to give greater operational flexibility to the management of public sector banks to compete effectively in the market.
The Reserve Bank of India issued comprehensive guidelines paving a roadmap for operation of foreign banks in India and ownership and governance for private sector banks.
Proposal mooted to amend Banking Regulation Act aimed at strengthening the regulatory role of RBI. The proposed legislative changes include :
Provision to allow Banking Companies to issue preferential shares; Provision to allow Banking Companies to issue preferential shares;
Remove the existing ceiling of 10% on voting rights of shareholders in Banking Companies;
Remove the floor / ceiling on maintenance of CRR/SLR to give greater flexibility to RBI in managing the monetary system.
A number of measures giving additional powers to Reserve Bank of India to supervise Banking Companies.
Government proposes to amend Securities Contract (Regulation) Act, 1956 and Reserve Bank of India Act, 1934 to develop market for securities and derivatives.
Re-structuring of RRBs has been taken up to enable them to compete effectively in the market and play a crucial role in rural development. Consolidation through merger of RRBs within the State was mooted.
Initiatives were taken to restructure and strengthen the co-operative banking set up in the country.
Policy measures are adopted to encourage consolidation in the banking industry through mergers and acquisitions.
Changes in the legal framework for recovery of bank loans :
The Government amended SARFAESI Act, 2002 to remove the anomalies created by the Supreme Court Judgement on Mardia Chemicals case and to prevent defaulters from adopting delaying tactics.
Credit Information Companies (Regulation) Bill 2004 was introduced in Rajya Sabha in December 2004 to facilitate setting up of credit information companies aimed at improving quality of appraisal and bringing in greater financial discipline among bank borrowers.
INSURANCE
Relief to victims of Tsunami of 26th December, 2004
· Life Insurance Corporation of India and four public sector general insurance companies have taken various measures by waiving of certain documents, simplification of claim procedures and necessary wider publicity resulting in quick settlement of claim arising out of Tsunami.
· LIC has settled 371 claims for Rs.3.29 crore out of 399 reported with a settlement ratio of 94% within two months of the catastrophe i.e., by 25th February, 2005.
· The four public sector general insurance companies have settled all 1214 claims (below Rs.50,000/-) and 345 claims out of 865 (above Rs.50,000) amounting to a total of Rs.10.10 crore within two months of the catastrophe i.e., by 25th February 2005.
DEPARTMENT OF REVENUE
Direct Taxes:
· This is the first time (at least since 1970-71) that the rate of growth of direct taxes has been more than 20% in three consecutive years. The net collection of direct taxes for 2004-05 have been provisionally reported at Rs.1,31,454 crores, which is 25.24% higher than the collection for 2003-04. Moreover, the direct tax-GDP ratio has exceeded 4% for the first time since 1970-71.
· A Task Force on Recovery of Arrears of Direct Taxes was constituted by the Government in August 2004 for evolving and implementing a multi-pronged strategy for effecting recovery from direct tax arrears. Due to the efforts of the Task Force and the special attention to collection of arrears given by the Income Tax Department, an amount of Rs.7,038 crore has been collected out of arrears in 2004-05 as compared to Rs.5,540 crore and Rs.5,470 crore collected in 2003-04 and 2002-03 respectively.
· In the interest of the welfare of the personnel of the armed forces, family pension received by widows, children and nominated heirs of members of the armed forces (including paramilitary forces) killed in action exempted.
Steps to tap unreported income:
Following provisions in the Income-tax Act were introduced with an aim at bringing unreported income within the tax net and checking the flow of black money –
§ Taxation of gifts of money received by a person from unrelated persons in excess of twenty-five thousand rupees.
§ Obligation has been cast on certain Government agencies and assessees to furnish the annual information return in respect of transactions registered or recorded by them with value of Rs.50,000/- or more.
§ Tax deduction at source on compensation paid on compulsory acquisition of immovable properties (other than agricultural land).
§ Tax collection at source at the time of awarding contracts for parking lots and toll plazas and granting lease in respect of mines and quarries.
§ Provision for prosecution of persons who issue false bills, vouchers, etc., and make false entries in books with intent to enable any other person to evade tax.
Finance Bill, 2005:
§ A new tax, namely “banking cash transaction tax” on withdrawal of cash exceeding Rs.25,000 on any single day from a current bank account in a scheduled bank.
Drawback Rates:
The new drawback rates for 2004-05 have been notified in respect of more than 1050 export products. The new rates have been determined on the basis of certain broad parameters including, inter alia, the prevailing prices of inputs, standard input/ output norms (SION) published by DGFT, share of imports in the total consumption of inputs and the applicable rates of duty. Some of the significant features of the new Drawback Schedule are :
¨ the rates for most products have been expressed in terms of Metric Tonne/kg in lieu of earlier ad valorem rates.
¨ to make the Schedule attractive and useful for exporters, the drawback rate for excise portion has been allowed in respect of several export products.
¨ A new Chapter (Chapter 72) has been introduced covering pig iron, iron ore pellets, ferroalloys and steel products. In all, 29 new entries have been created. In the textile sector (Chapters 50-63), the product coverage has been expanded by creating about 165 new entries.
Several changes were made in respect of various Export Promotion Schemes in the Foreign Trade Policy, 2004-09 announced on 31st August, 2004. Some of the important notifications which have been issued to implement the provisions of Foreign Trade Policy are as under:-
¨ Notification No. 90/2004-Cus., dated 10.9.2004 was issued to operationalise the Duty Free Replenishment Certificate (DFRC) Scheme. DFRC Scheme is an export promotion scheme, and under this scheme import of inputs used in the manufacture of resultant export product is permitted free of basic customs duty as replenishment.
¨ Notification No. 91/2004-Cus., dated 10.9.2004 was issued to operationalise the Advance Licence for Deemed Export Scheme. Under the Advance Licence for Deemed Export Scheme materials required for the manufacture of resultant goods supplied under Deemed Export Scheme are allowed to be imported duty-free.
¨ Notification No. 92/2004-Cus., dated 10.9.2004 was issued to operationalise the “Served From India Scheme”. Under this Scheme individual service providers who earn foreign exchange of at least Rs.5 lakhs, and other service providers who earn foreign exchange of at least Rs.10 lakhs are eligible for a duty credit entitlement of 10% of total foreign exchange earned by them. In the case of hotels and tourism sector the entitlement is 5% whereas, in the case of stand-alone restaurants it is 20%. Duty credit entitlement may be used for duty free import of capital goods including spares, office equipment, professional equipment, office furniture & consumables related to the main line of business of the applicant. The objective of this scheme is to accelerate growth in export of services.
¨ Notification No.32/2005-Customs dated 8.4.2005 was issued to operationalise the Target Plus Scheme announced under the Foreign Trade Policy 2004-09. Under this Scheme the Star Export Houses get rewards in the form of duty credit based on incremental exports. The objective of the scheme is to help accelerate growth of exports.
Setting up of a Financial Intelligence unit:
Recognizing that money-laundering is becoming a significant threat to the integrity of the Indian financial system, the Government of India has set up a Financial Intelligence Unit, India (FIU-IND) with a view to coordinate and strengthen collection and sharing of financial intelligence through an effective national, regional and global network to combat money laundering and related crimes. The FIU-IND will be a multi-disciplinary unit for establishing links between suspicious or unusual financial transactions and underlying criminal activities. It will be the central national agency responsible for receiving, processing, analyzing and disseminating information relating to suspect financial transactions to these agencies.
DEPARTMENT OF EXPENDITURE
Twelfth Finance Commission’s Recommendations:
Twelfth Finance Commission recommendations have been accepted by Government resulting in Substantive additional flow of Resources from Government of India to the States in the next five years
· Over Rs. 1,40,000 crore as Grant in aid – an increase of 123%;
· Central loans of about Rs. 1,29,000 crore to be rescheduled for a fresh term of 20 years at an interest rate of only 7.5%;
· Interest rates of loans to the States have been brought down from 10.5% to 9% with effective from 1st April 2004 in the Budget 2004-05.
Expenditure Management:
Guidelines on expenditure management – fiscal prudence and austerity were issued vide O.M. No. 7(5)/E.Coord/2004 dt. 24th September 2004, with a view to curtailing the expenditure as well as to generate revenue from PSEs/Joint Venture Companies. These austerity measures are expected to yield savings of approximately Rupees Two Thousand Crores per annum.
DEPARTMENT OF DISINVESTMENT
Board for Reconstruction of PSEs :
The Board for Reconstruction of Public Sector Enterprises has been constituted by the Government, which is located in the Department of Public Enterprises (DPE), to take up the cases of strengthening, modernizing, reviving and restructuring of Public Sector Enterprises.
Investment Commission :
Investment Commission has been established to make recommendations to government both on policies and procedures to facilitate greater FDI flows into India. The Commission would endeavour to secure a certain level of investment every year.
National Investment Fund for Specific Schemes :
In pursuance of the announcement in the NCMP and the budget announcement by FM, Government has decided to constitute a “National Investment Fund” (NIF). The Fund would have a permanent corpus and would be maintained outside the Consolidated Fund of India. It would be professionally managed by Public Sector Financial Institutions to provide sustainable returns to the Government without affecting its corpus.
The returns earned by the Fund would be used for financing specific schemes and the broad investment objective will be
§ Investment in social sector projects which promote education, health care and employment;
§ Capital investment in selected profitable and revivable Public Sector Enterprises that yield adequate returns, in order to enlarge their capital base to finance expansion/ diversification.
BSC/BY/CS-224/05
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