The Telegraph
Since 1st March, 1999
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- An enabling budget to facilitate growth without dramatic changes

The author teaches at the University of Warwick, United Kingdom

Jaswant Singh had a relatively successful tenure as the for- eign minister. His first budget holds out the promise that he will be an even better finance minister. Singh has managed to formulate a budget which contains good news for practically everyone. It is not a radical budget, and will certainly not transform the economy. But, budget making is a difficult task in the best of times, and particularly onerous when general elections are just round the corner. At the very least, the finance minister deserves credit for being able to resist the temptation of framing a populist budget.

The middle classes should love the budget because the budget contains several sops to them. The income tax surcharge of five per cent has been removed for those with incomes up to Rs 8.5 lakh. Standard deduction has been raised for salaried employees with incomes up to Rs 5 lakh. Perhaps, the only fly in the ointment is that the interest rate on small savings schemes has been cut by one per cent. However, senior citizens will be helped by an increase in their tax rebate. The net effect of all changes in personal direct taxes, will leave more money in the hands of all individuals earning less than Rs 8.5 lakh.

The corporate sector also has reason to be satisfied with the budget. While the basic rate of corporate tax has not been changed, the surcharge has been halved to 2.5 per cent. Specific industries have been promised special benefits. For instance, a package of incentives has been announced for the textiles industry. Some measures to strengthen the stock market will also bring indirect benefits to the corporate sector. For instance, the tax on dividend income and capital gains tax have been removed.

One of the most satisfactory features of the budget is the support given to the social sector. The finance minister has announced that the public sector general insurance companies will formulate a scheme which will provide a universal health insurance scheme at a cost of not more than Re 1 per person per day. The premium will provide reimbursement of medical expenses up to Rs 30,000. This will be of immense help to the poorer families. On the other hand, it is very likely that the rich will opt out of the scheme because the sum of Rs 30,000 is only a relatively small amount of hospitalization expenses incurred in more expensive private hospitals. So, the benefit to the rich will not be worth the paperwork typically involved with such schemes. Hence, this will be one of the few subsidy schemes which will also be targeted towards the poor. The budget also provides a tax rebate for expenditure on children’s education up to Rs 12,000.

The major expenditure proposal is targeted at the infrastructure sector, with an ambitious plan to spend Rs 60,000 crore. One of the major success stories in the last couple of years has been the pace at which highway construction has been pushed forward. Singh has decided to accelerate this process by promising an additional Rs 800 crore. Railways, ports and airports will be the other major beneficiaries. The emphasis on infrastructure investment will have multiplier effects through the economy, as it will be a major source of demand for steel, cement and other industries. Many of these infrastructure projects will also help in creating additional employment.

Of course, there is a slight catch here. Singh has promised that the Centre will contribute only a third of the planned expenditure of Rs 60,000 crore on infrastructure. He hopes that the success of the Golden Quadrilateral programme will bring in increased participation from the private sector. For instance, the road projects are to be financed on a build, operate and transfer basis, with the Centre only providing an annual subsidy to bridge the gap between anticipated revenue and loan repayment liabilities. The railway projects are to be funded through a special purpose vehicle which will raise debt from the market. Direct funding from the Centre will also be restricted in the case of modernization of ports and airports. Hopefully, private sector funding will prove to be adequate.

A measure which may be significant in the long run is the attempt to increase the scope of the service tax. Several new services are being brought under the tax, and the rate of tax has also been increased to eight per cent from the current level of five per cent. The composition of gross domestic product has been changing over the years, with the services sector becoming increasingly large. Hence, the services sector has to contribute more taxes if the tax system is to be buoyant.

Given the controversy created by the Kelkar committee report, it is natural to ask whether the committee has had any impact on the budget. At best, the influence has been marginal. The thrust of the committee’s report on direct taxes was to raise exemption limits, lower tax rates, and make these proposals revenue-neutral by simultaneously removing the multiple tax rebates on various forms of savings. Unfortunately, the finance minister decided not to bite this bullet. Both exemption limits as well as basic rates of taxation have remained constant. Neither has he made any effort to remove the tax rebates on savings.

The Kelkar committee had also recommended further simplification of the indirect tax structure by reducing the number of basic rates of excise to two. Singh has made some progress in this direction by introducing a three-tier excise duty structure. He must be deducted some points for his failure to follow through with the Kelkar committee recommendations more vigorously.

Singh concluded his budget speech with the remark, “ This budget is of an India that is on the move.” What will be the specific contribution(s) of this budget in making the economy “move”' And how fast will the economy move after this budget' Perhaps the most accurate word describing this budget is “enabling” — it has tried to facilitate the growth process without making any dramatic changes. Indian industry cannot really ask for much more since there is an obvious sense in which the government’s role in the economy has been reduced.

But, will the private sector be able to exploit the benefits given to it by this budget' Unfortunately, the answer to this question is best known to George Bush and Tony Blair. A war with Iraq and the resultant disruptions in world trade and commerce cannot but have an adverse effect on the Indian economy. How fast will the economy move after this budget'

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