New Delhi, July 8: Farmer, and not reformer, is the hero of this budget but P. Chidambaram today ran a trailer of what might be in store when he rises again in the House in about seven months from now.
Known to spring surprises — the finance minister’s 1997 budget sprang some pleasant tax cuts — Chidambaram stepped up the foreign investment limit in insurance from 26 to 49 per cent, a step the previous government had balked at.
Simultaneously, the ceiling on foreign holding has been pushed up to 74 from 49 per cent in telecom and to 49 from 40 per cent in civil aviation. Left MPs, who support the United Progressive Alliance government, started shouting during the finance minister’s speech itself.
Perhaps the second most striking reform measure consisted in freeing some 85 items from the exclusive domain of small-scale production.
Both he and the Prime Minister being fundamentalist followers of financial discipline, Chidambaram promised to hold the revenue deficit — the government’s current expenditure minus current earnings — at 2.5 per cent of the gross domestic product and promised to wipe it out in five years. Fiscal deficit — the amount the government needs to borrow — is to be cut to 4.4 per cent in 2004-05.
He is also determined to hold interest rates at current levels, ignoring demands by the Left to raise the rate of 9.5 per cent the employees’ provident fund pays to subscribers.
In most other cases, the emphasis is on continuity, as the minister himself pointed out — this government has been in power for less than two months and the next budget is due as early as February.
Income-tax rates stay unchanged but a 2 per cent education cess — that had been predicted — has been imposed. The cess will be on the entire range of levies — income and corporation tax and excise and customs.
There was a small bonus for those with an annual income of up to Rs 100,000 who will now pay no tax.
The service sector takes a hit with a tax rate increase from 8 to 10 per cent along with inclusion of 13 other areas within the ambit of the levy— for one, partying may become costlier. The caterer supplying food to your party will have to pay service tax.
Had sheer economics ruled the budget, interest rates on small savings schemes might have been cut because of lower interest levels in much of the rest of the economy. But Chidambaram held the rates on public provident fund and general provident fund at the current 8 per cent.
For the old and pensioners, a new scheme will be launched, offering a 1 per cent higher return at 9 per cent. As a result, the Varishta Bima Yojana may be disbanded.
The finance minister lived to fight another day on subsidies, which both he and the Prime Minister believe are unsustainable at the current level of Rs 25,000 crore plus.
“All subsidies will be targeted sharply at the poor…. I have asked the National Institute of Public Finance and Policy to prepare a blueprint to accomplish these objectives. I expect to place the report before the House in the next session,” he said.
In another area of potential trouble, the public sector, Chidambaram walked a tightrope, neither surrendering the option to divest government equity or even outright sale nor of maintaining majority government holding. While the first of the alternatives will anger the Left, the second will not be palatable to the reform lobby.
“Divestment and privatisation are useful economic tools. We will selectively employ these tools, consistent with the declared policy. As a first step, I propose to establish a Board for Reconstruction of Public Sector Enterprises,” he said.
The board will advise the government on restructuring that could include divestment or closure or sale.
His target of raising money through sale of government equity is modest at Rs 4,000 crore for 2004-05. Immediately, the government is going ahead with the sale of 5 per cent of the National Thermal Power Corporation’s equity in the market.
As another round of loud protests erupted, Chidambaram raised a reassuring hand: “Main hoon na.... I am here.”
To please the votaries of a strong public sector, he announced equity support of Rs 14,194 crore and loans of Rs 2,132 crore. He also promised investments in power, telecom, railway, roads, petroleum, coal and civil aviation. A fund of Rs 40,000 crore is being created by a consortium of banks to enable infrastructure projects to tie up their financing requirements.
The stock market wasn’t too happy with the budget, mainly because of a tax of 0.15 per cent slapped on transactions. The Bombay Stock Exchange sensitive index slipped 112 points to 4843.84 after swinging through the day in a less than 200-point band. After his 1997 “dream” budget, the index had gone up 179 points.
The tax nipped in the bud the feel-good sentiment that abolition of the tax on long-term capital gains from equities — and a sharp cut of the levy on short-term gains — would have induced.
Later, the finance minister clarified that the tax will be levied on shares sold and delivered and not on every trade.