The Economic Survey admits to economic growth dropping to 4.4 per cent from 5.6 per cent in the previous year. It is generally believed that 50 per cent of the GDP growth comes from the service sector while agriculture and industry equally share the other half. This worrying revision has been largely on account of the agricultural-pulled deceleration (-3.1 per cent). Drought has clouded the across-the-board improvement in the performance of industry and services sectors.
To correct the slipped growth to 8 per cent , the finance minister, Jaswant Singh, has identified the Panch Pandavas, poverty eradication, infrastructure, fiscal consolidation, agricultural and tax reforms. The menace of the rising fiscal deficit — Centre and state deficit have reached an alarming figure of 10 per cent. The Survey in no uncertain terms highlights this and as such has moved this concern to the top drawer of discussion.
The stage has been set for a comprehensive reallocation of investment — moving out the subsidies, wasteful government expenditure and moving towards the creation of more productive assets to trigger the next phase of growth. Fiscal consolidation requires a two-pronged strategy of augmenting revenues and restraining expenditure. Modernisation by pressing for web based tax administration and broadening the tax base are likely to help the cause to a large extent. Today, a peculiar combination of some key factors stare at us in the face —burgeoning fiscal deficit, ballooning NPAs, moving from a low inflation economy and a growing realisation that a significant portion of our GDP goes in servicing past debt.
Faced with such a situation, we may have no other option but to inflate the economy — a very dangerous scenario —especially with war clouds looming large. The 5.6 per cent planned fiscal deficit augurs ill. Singh has attempted an awkward balancing act between politics and fiscal prudence. He has hesitatingly raised the service tax from 5 to 8 per cent, knowing fully well, 50 per cent of the Indian economy is services. If this is VAT-able, the golden goose of services which has contributed 3.5 per cent to the 4.4 per cent anticipated growth in this year can be affected grievously. Bulk of the Kelkar Committee report has been accepted. There has been no attempt to attack either the subsidies regime by even a statement that only merits subsidies will survive.
In fact, the finance minister remarks about the slight increase in the prices of fertiliser was a cause of concern in an otherwise well accepted speech. What appears most alarming is that no word has been mentioned about disinvestment. The key welcome changes were the elimination of dividend tax in the hands of the recipient, elimination of capital gains tax on listed equity, continuation of sections 10A and 10B benefits for IT, gem and jewellery; rationalisation of excise duty rates to 8 per cent,16 per cent and 24 per cent and reduction of Central Sales Tax to 2 per cent in anticipation of a comprehensive CENVAT.
The other remarkable features of Singh’s announcements were Comprehensive reforms of tax administration largely through the facilitation of electronic filing of returns, outsourcing key unfinished tasks and a search and seizure survey regime which will be fair and friendly; selection of random checking of returns through computers and a similar provision under the Customs Law will go a long way in eliminating corruption. The implementation of VAT from April with full co-operation of state finance ministers. The welcome cash management system, which will eliminate the pressures on spending only in last quarter and a debt swap mechanism,whereby interest rates on the debts will rapidly come down to market driven rates, resulting in Rs 81,000 crore interest cost reduction for the State alone.
A commitment to further simplification, rationalisation and implementation of a tax regime which is globally compatible. Housing sector will be the biggest beneficiary of this budget. Interest deduction of Rs 1,50,000 for housing loan has been retained. Tax exemption has been accorded to housing construction projects and the benefits of Section 10(23)(g) has been extended to investments in companies which will construct houses. The property boom will continue unabated under the twin options of low interest and tax exemptions.
The fillip to infrastructure is indeed remarkable. This is most visionary part of the Singh’s budget where road construction will continue un abated on the back of a 50 paise diesel cess. Mumbai and Delhi will have internationally compatible airports. Two major ports will be revamped and the power sector will receive much needed reforms to make sure that this major ill of our economy gets cured. The finance minister has for the first time identified specific infrastructure projects which can transform the ability of the country to support rapid growth.The pension related proposals announced by Singh appear to be extremely ambitious and the reimbursement of the difference between 9 per cent and the actual earning by Life Insurance Corporation and provide a very very huge burden in the context of an uncalculated and frighteningly high unfunded pension liability. This provision has the potential of creating serious problems.
This is particularly true when Singh himself realizes that the average yield of an individual property is 6.3 per cent and in order to bring sanity to the interest rate structure, he has proposed a 1 per cent reduction in PPF and relief bond interest rates. As far as the capital markets are concerned, they should be jubilant because of the elimination of dividends in the hands of the recipients and capital gains. However, the retention of 2.5 per cent surcharge and non-reduction of basic rates came as a downer.
All infrastructure related sectors and health related sectors will get a deserved boost and fillip as well. The incentives to pharmaceuticals and health related sectors, the experiment with public-private partnership in infrastructure creation and the provisions of health and education are an initiative whose results will be watched with great anticipation. Clearly only those which are best covered will find investors flock to them. It does not appear as if any specific attempt has been made to lure the investors back into the capital markets.
The exemption to equity related mutual fund for one year will drive some money towards equity mutual fund but ultimately it is only through astute investment which will bring the investors savings. The budget seems to be long on hope and short on tough action to rein in fiscal deficit. The big fear is inflation and the big promise is more of growth through infrastructure creation.
Shailesh Haribhakti is president-elect, IMC and managing partner and CEO of Haribhakti Group