The Hindu : National : Industry has modest hopes

Online edition of India's National Newspaper
Tuesday, Jul 06, 2004

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National

Industry has modest hopes

By Sushma Ramachandran

NEW DELHI, JULY 5. Industry has modest expectations from the first budget of the United Progressive Alliance, given the avowed stress on agriculture and the rural sector, but Finance Minister P. Chidambaram may spring a surprise for corporate India. Declaring that he really wants to be "Minister for Investment", he is likely to introduce measures to make the climate easier for investment both for domestic and foreign industry.

This could include specific sops for industry such as a marginal cut in corporate tax rates or abolition of the minimum alternate tax (MAT) but more may be done in broader terms to pep up investment including higher public outlays for the infrastructure sector.

One of the areas expected to be given a special focus is the small scale and tiny sector largely due to its huge employment potential as well as the fact that it is the biggest export earner for the country. This ties in well with one of the key goals of the Common Minimum Programme to give a boost to employment.

In fact, Finance Ministry sources say procedural excise duty regulations are likely to be altered to enable large companies to set up small units in different parts of the country. Existing rules force companies to set up huge single point manufacturing units when it can make better economic sense to set up ancillary units along with a central assembly plant.

The Finance Minister is also believed to be bullish on foreign direct investment flows and is trying to evolve an innovative strategy to ensure that these rise at least five to six times higher than at present. The budget may well see an evolution of the Foreign Investment Promotion Board from a regulatory agency to a promotional investment institution. The thinking is that the FIPB is no longer needed to clear large FDI projects as these can be shifted to the "automatic" route under Reserve Bank of India guidelines. Instead, the FIPB may be restructured into an agency to give an impetus to higher inflows of FDI.

Though the Finance Ministry is of view that the wish list of industry is much smaller than it used to be as a result of increasing liberalisation in the corporate sector, corporates are hoping the budget will take some positive steps on several of their key demands. These include withdrawal of the dividend distribution tax, abolition of MAT and giving infrastructure status to the healthcare sector. The dividend tax has for long been decried as double taxation both through the giver and the recipient while the abolition of MAT is expected to enable industry to mobilise more resources for further investment. The grant of infrastructure status to the healthcare sector is expected to make a large number of hospital projects viable especially since India is now set to become a global hub for this industry.

The stock markets are also looking forward to some changes in the capital gains tax, either by way of moving towards a turnover tax or removing the distinction between short-term and long-term capital gains tax. The volatility in the markets in recent weeks, however, indicates that hopes are not being pinned on the budget being proactive as far as industry is concerned.

Even so, it must be noted that the original economic reforms team is back in the saddle right from Prime Minister Manmohan Singh and the Finance Minister down to the latest entrant, the new Deputy Chairman of the Planning Commission Montek Singh Ahluwalia. The UPA budget is thus bound to have the hallmark of liberalisation though it may come with a populist face.

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