Bhanoji Rao

If the Finance Minister is serious about responding to what people want, rather than what the coalition dharma demands, then, there may be merit in making certain critical changes.

The day after the Budget, newspapers, including the financial dailies, carried a number of letters to editors. In a sample of 13, just about three were positive. Not a great score for the Finance Minister. If he is serious about responding to what people want, rather than what the coalition dharma demands, then, there may be much merit in changing and fine-tuning the Budget proposals.

ECONOMY SITUATION

Before considering the critical minimum changes needed, it would be useful to take stock of the macro-economic situation and the key issues that the nation's economic managers need to address. The Economic Survey lists them, and are as follows:

The rate of economic growth, which declined from 8.5 per cent in 2003-04 to 7.5 per cent in 2004-05, has picked up to an estimated 8.1 per cent in 2005-06.

Agriculture and manufacturing have performed relatively better compared to the last fiscal, underscoring the importance of the two goods-producing sectors for balanced and relatively high growth. Despite the good overall growth in 2005-06, because of the dismal 3.8 per cent growth in 2002-03, the first four years of the Tenth Five Year Plan (2002-03 to 2006-07) ended up with an average growth rate of 7 per cent against the Plan target of 8 per cent.

Gross investment as a percentage of GDP has risen from 25.3 in 2002-03 to 27.2 in 2003-04 and a high 30.1 in 2004-05. If maintaining a rate of 32 per cent is vital for achieving 8 per cent GDP growth, the investment rate must rise to 40 per cent if a 10 per cent growth is desired, assuming that the overall efficiency of the economic system remains the same as before.

Merchandise exports during April-January 2005-06 reached $74.9 billion and are well on their way to the $92-billion target set for 2005-06. India, thus, is fast becoming one of the important trading nations.

Private investments received (during April-September 2005) totalled $7.4 billion of which $4.2 billion was foreign institutional investment (FII). While the inflow of foreign direct investment (FDI) was relatively less, India's estimated need is $150 billion in the next five years in the infrastructure sector alone.

Infrastructural constraints continue to be a key problem. In the first three quarters of 2005-06, the overall index of six core industries — coal, electricity, crude petroleum, refinery throughput, steel, and cement — having a direct bearing on infrastructure, registered a growth of only 4.5 per cent.

In sum, there is a good showing on growth, investment and exports. Too little FDI inflows relative to FII investment and infrastructure bottlenecks are among the constraints to higher growth.

The Economic Survey does point to the feasibility of a virtuous cycle taking off soon, with income increases leading to higher savings rates and these in turn bringing about higher investment and growth rates. A facilitating force behind a higher savings rate is the relatively high ratio of working age population, which also poses the great challenge — of ensuring commensurate expansion in employment opportunities.

During January-June 2004, as per the 60th round of the National Sample Survey Organisation, the unemployment rate for males was 9 per cent (up from 5.6 per cent in 1993-94) in the rural areas and at 8.1 per cent (up from 6.7 per cent in 1993-94) in the urban areas. The corresponding figures for females were 9.3 per cent (up from 5.6 per cent) in the rural areas and 11.7 per cent (up from 10.5 per cent) in the urban areas. The country seems to be going at a rate of unemployment close to 10 per cent.

From the above account of the macro accomplishments and issues, one can easily see that there is indeed a problem that the Budget has to tackle — of creating the environment for relatively high (8-10 per cent) growth of the economy plus particular emphasis on growth with employment expansion in the two key sectors of manufacturing and services, since high growth and declining relative labour absorption in agriculture are integral to the development process.

THE CHANGES NEEDED

From the point of view of safeguarding the investment climate and promoting employment growth, the Budget proposals need modifications: The proposed reduction in the peak rate of Customs duty for non-agricultural products from 15 per cent to 12.5 per cent should be applied uniformly with only that rate or a zero rate applied to each and every commodity. Thus, for instance, zero rate could replace all of the following: 7.5 per cent on alloy steel, primary and secondary non-ferrous metals and ferro alloys; 5 per cent on steel melting scrap; 5 per cent on mineral products; 2 per cent on ores and concentrates; and 7.5 per cent on refractories and materials for manufacture of refractories.

On the basis of the two rate (zero or 12.5 per cent) philosophy, CVD (countervailing duty) should be scrapped and any revenue implication should be taken care of by application of the higher rate of duty across the board, for instance, on those final commodities (other than life saving drugs) which now attract 10 per cent or less duty. The important point is to minimise the need for and use of discretions and references to volumes of classifications. Imagine the tremendous convenience of finding on a Customs Department web site if a product attracts duty or not. If it does, the duty is 12.5 per cent. Similar revisions (as in the case of Customs) could be considered for excise duties too: A uniform rate and no exemptions.

The service tax rate should be restored to 10 per cent. A clarification is needed on the final incidence of the service tax on ATM operations, maintenance and management.

As for direct taxes, raising the income-tax exemption limit to Rs 2 lakh will help focus on the real tax-payers and free the low-income groups from tax-saving preoccupations. Why has the one-by-six scheme been abolished? The people deserve an explanation, at least. The Fringe Benefit Tax should go and all fringe benefits to a specified extent should be part of income.

(The author, formerly with the National University of Singapore and the World Bank, is Professor Emeritus, GITAM Institute of Foreign Trade, Visakhapatnam. He can be reached at bhanoji@gmail.com)

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