In listening to the budget live, as one special group after another received specially tailored exemptions, I was gradually transported back a decade and a half in time, when budgets used about giving and withdrawing concessions. My fear that the budget would be shaped and driven by the forthcoming elections was moderated by the Finance minister’s inherent conservatism. Even when he gave income tax concessions to government servants, retirees, pensioners, the sick, these were far from extravagant. The sectoral give-aways though equally modest were more clearly ART (against the reform trend) as they represented a return to industry specific customs duty exemptions, that every body had agreed were bad for the economy. As expected only the administrative reform recommendations of the Kelkar committees were accepted while the reform elements were junked after a bow. Even the forecast removal of the surcharge was partial, the dividend tax was replaced by the old dividend distribution tax and the long-term capital gains tax on shares eliminated for a year.
Within this overall picture of lack of clear economic direction there are a few nuggets that are positive. As expected the ‘peak’ customs duty was reduced to 25% (from 30%). To my surprise the administered interest rate on Government Provident fund and related schemes was reduced by 1% point. SSI reservation was also eliminated on 75 more items, and the expenditure tax eliminated. These steps could have a modest positive effect on investment expectations if followed up by other reform steps in the EXIM and Credit policies in the next two months.
Saturday, February 28, 2004
Wednesday, February 4, 2004
Interim Budget/Vote on Account : Mini-budget for 2004-5
Many people made the mistake of seeing the actions so called ‘election sops’ announced earlier as being distinct actions, that gave an indication of more to come in the (Indian) Mini-budget. It was actually a three act play, where the more provocative and surprising actions were taken pre-budget and the budget itself was more moderate and mild so as to ensure quick passage in parliament and minimise any potential hitch in dissolving parliament on February 6th. From an economic reform perspective, it is therefore more fruitfull to take all the measures together. These can be divided into three parts:
(a) Genuine reform measures include the reduction of the peak import duty rate from 25% to 20% and the corresponding reduction baggage import duties along with a rise in the free allowance and the elimination of the SAD. Research at ICRIER has shown that these measures will stimulate the efficiency and productivity of the manufacturing sector.
(b) Anti-reform actions: Include a number of new end-use exemptions in the customs act, and exemptions in the CENVAT something that tax reformers like myself have been struggling for the past decade and a half to eliminate. Zero duty excise rates on food, drug and medical items improve equity. All others increase inefficiency. Every customs duty exemption hurts another industry and leads to a string of input exemptions that complicate the system often leading to negative protection. That is why the Virmani(2001) committee of the revenue department recommended a uniform tariff rate. Other negative changes relate to the sugar industry and the merging of 50% of DA with salary for central govt employees. The solution to the former is complete de-control of the sugar industry. The latter will result in further pressure on the fiscal situation of the Centre and the States.
(c) There are also a number of measures, that are taken in every budget to provide some benefit to each group. As long as there is no major negative impact on the fic these are the normal socio-economic actions that every government has to take. Some of them pan out (eg. The Antodya scheme, the Kisan Credit Card), while others fail (DRI scheme, the subsidised interest scheme for loans below Rs 2 lakh, now raised to Rs 10 lakh).
Overall I would say it is moderate budget and more appropriate to the circumstances than I had expected.
(a) Genuine reform measures include the reduction of the peak import duty rate from 25% to 20% and the corresponding reduction baggage import duties along with a rise in the free allowance and the elimination of the SAD. Research at ICRIER has shown that these measures will stimulate the efficiency and productivity of the manufacturing sector.
(b) Anti-reform actions: Include a number of new end-use exemptions in the customs act, and exemptions in the CENVAT something that tax reformers like myself have been struggling for the past decade and a half to eliminate. Zero duty excise rates on food, drug and medical items improve equity. All others increase inefficiency. Every customs duty exemption hurts another industry and leads to a string of input exemptions that complicate the system often leading to negative protection. That is why the Virmani(2001) committee of the revenue department recommended a uniform tariff rate. Other negative changes relate to the sugar industry and the merging of 50% of DA with salary for central govt employees. The solution to the former is complete de-control of the sugar industry. The latter will result in further pressure on the fiscal situation of the Centre and the States.
(c) There are also a number of measures, that are taken in every budget to provide some benefit to each group. As long as there is no major negative impact on the fic these are the normal socio-economic actions that every government has to take. Some of them pan out (eg. The Antodya scheme, the Kisan Credit Card), while others fail (DRI scheme, the subsidised interest scheme for loans below Rs 2 lakh, now raised to Rs 10 lakh).
Overall I would say it is moderate budget and more appropriate to the circumstances than I had expected.
Tuesday, February 3, 2004
Interim Budget/ Vote on Account 2004-5
Many people were dis-appointed by the Mini Budget. Neverthless many people, particularly stock market investors and salary earners, hoped that they would be favoured by an election eve Bonanza through reduction in their income tax liability. The Finance Minister, quite wisely, decided not to stir the hornet’s nest in the Lok Sabha by announcing income tax changes that could not be implemented as parliament could not pass such a finance bill under the vote-on account.
So what is the balance sheet of this Mini-budget. From a reform perspective, there are two significant plus points and two minus points. First the announcement of a halving of the central Stamp duty, even though implementation must await a change in the stamp act is a positive signal. The stamp duty is a highly inefficient and outdated tax. The reduction in rates may not even reduce revenues as evasion is likely to decline as more people follow regular registration procedure. The second positive signal is the setting up of the non-lapsable Defence fund. As major defence purchases have to be forward looking because the fast pace of technological development and consequent obsolescence, and the procurement procedures are unduly drawn out dilatory, defence planning suffers. This fund will make it possible to plan and procure major weapons systems more efficiently. The two negative factors are to (a) continue the license-subsidy Raj in the sugar industry, and (b) to merge 50% of DA with salary for central government servants. The latter will not only increase the revenue and fiscal deficit of the central government on a continuing basis but also have a negative effect on State governments’ finances.
So what is the balance sheet of this Mini-budget. From a reform perspective, there are two significant plus points and two minus points. First the announcement of a halving of the central Stamp duty, even though implementation must await a change in the stamp act is a positive signal. The stamp duty is a highly inefficient and outdated tax. The reduction in rates may not even reduce revenues as evasion is likely to decline as more people follow regular registration procedure. The second positive signal is the setting up of the non-lapsable Defence fund. As major defence purchases have to be forward looking because the fast pace of technological development and consequent obsolescence, and the procurement procedures are unduly drawn out dilatory, defence planning suffers. This fund will make it possible to plan and procure major weapons systems more efficiently. The two negative factors are to (a) continue the license-subsidy Raj in the sugar industry, and (b) to merge 50% of DA with salary for central government servants. The latter will not only increase the revenue and fiscal deficit of the central government on a continuing basis but also have a negative effect on State governments’ finances.
Has the interim budget achieved anything?
Many people were dis-appointed by the Mini Budget. Neverthless many people, particularly stock market investors and salary earners, hoped that they would be favoured by an election eve Bonanza through reduction in their income tax liability. The Finance Minister, quite wisely, decided not to stir the hornet’s nest in the Lok Sabha by announcing income tax changes that could not be implemented as parliament could not pass such a finance bill under the vote-on account.
So what is the balance sheet of this Mini-budget. From a reform perspective, there are two significant plus points and two minus points. First the announcement of a halving of the central Stamp duty, even though implementation must await a change in the stamp act is a positive signal. The stamp duty is a highly inefficient and outdated tax. The reduction in rates may not even reduce revenues as evasion is likely to decline as more people follow regular registration procedure. The second positive signal is the setting up of the non-lapsable Defence fund. As major defence purchases have to be forward looking because the fast pace of technological development and consequent obsolescence, and the procurement procedures are unduly drawn out dilatory, defence planning suffers. This fund will make it possible to plan and procure major weapons systems more efficiently. The two negative factors are to (a) continue the license-subsidy Raj in the sugar industry, and (b) to merge 50% of DA with salary for central government servants. The latter will not only increase the revenue and fiscal deficit of the central government on a continuing basis but also have a negative effect on State governments’ finances.
So what is the balance sheet of this Mini-budget. From a reform perspective, there are two significant plus points and two minus points. First the announcement of a halving of the central Stamp duty, even though implementation must await a change in the stamp act is a positive signal. The stamp duty is a highly inefficient and outdated tax. The reduction in rates may not even reduce revenues as evasion is likely to decline as more people follow regular registration procedure. The second positive signal is the setting up of the non-lapsable Defence fund. As major defence purchases have to be forward looking because the fast pace of technological development and consequent obsolescence, and the procurement procedures are unduly drawn out dilatory, defence planning suffers. This fund will make it possible to plan and procure major weapons systems more efficiently. The two negative factors are to (a) continue the license-subsidy Raj in the sugar industry, and (b) to merge 50% of DA with salary for central government servants. The latter will not only increase the revenue and fiscal deficit of the central government on a continuing basis but also have a negative effect on State governments’ finances.
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