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.

No comments: