Thursday, July 8, 2004

Economic Reforms and The Budget

The CMP and the statements of some of the coalition partners had lead to a lot speculation in the media and many fears. The PM’s address to the Nation and the budget have progressively elaborated the concept of “Reforms with a human Face,” that was first mentioned in the CMP. In the process they have also dispelled the notion that focusing on the “common man” the poor, the farmer and the unemployed will mean huge subsidies fiscal irresponsibility and large deficits. The government has made very clear that they intend to meet the targets of the FRBM (with a delay of one year). The counterpart of this on the expenditure side is a careful and cautious refocusing of the emphasis of the expenditure side of the budget, particularly the plan expenditure on agriculture & rural development and social sectors. Though plan allocations have been increased allocation to specific programs will follow a thorough review by the planning commission.
Several reform steps also confirm that in the view of the government reforms are consistent with the social objectives of employment growth and poverty reduction. At the same time exaggerated fears stimulated earlier have been laid to rest. Among the reform actions in the budget are:
1) A rise in FDI limits in Telecom to 74% (from 49%), in insurance to 49% (from 26%) and in Civil Aviation to 49% (from 40%). This follows the earlier cabinet decision to proceed with private entry into the development & management of the Delhi and Mumbai airports with 49% FDI.
2) SSI de-reservation of 85 items.
3) Board of Restructuring to carry forward the disinvestment/closure/sale/revival of PSEs.
4) Proposal to convert the CENVAT into a goods and service tax. The first step of modifying the service tax to allow off-set for both goods and service taxes paid is a good first step.
5) A comprehensive law for SEZs to devolve administrative and financial responsibility. This had been deadlocked between the MOF, MOC etc.
6) Reduction in customs duty on steel to a rate closer to that on other metals like aluminum & copper and a reversal of the February distortion (to 8%) in CENVAT rate.

As in every budget there are also actions that are either anti-reform such as the removal of Textiles from CENVAT. Controversial moves include (a) the tax changes relating to removal/reduction of capital gains on securities and its replacement by a turnover tax on securities transactions and (b) the manner of reducing income tax on individuals with taxable income less than Rs. 1 lakh. Both these are likely to have unpleasant long term consequences even if they appear successful in the short run. I hope that the FM will correct these as part of the broader tax reform he is likely to undertake in his next budget.

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