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The Rediff Budget Special Chat

Read on for a most illuminating discussion!

It has been a great disappointment. The Budget is not a routine accountance statement of income and expenditure. We are interested in the macro economic targets, the Budget aims to reach. Mr Chidambaram's presentation is a single sentence which says that he expects the rate of growth for the economy to be maintained at 7 per cent. But we are not told of the mechanism which will make this possible. That is hardly a discussion about the problems confronting domestic savings and capital formation nor is there any discussion of the aggregation of measures which could raise the annual inflow of direct foreign investment from the present measly rate of less than a level of one billion dollars annually to a level of 15 or 20 billion dollars. Thus intersectoral problems and issues affecting trends in industry and agriculture are left untouched. Perhaps the finance minister did not want to dilate on themes and issues which could lead to or create friction between the coalition partners of the United Front.

Good evening! I look forward to this interaction on the 1997-98 Budget. I hope I can answer some of your questions. So if you are ready, I'm ready.

The Finance Minister has presented a Budget which in the areas of taxation, goes very much further down the road of aligning with the other countries in Asia and is therefore consistent with the original commitments made when the liberalisation process started. The impact would be to increase people's purchasing power, create more demand for goods and services, stimulate growth and create employment. In addition, he has moved much further towards the introduction of a value-added tax. Some of the announcements regarding amendment of the Urban Land Ceiling Act, the Companies Act and the direct taxation system are good news. The housing situation in cities should improve if the amendment to the Land Ceiling Act is as promised. The Finance Minister will have to devise an effective computerised system for implementing the new proposal regarding people with houses or telephones or cars or who travel abroad within the tax net. These are some of the highlights.

Nikhil: The Budget has disappointed me because it does not answer any of the questions which I expect a Budget to respond to. It does not even say what is the quantum of deficit within the narrow government sector or what its impact could be on the level of prices. It is mum on the government's initiatives, if any, in the sphere of agricultural or industrial capital formation. It has no positive things to say on how to take care of the deficiencies in the power or oil sectors or in the case of such infrastruture industries such as telecommunications. We know from the experience of the past half a dozen years that there is by now a negative correlation established between additional incentives offered to private and foreign investors and actual extraction of crude petroleum and gas in the country. That does not prevent the finance minister from adding to the list of more incentives. I think the difficulty some of us in the Left are encountering with the Budget and with the government's overall position in economic matters is that we want the government to admit that the reforms have been a total disaster, the rate of overall growth in the years since 1991-92 has been much lower than in the 1980s, the same is equally true for the two basic sectors -- agriculture and industry. Domestic savings have levelled off, employment has stopped growing. In fact, by closing down State-owned industrial undertakings the government has actually contributed to an increase in the net volume of unemployment. Since foreign investors have not flocked in, industry has begun to languish and lower import tariffs have killed off whatever enterprise domestic private industry was capable of exhibiting. Therefore, the finance minister's statement toward the end of his Budget speech that the economy is much stronger than what it was six years ago could not have been more unfortunate and irresponsible. As far as holding of foreign balances are concerned there is not one area where the finance minister can pinpoint a qualitative or quantative improvement over the situations or circumstances obtaining in the pre-reforms period. And yet, because the finance minister and his advisors are so much sold on the Bank-Fund- WTO line that they refuse to put on their thinking cap.

Good evening everyone!

The railways are not generating enough revenues. The return on capital is under 9 per cent and the operating ratio is now going to be over 91 per cent. Railways need to generate more revenue and improve margins. Increasing freight rates is one way. At the same time, measures for cost reduction also need to be applied. However, we cannot expect the railways to run without generating surpluses.

The customs duty on imported components would now reduce from 50 per cent to 40 per cent. The duty on imported cold rolled steel coils and on various chemicals used in paints and adhesives would also come down. All these would reduce cost. However, freight costs would increase and the excise duty on 8-seater vehicles would increase by 5 per cent. Overall, I expect that the greater purchasing power created by the Budget, would result in a higher demand for cars.

The Budget is unlikely to make a big difference in the demand for more expensive cars. However, more people from the middle class can hope to buy a small car.

By and large the Budget has been received with a good deal of satisfaction. So far as I am concerned I consider this Budget a watershed in the march of the nation towards achieving accelerated economic growth with social justice. The most outstanding feature I consider in this Budget is the recognition of a basic prinicple of taxation. Which principle has been accepted and successfully implemented by nations who have achieved a miracle of economic growth. It is recognition of the long overdue priciple of fiscal management that higher revenues are to be harnessed not by growth of the rate of taxation but by ensuring higher growth of incomes, production, and productivity. Any successful tax regime must aim at providing an effective instrument of economic growth while providing adequate revenues to the government not only to meet its household expenditure but to provide resources for higher development and for alleviation of poverty. The salient features of the budget acording to me are as follows...

Nikhil: There is a long roster of individual schemes on rural development and social services. This is in conformity with the style, the finance minister has set up in his last Budget. But I doubt whether in the totality they will contribute much either to rural growth or to social welfare. Or industry: The CMP did suggest that as far as these investment operations pertaining to public sector undertakings, the approach should be cautious and should not involve widespread hardship to the working class. The CMP also hinted at initiating concrete measures for reviving and expanding industries that are in the doldrums. But the Finance minister has shunned the root of direct public investment and left these major responsibilities to the chancey role to be played by the private enterpreneurs and foreign investors. The signals beamed by the latter are altogether negative. So why do we go for it now? I should mention something else, the Finance minister hanging in the air a decision on the total amount he would agree to set aside for subsidising the distribution of foodgrains for the millions who subsist below the line of poverty. Presumably, he is looking around for a bargaining counter. He wants petroleum prices to be raised across the board. He is throwing an indirect challenge to those coalition partners who insist on a higher quantum and food subsidy but would not like indirect imports to be hidden. The finance minister is obviously not concerned about inflation, but Left parties are. These are unsettled issues which remain to be sorted out.

The foreign investment decisions are taken keeping in mind the growth prospects of an economy and the ability to make profits. Lower rates of customs duty and cut in corporate taxes as well as on dividends would certainly create a more favourable investment climate for both Indian and foreign investors. The announcement that a special committee would lay down the road for reaching convertibility on capital account would also be an encouragement to foreign investors.

I believe that the logic underlying MAT was quite sound. The need for MAT arose because of the fact that depreciation rates under the Companies Act are much lower than under the Income Tax Act. The Finance Minister has announced that these rates will be rationalised and that would probably remove the need for MAT. In any case, he has given some concession in the MAT system and that should please many companies who are within the MAT network.

Teji: There is a friend of mine who was recently visiting Marutius. He came across specimens of overseas Chinese and overseas Indians doing well in that island contry. But while the overseas Chinese would remit their surplus funds back home te overseas Indians would transmit their savings to American or European banks. So you cannot teach any community or section of community what patriotism is ought to be. Therefore, I am not particularly enamoured by the gesture the finance minister has offered to the direction of the NRIs. The bulk of foreign remittances from overseas that we will continue to get are from migrant workers who have a greater sense of duty towards their motherland than the snooty upper classes infesting Mayfair or Park Avenue.

Teji: The NRI has two positive things in this Budget relating to property investment. The first is the amendment in the Land Ceiling Act which will create new opportunities for investment and reduce land prices. The second is the reduction in the capital gains tax from 20 per cent to 10 per cent. In addition, various concessions have been given to the hotel industry and NRIs could also look at those as possible areas for investment.

Reddy: The common man would be happy, if s/he knew the prices would be stable and relief will come in the form of higher income and earnings and better emplyment opportunities. The Budget does not adress itself to these questions. As far as the middle classes are concerned, the minor gesture of lowering income tax rates will perhaps contribute some fleeting happiness. But these can evaporate soon if prices start shooting up.

Reddy: The reduction in the rates of income tax would benefit all those within the tax paying brackets. The exemption limit has effectively increased and even those with a monthly income of Rs 8,000 a month would pay very little tax. The Budget would also generate more growth and create jobs which is what most people want because unemployment is still quite high. The reduction in import duties and excise duties would help to control inflation. Senior citizens have also been given tax concessions. The social services sector, including education and health will receive larger outlays. It will be easier to get health insurance because this area has been opened to private investment.

A comparison of the Budgets presented by Dr Manmohan Singh and Mr Chidambaram is very difficult. The economic conditions prevailing when Dr Manmohan Singh presented his first Budget are different from those prevailing now. However, Budgets of both have been in the same direction of reducing taxes, promoting growth, simplifying procedures and generally integrating the Indian economy with the global economy.

Phasing out of the very pernicious system of central government borrowing through ad hoc treasury bills. It is absolutely imperative in any system of fiscal discipline that a borrower should not have unrestricted right to keep borrowing and on a long term basis. From April 1, 1997 the central government can borrow for a short term by way of ways and means advances which would always be short term borrowing and not through the instrumentality of ad hoc treasury bills. The finance minister has promised constitution of an expert committee to work on the norms and parameters for full convertibility of rupee on capital account. Coming to the tax proposals -- it is heartening to note that despite reduction in the direct and indirect taxes the buouancy in taxes is nearly 17.5 per cent which is a very healthy feature of this Budget. The presumptive tax is sought to be replaced by an estimated income scheme applicable to small traders having an income between Rs 800,000 to Rs 4 million. The abolition of tax on dividends rationalises a long pending area of dispute both on the grounds of fiscal prudence and fiscal morality. This would abolish the double taxation of income by way of dividends. Dividends is paid by companies out of taxed profits and as such they should not have ever been taxed in the hands of the receipents of dividends. This is a very welcome measure. The study of the economic review published by the government would reveal that we have not been able to maintain the growth rate of our exports. This was a very disconcerting feature of our economy. The surcharge on corporate profits has also been abolished At the same time income tax levels on individuals has been reduced, excise duties as well as custom tariffs have lowered. All these should enthuse the corporate sector and the capital market including, of course, the stock market. So the net effect on the corporate sector will be reflected on higher production next year which will also help overall GDP growth rate.

Tejinder: The Finance Minister did not mention anything about changes in the transfer of residence baggage rules. Maybe, there would be something in the printed books which I have not seen as yet. However, the customs duty on baggage for tourists has come down from 60 per cent to 50 per cent.

Photographs: Atul Chowdhary